Goods and bads
Genetic distance, trade, and the diffusion of development
Vincenzo Bove & Gunes Gokmen
Journal of Applied Econometrics, June/July 2018, Pages 617-623
Abstract:
The determinants of countries' long‐term income differences feature prominently in the literature. Spolaore and Wacziarg (The diffusion of development, Quarterly Journal of Economics, 2009, 124, 469–529) argue that cultural differences, measured by countries' genetic distance, are an important barrier to the diffusion of development from the world's technological frontier. We revisit their findings in three ways. First, we successfully reproduce their results and confirm the robustness of their baseline findings. Second, we estimate their models for different time periods and find that the impact of genetic distance on income differences did not significantly change over time. Finally, we explore one of the underlying mechanisms of technology adoption and show that bilateral trade is one channel through which cultural differences retard the diffusion of development.
Tariffs and Markups in Retailing
Matthew Cole & Carsten Eckel
Journal of International Economics, July 2018, Pages 139-153
Abstract:
Tariffs on imported products are typically expected to raise the relative price of foreign goods and, as a result, increase the residual demands of domestic substitutes. In this paper we show, more generally, that these changes in wholesale/manufacturing prices can be offset and even dominated by adjustments in retail mark-ups. Retailers have an incentive to charge the highest mark-ups on the lowest-cost products and to adjust the mark-ups on these products most actively. Thus, if the procurement costs of some foreign products rise, retailers will absorb these cost increases by raising prices relatively more on their relatively more efficient products, thereby mitigating the benefits of a protectionist tariff. We show that this effect can dominate the traditional substitution effect, which highlights the need to better understand the role of retailers in trade policy.
Commercial Diplomacy and Political Risk
Geoffrey Gertz
International Studies Quarterly, March 2018, Pages 94–107
Abstract:
The modern investor-state arbitration regime was explicitly designed to replace commercial diplomacy as a mechanism for protecting foreign investment. I argue, however, that diplomacy continues to play an important role in managing political risk, particularly in countries with weak rule of law. Yet, since commercial diplomacy occurs primarily behind closed doors, it is difficult to observe, let alone test for its effects. To overcome this obstacle, I exploit variation in vacancies among US ambassadors to foreign countries — conditions overwhelmingly driven by US domestic political factors — which provides for a quasi-natural experiment for testing the effects of commercial diplomacy. I show that American firms operating abroad are significantly more likely to initiate investor-state arbitration disputes during temporary vacancies in US ambassadorships. The effects of these vacancies prove particularly strong in countries with weak rule of law. The results suggest American investors frequently seek assistance from the US government in informally resolving incipient investment disputes; if diplomatic channels are unsuccessful or unavailable, investors then file formal arbitration cases. These findings underline that, even in highly legalized issue areas in world politics, such as investment protection, informal diplomacy continues to influence important political economy outcomes.
Temporary Protection and Technology Adoption: Evidence from the Napoleonic Blockade
Réka Juhász
American Economic Review, forthcoming
Abstract:
This paper uses a natural experiment to estimate the causal effect of temporary trade protection on long-term economic development. I find that regions in the French Empire which became better protected from trade with the British for exogenous reasons during the Napoleonic Wars (1803–15) increased capacity in mechanized cotton spinning to a larger extent than regions which remained more exposed to trade. In the long-run, regions with exogenously higher spinning capacity had higher activity in mechanized cotton spinning. They also had higher value-added per capita in industry up to the second half of the 19th century, but not later.
Trade liberalization, democratization, and technology adoption
Matteo Cervellati, Alireza Naghavi & Farid Toubal
Journal of Economic Growth, June 2018, Pages 145–173
Abstract:
A general equilibrium theory with heterogeneous skills predicts a complementarity between trade and democracy in creating demand for superior technologies. Trade liberalization or democratization alone may lead to vested interests that limit technology adoption. We use panel data on technology adoption, at a disaggregated level, for the period 1980–2000. Exploiting within-country variation over time and the heterogeneous timing of trade liberalization and democratization, we document a significant and sizable positive interaction between trade openness and democratization for technology adoption. The result that transitions to open democracies are beneficial for technological dynamics is robust to a large set of checks.
Minority Rules: Credible State Ownership and Investment Risk Around the World
Barclay James & Paul Vaaler
Organization Science, forthcoming
Abstract:
Research in management and related fields largely assumes that host-country state (“state”) ownership in investment projects raises risk for private coinvestors. We question that assumption in theorizing that minority state ownership may actually decrease investment risk in host countries where policy stability is low. Noncontrolling but still substantial state ownership signals to private coinvestors that states will maintain initial investment project terms yet limit interference in project management under those same initial terms. Analyses of 1,373 investment projects announced in 95 host countries from 1990 to 2012 support this proposition: (1) low policy stability in the host country increases investment risk, measured as the percentage of equity comprising all project capital funding on the announcement date, but (2) minority state ownership diminishes the risk-increasing impact of low policy stability, and (3) the risk-diminishing effect is greatest when policy stability is low and the state holds from 21% to 40% of investment project equity. Where permitted, private investors can use state ownership as a risk-reducing strategy in response to low policy stability. Our study highlights where these “minority rules” hold and state ownership signals credible assurance to private coinvestors in less stable policy environments.
Inventory Management, Product Quality, and Cross-Country Income Differences
Bernardo Blum et al.
American Economic Journal: Macroeconomics, forthcoming
Abstract:
Previous research has documented that export shipments are “lumpy” – exporters make infrequent and relatively large shipments to any given export destination. This fact has been interpreted as implying that fixed, per-shipment costs and inventory management decisions play a key role in international trade. We document here that exports from poor countries are considerably more lumpy – have higher fixed per-shipment costs – than those from rich countries. Using a model of trade with inventory management, we estimate that the country at the 90th percentile of the distribution of per shipment costs has almost three times higher costs than the one at the 10th percentile. We show that these per-shipment cost differences have a reduced-form representation given by an ad valorem trade cost that varies with export country income (as in Waugh, 2010). A calibrated version of the model that in- corporates these estimates and allows for endogenous product quality reveals that cross-country differences in per-shipment costs explain almost forty percent of the observed cross-country differences in income. It also shows that policies that lower per-shipment costs can lead to significant welfare gains, mainly due to induced quality upgrading.
Free Riding on Enforcement in the World Trade Organization
Leslie Johns & Krzysztof Pelc
Journal of Politics, forthcoming
Abstract:
Many policies that appear to violate WTO rules remain unchallenged, even as they have a significant economic impact. Why is this? We argue that the likelihood that a country challenges a protectionist policy is linked to how concentrated or diffuse that policy is. When it is concentrated, litigation is a private good. But when a policy is diffuse, affecting many states, litigation is a public good and countries face a collective action problem: each country seeks to free ride on others’ litigation. The resulting selection effect has two consequences. First, we see a longer enforcement delay for diffuse trade violations. Second, states require higher odds of success to overcome the collective action problem, meaning that conditional on being filed, cases that challenge concentrated policies are less likely to succeed. Examining all WTO disputes, we leverage selection effects to test our argument using data on the timing and outcomes of trade disputes.
International Corporate Governance Spillovers: Evidence from Cross-Border Mergers and Acquisitions
Rui Albuquerque et al.
Review of Financial Studies, forthcoming
Abstract:
We test the hypothesis that foreign direct investment promotes corporate governance spillovers in the host country. Using firm-level data from 64 countries during the period 2005–2014, we find that cross-border M&A activity is associated with subsequent improvements in the governance of nontarget firms when the acquirer country has stronger investor protection than the target country. The effect is more pronounced when the target industry is more competitive. Cross-border M&As are also associated with increases in investment and valuation of nontarget firms. Alternative explanations, such as access to global financial markets and cultural similarities, do not appear to explain our findings.
Do Announcements of WTO Dispute Resolution Cases Matter? Evidence from the Rare Earth Elements Market
Juliane Proelss, Denis Schweizer & Volker Seiler
Energy Economics, June 2018, Pages 1-23
Abstract:
Rare earth elements (REEs) have gained increasing attention recently for several key reasons: 1) they are vital to many strategic industries, 2) they are relatively scarce, 3) they frequently exhibit high price fluctuations, 4) China holds a quasi-monopoly on their mining, and 5) China’s REE policy, which was overly restrictive and led to a formal complaint from the U.S., Japan, and the EU at the World Trade Organization (WTO) in 2012. This paper investigates whether the announcement of a WTO dispute resolution case has the power to fundamentally change market dynamics. We find empirical support for this notion because REE prices exhibit a structural break around the announcement of the WTO dispute, and show lower variance ratios for all tested REEs afterward. This indicates a tendency toward efficiency, although REE prices still do not follow a random walk. Similarly, we find that stock price informativeness of companies in the REE industry increases after the announcement, reflecting more firm-specific than marketwide information and less governmental influence. Finally, we show that model uncertainty for option pricing models decreases, which we measure by the lower pricing differences among them.