I causally estimate local knowledge spillovers in R&D and quantify their importance when implementing R&D policies. Using a new administrative panel on German inventors, I estimate these spillovers by isolating quasi-exogenous variation from the arrival of East German inventors across West Germany after the Reunification of Germany in 1990. Increasing the number of inventors by 1% increases inventor productivity by 0.4%. I build a spatial model of innovation, and show that these spillovers are crucial when reducing migration costs for inventors or implementing R&D subsidies to promote economic activity.
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Multinational Production and Innovation in Tandem
October 2024
Working Paper Number:
CES-24-64
Multinational firms colocate production and innovation by offshoring them to the same host country or region. In this paper, I examine the determinants of multinational firms' production and innovation locations. Exploiting plausibly exogenous variations in tariffs, I find complementarities between production and innovation within host countries and regions. To evaluate manufacturing reshoring policies, I develop a quantitative multicountry offshoring location choice model. I allow for rich colocation benefits and cross-country interdependencies and prove supermodularity of the model to solve this otherwise NP-hard problem. I find the effects of manufacturing reshoring policies are nonlinear, contingent upon firm heterogeneity, and they accumulate dynamically.
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Foreign Direct Investment, Geography, and Welfare
September 2024
Working Paper Number:
CES-24-45
We study the impact of FDI on domestic welfare using a model of internal trade with variable markups that incorporates intranational transport costs. The model allows us to disentangle the various channels through which FDI affects welfare. We apply the model to the case of Ethiopian manufacturing, which received considerable amounts of FDI during our study period. We find substantial gains from the presence of foreign firms, both in the local market and in other connected markets in the country. FDI, however, resulted in a modest worsening of allocative efficiency because foreign firms tend to have significantly higher markups than domestic firms. We report consistent findings from our empirical analysis, which utilises microdata on manufacturing firms, information on FDI projects, and geospatial data on improvements in the road network.
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The Location of Industrial Innovation: Does Manufacturing Matter?
March 2013
Working Paper Number:
CES-13-09
What explains the location of industrial innovation? Economists have traditionally attempted to answer this question by studying firm-external knowledge spillovers. This paper shows that firm-internal linkages between production and R&D play an equally important role. I estimate an R&D location choice model that predicts patents by a firm in a location from R&D productivity and costs. Focusing on large R&D-performing firms in the chemical industry, an average-sized plant raises the firm's R&D productivity in the metropolitan area by about 2.5 times. The elasticity of R&D productivity with respect to the firm's production workers is almost as large as the elasticity with respect to total patents in the MSA, while proximity to academic R&D has no significant effect on R&D productivity in this sample. Other manufacturing industries exhibit similar results. My results cast doubt on the frequently-held view that a country can divest itself of manufacturing and specialize in innovation alone.
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What Drives Stagnation: Monopsony or Monopoly?
October 2022
Working Paper Number:
CES-22-45
Wages for the vast majority of workers have stagnated since the 1980s while productivity
has grown. We investigate two coexisting explanations based on rising market power: 1. Monopsony, where dominant firms exploit the limited mobility of their own workers to pay lower wages; and 2. Monopoly, where dominant firms charge too high prices for what they sell, which lowers production and the demand for labor, and hence equilibrium wages economy-wide. Using establishment data from the US Census Bureau between 1997 and 2016, we find evidence of both monopoly and monopsony, where the former is rising over this period and the latter is stable. Both contribute to the decoupling of productivity and wage growth, with monopoly being the primary determinant: in 2016 monopoly accounts for 75% of wage stagnation, monopsony for 25%.
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Firm Heterogeneity, Misallocation, and Trade
May 2025
Working Paper Number:
CES-25-33
To what extent do domestic distortions influence the gains from trade? Using data from Chinese manufacturing surveys and U.S. census records, I document two novel stylized facts: (1) Larger producers in China exhibit lower revenue productivity, whereas larger producers in the U.S. exhibit higher revenue productivity. (2) Larger exporters in China exhibit lower export intensity, whereas larger exporters in the U.S. exhibit higher export intensity. A model of heterogeneous producers shows that only the U.S. patterns are consistent with an efficient allocation. To reconcile the observed patterns in China, I introduce producer- and destination-specific subsidies and estimate the model without imposing functional form assumptions on the joint distribution of productivity and subsidy rates. Accounting for distortions in China leads to substantially smaller estimated gains from trade.
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Urban-Biased Growth: A Macroeconomic Analysis
June 2024
Working Paper Number:
CES-24-33
After 1980, larger US cities experienced substantially faster wage growth than smaller ones. We show that this urban bias mainly reflected wage growth at large Business Services firms. These firms stand out through their high per-worker expenditure on information technology and disproportionate presence in big cities. We introduce a spatial model of investment-specific technical change that can rationalize these patterns. Using the model as an accounting framework, we find that the observed decline in the investment price of information technology capital explains most urban-biased growth by raising the profits of large Business Services firms in big cities.
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Geography in Reduced Form
January 2017
Working Paper Number:
CES-17-10
Geography models have introduced and estimated a set of competing explanations for the persistent relationships between firm and location characteristics, but cannot identify these forces. I introduce a solution method for models in arbitrary geographies that generates reduced-form predictions and tests to identify forces acting through geographic linkages. This theoretical approach creates a new strategy for spatial empirics. Using the correct observables, the model shows that geographic forces can be taken into account without being directly estimated; establishment and employment density emerge as sufficient statistics for all geographic forces. I present two applications. First, the model can be used to evaluate whether geographic linkages matter and when simplified models suffice: the mono-centric model is a good fit for business services firms but cannot capture the geography of manufactures. Second, the model generates reduced-form tests that distinguish between spillovers and firm sorting and finds evidence of sorting.
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Market Power And Wage Inequality
September 2022
Working Paper Number:
CES-22-37
We propose a theory of how market power affects wage inequality. We ask how goods and labor market power jointly affect the level of wages, the Skill Premium, and wage inequality. We then use detailed microdata from the US Census between 1997 and 2016 to estimate the parameters of labor supply, technology and the market structure. We find that a less competitive market structure lowers the wage level, contributes 7% to the rise in the Skill Premium and accounts for half of the increase in between-establishment wage variance.
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The Role of R&D Factors in Economic Growth
November 2024
Working Paper Number:
CES-24-69
This paper studies factor usage in the R&D sector. I show that the usage of non-labor inputs in R&D is significant, and that their usage has grown much more rapidly than the R&D workforce. Using a standard growth decomposition applied to the aggregate idea production function, I estimate that at least 77% of idea growth since the early 1960s can be attributed to the growth of non-labor inputs in R&D. I demonstrate that a similar pattern would hold on the balanced growth path of a standard semi-endogenous growth model, and thus that the decomposition is not simply a by-product of rising research intensity. I then show that combining long-running differences in factor growth rates with non-unitary elasticities of substitution in idea production leads to a slowdown in idea growth whenever labor and capital are complementary. I conclude by estimating this elasticity of substitution and demonstrate that the results favor complimentarities.
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An Applied General Equilibrium Model Of Moroccan Trade Liberalization Featuring External Economies
November 1997
Working Paper Number:
CES-97-16
Since the 1920's economists have wrestled with the effects of external economies on trade liberalization. In this paper I show that under extreme conditions, externalities can reverse the gains from trade found in perfectly competitive trade models. However, the externalities needed to generate this result, even under the worst possible conditions (all expanding industries are subject to negative externalities, all contracting industries have positive externalities) are orders of magnitude larger than those estimated in Krizan (1997). This suggests that the presence of external economies of scale does not provide a credible argument for protectionism. On the other hand, the CGE model showed that external effects can increase the welfare gains from trade liberalization, but the combined effect is still small compared to other policy options. This finding contrasts sharply with many models featuring internal returns to scale that are able to generate large welfare benefits from trade liberalization.
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