1,721,005 research outputs found
Coordination Failures, Cluster Theory and Entrepreneurship: A Critical View
Get PDFDevelopment policy has been energized in the last decades by a number of contributions emphasizing a new positive role the state can and should play in fostering economic growth. The central pillar of this literature is Michael Porter and his theory of clusters. A number of economists have attempted to anchor the appetite for clustering initiatives in a solid theoretical bedrock. They have pointed out an interesting market failure that may prevent the emergence of profitable clusters and thus jeopardize overall economic development: the failure of individuals to coordinate changes in their actions in order to reap the benefits of a better situation. This paper intends to provide a refutation of the idea that coordination failures as manifested in the inability of clusters to emerge can serve as a ground for government intervention. It uses mainly Porter, Rodrik and Rodriguez-Clare thesis as an example of this approach and criticizes the claim that coordination externalities prevent the market process to allocate resources optimally.Coordination, Market failure, Economic development
Coordination Failures, Cluster Theory and Entrepreneurship: A Critical View
Get PDFDevelopment policy has been energized in the last decades by a number of contributions emphasizing a new positive role the state can and should play in fostering economic growth. The central pillar of this literature is Michael Porter and his theory of clusters. This paper intends to provide a refutation of the idea that coordination failures as manifested in the inability of clusters to emerge can serve as a ground for government intervention. It uses mainly Porter, Rodrik and Rodriguez-Clare thesis as an example of this approach and criticizes the claim that coordination externalities prevent the market process to allocate resources optimallycoordination failure, cluster theory, development economics
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Essays on Globalization and Economic Development
Get PDFIn this dissertation, I study the effects of policies introduced by less-advanced economies to draw on the benefits of globalization. Chapters 2 and 3 focus on the impacts of foreign multinationals that open affiliates in Costa Rica on the performance of local firms and wages of local workers. These two chapters bring novel evidence to the continued debate on the generous policies governments use to compete over multinationals. Chapter 4 studies an industrial policy implemented in Romania to spur the development of the information technology (IT) sector. The policy was justified by both an underdeveloped potential in the IT industry in Romania and a predicted explosion in global demand for IT services. Though industrial policies are central to debates about the role of the state in economic development, the empirical literature on industrial policies is scant. This last chapter aims to close the gap with evidence on the effectiveness of industrial policy.In Chapter 2 (co-authored with Alonso Alfaro-Urena and Jose Vasquez), we investigate the effects of becoming a supplier to multinational corporations (MNCs) using administrative data tracking all firm-to-firm transactions in Costa Rica. Event-study estimates reveal that after starting to supply to MNCs, domestic firms experience strong and persistent improvements in performance, including the expansion of their workforce by 26% and gains in standard measures of total factor productivity (TFP) of 6-9% four years after. Moreover, the sales of domestic firms to buyers other than the first MNC buyer grow by 20%, both through a larger number of buyers and larger sales per buyer. We propose a simple model by which TFP and reputation affect the number of buyers, but TFP alone affects sales conditional on buying. We find a model-based increase in TFP of 3% four years after. Finally, we collect survey data from managers in both domestic firms and MNCs for further insights on mechanisms. Our surveys suggest that becoming suppliers to MNCs is transformative for domestic firms, with changes ranging from new managerial practices to better reputation. In Chapter 3 (co-authored with Alonso Alfaro-Urena and Jose Vasquez), we estimate the effects of foreign multinational corporations (MNCs) on workers. To that end, we combine microdata on all worker-firm and firm-firm relationships in Costa Rica with an instrumental variable strategy that exploits shocks to the size of MNCs in the country. First, using a within-worker event-study design, we find a direct MNC wage premium of nine percent. This premium reflects above market wages rather than compensation for disamenities. Next, we study the indirect effects of MNCs on workers in domestic firms. As MNCs bring jobs that pay a premium, they can improve the outside options of workers by altering both the level and composition of labor demand. MNCs can also enhance the performance of domestic employers through firm-level input-output linkages. Shocks to firm performance may then pass through to wages. We show that the growth rate of annual earnings of a worker experiencing a one standard deviation increase in either her labor market or firm-level exposure to MNCs is one percentage point higher than that of an identical worker with no change in either MNC exposure. Finally, we develop a model to rationalize the reduced-form evidence and estimate structural parameters that govern wage setting in domestic firms. We model MNCs as paying a wage premium and buying inputs from domestic firms. To hire new workers, domestic firms need to incur recruitment and training costs. Model-based estimates reveal that workers in domestic firms are sensitive to improvements in outside options. Moreover, the marginal recruitment and training cost of the average domestic firm is estimated at 90% of the annual earnings of a worker earning the competitive market wage. This high cost allows incumbent workers to extract part of the increase in firm rents coming from intensified linkages with MNCs.In Chapter 4 (co-authored with Smaranda Pantea), we study the firm and sector-level effects of an industrial policy designed to support the development of the IT sector in Romania. In 2001, Romania introduced an unexpected personal income tax break to programmers with eligible bachelor's degrees and who work on software development for firms in eligible IT sector codes. In 2013, policy-makers suddenly expanded the scope of the original tax break to cover more bachelor's degrees and sector codes in IT. We first use firm-level data and difference-in-difference designs around each policy episode to show that treated firms experience strong and long-lasting growth. We then employ sector-level data and a synthetic control design to show that after the introduction of this policy in 2001, the IT sector grew faster in Romania than in otherwise similar countries. Finally, downstream sectors relying more on IT services also grew faster in Romania after 2001. Our results suggest that this policy has been effective in promoting the development of the IT sector, a sector typically seen as key to the transition to a knowledge economy
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Endogenous Spatial Production Networks: Theory, Estimation, and Evidence from Indian Firm-to-Firm Linkages
Get PDFIn modern economies, production is organized in large-scale complex networks of firms trading intermediate inputs with each other. Larger Indian firms selling inputs to other firms tend to have more customers, tend to be used more intensively by their customers, and tend to have larger customers. Motivated by these regularities, I propose a novel empirical model of trade featuring endogenous formation of input-output linkages between spatially distant firms. The empirical model consists of (a) a theoretical framework that accommodates first order features of firm-to-firm network data, (b) a maximum likelihood framework for structural estimation that is uninhibited by the scale of data, and (c) a procedure for counterfactual analysis that speaks to the effects of micro- and macro- shocks to the spatial network economy. In the model, differences in production costs across firms arise not just from differences in productivity but also from finding the most cost-effective suppliers of intermediate inputs. Firms with low production costs end up larger because they find more customers, are used more intensively by their customers and in turn their customers lower production costs and end up larger themselves. The model is estimated using novel micro-data on firm-to-firm sales between Indian firms. The model's fit is good. The estimated model implies that a 10% decline in inter-state border frictions in India leads to welfare gains ranging between 1% and 8% across districts. Moreover, over half of the variation in changes in firms' sales to other firms can be explained by endogenous changes in the network structure
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Essays in Urban Transportation and Factor Misallocation
Get PDFThis dissertation studies the effect of different policy interventions on allocative efficiency in developing countries. It evaluates how urban and antitrust policies may generate a better allocation of resources across firms, increasing aggregate welfare, and productivity. To provide causal evidence, it collects rich microdata at a very high granular level and exploits plausibly exogenous variation of the main mechanisms. It complements the main empirical findings with quantitative general equilibrium models that allow simulating the effect of different policy interventions.One of the main factors that explain factor misallocation in developing countries is the informal sector. The fact that firms face different tax schedules generate differences in marginal products of labor. The first chapter of my dissertation proposes a new mechanism to account for the significant presence of the informal economy in developing countries: the high commuting costs to transit within cities. I provide evidence of three different empirical facts that align with this hypothesis. First, due to the high commuting costs, most workers in Mexico City have poor access to formal employment. Second, workers that operate in the informal economy are more sensitive to commuting costs, which implies that it is easier to substitute informal jobs. Third, I exploit the construction of line B of the subway in Mexico City to provide causal evidence of the negative relationship between informality and transit improvements. I estimate a series of difference-in-differences specifications, finding that transit improvements lead to a reduction in informality rates by four percentage points in nearby areas to the new stations relative to other places in Mexico City. This result indicates that workers reallocate to firms with higher total factor revenue productivity, increasing the welfare effects of transit improvements relative to the estimates from previous literature.A fundamental question for economists and policymakers is to measure the welfare effects of transit infrastructure that reduce transit times within a city. While the literature has estimated the `direct'' effects of these projects, there are substantial ``indirect'' effects that previous work has ignored. The second chapter develops a spatial general equilibrium model to account for the ``direct'' effects and also for the "indirect" effects driven by the reallocation of workers from the informal into the formal economy. I extend recent theoretical work in the urban literature by adding distortions that generate resource misallocation. From a first-order approximation, I provide a formula that decomposes the welfare effects of trade and commuting shocks into a ``pure'' effect term and an allocative efficiency margin. I estimate the main elasticities of the model exploiting variation from transit shocks. With these parameters at hand, I simulate different counterfactual interventions. The main findings suggest that line B of the subway increased welfare between 1.3\% and 1.6\%, that the indirect effects explain approximately 15-25\% of the total gains, and that the average real income per every dollar spent on infrastructure increases by 15\% relative to a perfectly efficient economy. In addition to the informal sector, there can be other sources of resource misallocation in developing countries. The third chapter, co-authored with Dario Tortarolo, focuses on the role of market power in explaining differences in marginal products of labor across plants. We disentangle the extent of imperfect competition in product and labor markets, assuming cost-minimizing firms that face upward-sloping labor supply and downward-sloping product demand curves. In the first part, we derive a formula for the ratio between markups and markdowns. We compute this ratio by estimating the output elasticity with respect to labor and the wage bill share. We disentangle the measure of market power specific to each firm by estimating labor supply elasticities using as an instrument intermediate inputs. Our results suggest that both markets exhibit imperfect competition, but markups mainly drive the variation. We assume a general equilibrium model to measure the relative gains of removing market power dispersion on allocative efficiency. The findings suggest that markups are more critical in explaining TFP than markdowns
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Essays on International Trade
Get PDFThis dissertation investigates the role of firms in international trade using the recently available comprehensive datasets on international trade transactions of firms in different countries. The first chapter investigates empirically second-degree price discrimination in business-to-business dealings. I use highly detailed transaction-level Colombian imports data to document the presence of quantity discounts. These data helps me identify firms on both ends of the transaction. I document a robust negative relationship between prices and quantities of the same good purchased from a given seller by different Colombian buyers. This relationship is not an artifact of the measurement error or the scope for the quality differentiation of particular goods. I also show that this result is not driven by the length of the relationship and between a given buyer and a given seller or the number of transactions between a given buyer and a given seller per year. Finally, the negative relationship between prices and quantities holds when I condition my estimation on the measure of buyers' and sellers' market power. I find that, on average, a 10\% increase in the quantity purchased reduces the price charged per unit by 2\% and conclude that this relationship is most likely consistent with price discrimination rather than alternative explanations To rationalize this empirical fact, the second chapter of this dissertation develops a tractable theoretical framework that embeds nonlinear pricing (second-degree price discrimination) into a standard international trade model and characterizes optimal policies. The model can be conveniently aggregated and yields a standard gravity equation of international trade flows. However, the model has several important implications that are absent from the traditional trade models. I show that welfare losses from second-degree price discrimination can be quite substantial. I also characterize optimal trade policy from the perspective of a social planner in a small open economy. I prove that optimal tariffs are higher when firms use non-linear prices as compared to standard models. In addition, if the policymaker sets tariffs that are optimal under linear pricing, but firms use second-degree price discrimination, this will lead to significant welfare losses.The third chapter focuses on the the importance of the extensive margin (the number of firms exporting) for trade flows, which is highlighted by the Melitz model of international trade. Using the World Bank's \emph{Exporter Dynamics Database} featuring firm-level exports from 50 countries, it documents that around 50\% of variation in exports does occur on the extensive margin --- a quantitative victory for the Melitz framework. The remaining 50\% on the intensive margin (exports per exporting firm) contradicts a special case of Melitz with Pareto-distributed firm productivity, which has become a tractable benchmark. This benchmark model predicts that, conditional on the fixed costs of exporting, \emph{all} variation in exports across trading partners will occur on the extensive margin. Combining Melitz with lognormally-distributed firm productivity and firm-destination fixed trade costs can explain the intensive margin seen in the EDD data. In the EDD, the importance of the intensive margin rises steadily when going from the smallest to largest exporting firms across source countries, as is also predicted by the Melitz model with lognormally-distributed productivity
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Essays in International Trade and Spatial Economics
Get PDFThis dissertation studies how heterogeneous agents’ exposure to local markets determines welfare and distributional effects of shocks such as policy interventions. In both chapters recent modeling tools in the international trade literature are applied to the study of spatial inequality in cities and its sources in chapter 1 or scaling up agricultural policy interventions in chapter 2. These tools are used to answer research questions in the context of quantitative general equilibrium models that feature rich heterogeneity but remain tractable. Moreover, the models in this dissertation predict clear relationships between the choices of households, firms and aggregate variables that are disciplined with detailed microdata. The first chapter Two-Sided Sorting and Spatial Inequality in Cities studies a new economic force underlying the spatial sorting of rich and poor households in cities. On the demand side, households with different incomes choose neighborhoods and differ in their expenditures across various local services. On the supply side, service establishments sort into neighborhoods while taking into account proximity to their consumers. This two-sided sorting leads to endogenous differences in the local price index that amplify the concentration of household groups. A recent literature in urban economics has rationalized spatial sorting of households that is left unexplained by local incomes or housing costs by modeling pure amenity spillovers. In this chapter, I quantify the contribution of endogenous price indices to spatial sorting that is usually projected onto such reduced-form spillovers, and study the implications of two-sided sorting for urban policy. To do so, I develop a quantitative equilibrium model of the city that features two-sided sorting and nests many urban models. I estimate the key parameters of the model using detailed microdata for Los Angeles from 1990-2014. I find that spatial variation in local price indices decreases the estimates of reduced-form spillovers by about 30-50 percent. To shed light on the policy implications, I simulate policy counterfactuals, and compare the effects to the existing framework with only reduced-form amenity spillovers. By studying a number of prominent place-based policies in Los Angeles, I find substantially different effects on neighborhood composition and welfare between both models.The second chapter Scaling Agricultural Policy Interventions: Theory and Evidence from Uganda studies the welfare and distributional effects of scaling agricultural interventions in general equilibrium. Interventions aimed at raising agricultural productivity in developing countries have been a centerpiece in the global fight against poverty. These policies are increasingly informed by evidence from field experiments and natural experiments, with the well-known limitation that findings based on local variation generally do not speak to the general equilibrium (GE) effects if the intervention were to be scaled up to the national level. In this chapter, we develop a new framework to quantify these forces based on a combination of theory and rich but widely available microdata. We build a quantitative GE model of farm production and trade, and propose a new solution method in this environment for studying high-dimensional counterfactuals at the level of individual households in the macroeconomy. We then bring to bear microdata from Uganda to calibrate the model to all households populating the country. We use these building blocks to explore the average and distributional implications of local shocks compared to policies at scale, and quantify the underlying mechanisms
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Essays in Development and Trade
Get PDFThis dissertation in development and trade explores the economic impact of liberalization and globalization. In the past few decades, as emerging economies such as India and China have opened up to world trade and liberalized their economies, these countries have experienced a surprisingly fast increase in GDP per capita. This is testament to the large benefits that can be reaped from globalization and liberalization. Paradoxically however, while globalization and liberalization should be celebrating their success stories, they are met by ever fiercer criticism, as is clear from rising opposition against free trade and an increasing resentment against globalization on both sides of the Atlantic, of which the recent Brexit referendum is but one example. These developments call for a more nuanced understanding of the benefits, but also of the downsides of globalization and liberalization, and this dissertation attempts to contribute to this understanding.The first chapter of this dissertation develops a novel general-equilibrium model of the relationship between competition, financial constraints and misallocation. In the model, steady-state misallocation consists of both variable markups and capital wedges. The variable markups arise from Cournot-type competition, whereas the capital wedges result from the interaction of firm-level productivity volatility with financial constraints. Firms experience random shocks to their productivity and in response to positive productivity shocks they optimally grow their capital stock, subject to financial constraints. Competition plays a dual role in affecting misallocation. On the one hand, both markup levels and markup dispersion tend to fall with competition, which unambiguously improves allocative efficiency in a setting without financial constraints. On the other hand, in a setting with financial constraints, a reduction in markups is associated with slower capital accumulation, as the rate of self-financed investment shrinks. Thus, the positive impact of competition on steady-state misallocation is reduced by the presence of financial constraints. The second chapter then tests the implications of the theoretical model from the first chapter using Indian plant-level panel data. The prediction that the firm-level speed of capital convergence falls with competition is confirmed for the full panel of manufacturing plants in India's Annual Survey of Industries. This effect is particularly pronounced in sectors with higher levels of financial dependence. I also exploit natural variation in the level of competition, arising from the pro-competitive impact of India's 1997 dereservation reform on incumbent plants, and again confirm the qualitative predictions of the model. The third chapter, which is joint work with Andr'es Rodr'iguez-Clare and Moises Yi, develops and applies a framework to analyze the effect of trade on aggregate welfare as well as the distribution of this aggregate effect across different groups of workers. The framework combines a multi-sector gravity model of trade with a Roy-type model of the allocation of workers across sectors. The model predicts unequal distribution of the gains from trade as labor demand increases (decreases) for groups of workers specialized in export-oriented (import-oriented) sectors. The model generalizes the specific-factors intuition to a setting with labor reallocation, while maintaining analytical tractability for any number of groups and countries. We bring the model to the data using China's growth as a trade shock, where we define groups as German regions. First, we show that the model's structure accurately captures the empirical changes in regional income due to the China shock. Second, we structurally estimate the model's parameter that governs the distributional effects of the model. Counterfactual simulations show that this parameter implies sizable distributional implications of trade, with several groups losing from free trade. Finally, we measure the "inequality-adjusted" welfare effect of trade, which captures the full cross-group distribution of welfare changes in one measure. We find that inequality-adjusted gains from trade are larger than the aggregate gains for both countries, as between-group inequality falls with trade relative to autarky. Importantly, the opposite happens for the China shock
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New Perspectives on Policy Uncertainty
Get PDFIn recent years, the ubiquitous and intensifying nature of economic policy uncertainty has made it a popular explanation for weak economic performance in developed and developing markets alike. The primary channel for this effect is decreased and delayed investment as firms adopt a ``wait and see'' approach to irreversible investments (Bernanke, 1983; Dixit and Pindyck, 1994). Deep empirical examination of policy uncertainty's impact is rare because of the difficulty associated in measuring its magnitude and changes over time. In this dissertation, I leverage the recent advent of global news aggregators to directly identify and measure policy uncertainty shocks based on ``news chatter'' in the press. Unlike previously used measures of economic uncertainty (e.g., strike days or exchange rate volatility), ``news chatter'' uncertainty indices pick up economic volatility as well as the threat or anticipation of volatility stemming from policy uncertainty, whether or not it comes to fruition. The more holistic character of such measures allows for a more nuanced examination of uncertainty's impact on firm decisions and outcomes. After constructing novel measures of policy uncertainty, I then explore how they translate into economic outcomes that extend beyond the traditional investment channel.In Chapter 1, I offer new insights into the channels policy uncertainty operates through by constructing a novel and rich dataset of type-specific policy uncertainty indices and leveraging previously unexamined variation in firm-level exposure to external markets to create firm-specific measures of policy uncertainty. Specifically, I exploit variation in firms' exposure to external markets to construct a firm-level measure of policy uncertainty. The approach both highlights a new channel for policy uncertainty and allows for stronger causal identification of the effects of policy uncertainty on economic performance. As part of this effort, I refine prior approaches to measuring policy uncertainty and distinguish between generic, fiscal, monetary, and trade policy uncertainty. I find that firms with greater exposure to external markets tend to experience larger declines in investment, sales, profits, and employment when fiscal and monetary policy uncertainty increase. Unexpectedly, increases in trade policy uncertainty appear to have a positive impact on exports for exposed firms. Both sets of findings can be rationalized in a standard model of firm investment under uncertainty. In particular, I present evidence that exposed firms may perceive increased uncertainty around trade agreement negotiations as a signal that negative outcomes are less likely in the near-term, incentivizing immediate investments.Historically, exchange rate depreciation makes a country's exports more competitive and cheaper, increasing its exports. Since the end of the Great Recession, many countries have seen this relationship weaken. In Chapter 2, I advance policy uncertainty as a new explanation for such dilutions in the relationship between exchange rates and export performance. Using South Africa as a case study, I find that increased policy uncertainty diminishes the responsiveness of exports to exchange rate fluctuations. In Chapter 3, I examine a more extreme version of policy uncertainty--regime uncertainty. In 2010, the International Criminal Court (ICC) issued an indictment against six of Kenya's foremost leaders for crimes against humanity related to 2008 post-election violence. I find strong evidence that firms connected to the accused experienced declines in valuations during ICC shocks, with particularly negative revaluations for firms with highly public links to the accused. The results suggest that the negative effects of regime uncertainty outweighed any positive ``rule of law'' shock that the ICC's intervention might have provided to firms. Together the studies provide new insights on the connections between policy uncertainty and weak aggregate economic performance. In addition to offering more nuance for policy directives, the results will help discipline future theoretical efforts to more accurately model complex dynamics in modern open economies
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Essays in Macroeconomics and Trade
Get PDFIn the current thesis I investigate the impact of sectoral structure of the economy on some aspects of its short-run fluctuations and long-run trends.In the first chapter -- "Cost Structure and Price Rigidity across Sectors" -- I model a mechanism through which the structure of costs of producers can affect producers' decisions on the frequency of adjusting prices. First, I establish an empirical observation that sectors which are characterized by either a higher share of labor or more diversified structure of bundles of intermediate goods are characterized by more rigid prices. Then I build and solve a partial equilibrium model that describes optimal price-setting strategies of firms in different sectors. The model provides an explanation for heterogeneity in price rigidity across different sectors. The calibrated model can be used for predicting how changes in the production processes and in the structure of costs can affect the heterogeneity of price rigidity across sectors and, hence, the aggregate price rigidity in the economy. In the second chapter -- "Technological Spillovers and Dynamics of Comparative Advantage" -- I investigate the question of the evolution of sector productivity and comparative advantage under the presence of cross-sector technological spillovers. For that I develop a dynamic model of international trade with cross-sector spillovers. In addition to the standard effect of comparative advantage on labor allocation, the model accounts for the effects of labor allocation on the sector productivity and comparative advantage. The core mechanism is a combination of an idea-generating process within each sector and technological spillovers across sectors. I establish necessary and sufficient conditions for the existence and uniqueness of a balanced growth path and describe the conditions under which a welfare-improving industrial policy is possible. I calibrate the model using the US patent data to parametrize the strength of technological spillovers and use the model to describe the optimal industrial policy
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