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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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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THE MARGINS OF GLOBAL SOURCING: THEORY AND EVIDENCE FROM U.S. FIRMS
December 2014
Working Paper Number:
CES-14-47
This paper studies the extensive and intensive margins of firms' global sourcing decisions. We develop a quantifiable multi-country sourcing model in which heterogeneous firms self-select into importing based on their productivity and country-specific variables. The model delivers a simple closed-form solution for firm profits as a function of the countries from which a firm imports, as well as those countries' characteristics. In contrast to canonical models of exporting in which firm profits are additively separable across exporting markets, we show that global sourcing decisions naturally interact through the firm's cost function. In particular, the marginal change in profits from adding a country to the firm's set of potential sourcing locations depends on the number and characteristics of other countries in the set. Still, under plausible parametric restrictions, selection into importing features complementarity across markets and firms' sourcing strategies follow a hierarchical structure analogous to the one predicted by exporting models. Our quantitative analysis exploits these complementarities to distinguish between a country's potential as a marginal cost-reducing source of inputs and the fixed cost associated with sourcing from this country. Counterfactual exercises suggest that a shock to the potential benefits of sourcing from a country leads to significant and heterogeneous changes in sourcing across both countries and firms.
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Multi-Product Firms and Trade Liberalization
August 2009
Working Paper Number:
CES-09-21
This paper develops a general equilibrium model of international trade that features selection across firms, products and countries. Firms' export decisions depend on a combination of firm 'productivity' and firm-product-country 'consumer tastes', both of which are stochastic and unknown prior to the payment of a sunk cost of entry. Higher-productivity firms export a wider range of products to a larger set of countries than lower-productivity firms. Trade liberalization induces endogenous reallocations of resources that foster productivity growth both within and across firms. Empirically, we find key implications of the model to be consistent with U.S. trade data.
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Are firm-level idiosyncratic shocks important for U.S. aggregate volatility?
January 2017
Working Paper Number:
CES-17-23
This paper quantitatively assesses whether firm-specific shocks can drive the U.S. business cycle. Firm-specific shocks to the largest firms can directly contribute to aggregate fluctuations whenever the firm size distribution is fat-tailed giving rise to the granular hypothesis. I use a novel, comprehensive data set compiled from administrative sources that contains the universe of firms and trade transactions, and find that the granular hypothesis accounts at most for 16 percent of the variation in aggregate sales growth. This is about half of that found by previous studies that imposed Gibrat's law where all firms are equally volatile regardless of their size. Using the full distribution of growth rates among U.S. firms, I find robust evidence of a negative relationship between firm-level volatility and size, i.e. the size-variance relationship. The largest firms (whose shocks drive granularity) are the least volatile under the size-variance relationship, thus their influence on aggregates is mitigated. I show that by taking this relationship into account the effect of firm-specific shocks on observed macroeconomic volatility is substantially reduced. I then investigate several plausible mechanisms that could explain the negative sizevariance relationship. After empirically ruling out some of them, I suggest a 'market power' channel in which large firms face smaller price elasticities and therefore respond less to a givensized productivity shock than small firms do. I provide direct evidence for this mechanism by estimating demand elasticities among U.S. manufactures. Lastly, I construct an analytically tractable framework that is consistent with several empirical regularities related to firm size.
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Climate Change, The Food Problem, and the Challenge of Adaptation through Sectoral Reallocation
September 2021
Working Paper Number:
CES-21-29
This paper combines local temperature treatment effects with a quantitative macroeconomic model to assess the potential for global reallocation between agricultural and non-agricultural production to reduce the costs of climate change. First, I use firm-level panel data from a wide range of countries to show that extreme heat reduces productivity less in manufacturing and services than in agriculture, implying that hot countries could achieve large potential gains through adapting to global warming by shifting labor toward manufacturing and increasing imports of food. To investigate the likelihood that such gains will be realized, I embed the estimated productivity effects in a model of sectoral specialization and trade covering 158 countries. Simulations suggest that climate change does little to alter the geography of agricultural production, however, as high trade barriers in developing countries temper the influence of shifting comparative advantage. Instead, climate change accentuates the existing pattern, known as 'the food problem,' in which poor countries specialize heavily in relatively low productivity agricultural sectors to meet subsistence consumer needs. The productivity effects of climate change reduce welfare by 6-10% for the poorest quartile of the world with trade barriers held at current levels, but by nearly 70% less in an alternative policy counterfactual that moves low-income countries to OECD levels of trade openness.
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Workers' Job Prospects and Young Firm Dynamics
January 2025
Working Paper Number:
CES-25-09
This paper investigates how worker beliefs and job prospects impact the wages and growth of young firms, as well as the aggregate economy. Building a heterogeneous-firm directed search model where workers gradually learn about firm types, I find that learning generates endogenous wage differentials for young firms. High-performing young firms must pay higher wages than equally high-performing old firms, while low-performing young firms offer lower wages than equally low-performing old firms. Reduced uncertainty or labor market frictions lower the wage differentials, thereby enhancing young firm dynamics and aggregate productivity. The results are consistent with U.S. administrative employee-employer matched data.
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Global Sourcing and Multinational Activity: A Unified Approach
September 2022
Working Paper Number:
CES-22-36
Multinational firms (MNEs) accounted for 42 percent of US manufacturing employment, 87 percent of US imports, and 84 of US exports in 2007. Despite their disproportionate share of global trade, MNEs' input sourcing and final-good production decisions are often studied separately. Using newly merged data on firms' trade and FDI activity by country, we show that US MNEs are more likely to import not only from the countries in which they have affiliates, but also from other countries within their affiliates' region. We rationalize these patterns in a unified framework in which firms jointly determine the countries in which to produce final goods, and the countries from which to source inputs. The model generates a new source of scale economies that arises because a firm incurs a country specific fixed cost that allows all its assembly plants to source inputs from that country. This shared fixed cost across plants creates interdependencies between firms' assembly and sourcing locations, and leads to non-monotonic responses in third markets to bilateral trade cost changes.
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INTERNATIONAL PATENTING STRATEGIES WITH HETEROGENEOUS FIRMS
September 2014
Working Paper Number:
CES-14-28
This paper analyzes how firms decide where to patent in a heterogeneous firm model of trade with endogenous rival entry. In the model, innovating firms compete with rival firms on price, where rivals force the innovating firm to reduce markups and lower the innovating firm's probability of obtaining monopolistic profits. Patenting allows the innovating firm to reduce the number of rival rms by increasing their fixed overhead costs, thereby providing higher expected profits and increased markups from reduced competition. Countries with higher states of technology, more competition and better patent protection have a greater proportion of entrants who patent. Industries tend to follow a U-shaped pattern of patenting where industries with high heterogeneity in production and low substitution, along with industries with low heterogeneity in production and high substitution patent more frequently. Using a generalized framework of the model, I estimate market-based measures of country-level patent protection, which when compared with other IP indices, suggests that not enough international patenting is taking place. Finally, I test the predictions of the model using a newly available technology-to-industry concordance on bilateral patent flows and show that firms are increasingly sensitive to foreign IP protection. Countries that choose to maximize their IP protection can increase the number of foreign patents by almost 10%.
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Are firm-level idiosyncratic shocks important for U.S. aggregate volatility?
January 2016
Working Paper Number:
CES-16-47
This paper assesses the quantitative impact of firm-level idiosyncratic shocks on aggregate volatility in the U.S. economy and provides a microfoundation for the negative relationship between firm-level volatility and size. I argue that the role of firm-specific shocks through the granular channel plays a fairly limited role in the U.S. economy. Using a novel, comprehensive data set compiled from several sources of the U.S. Census Bureau, I find that the granular com-ponent accounts at most for 15.5% of the variation in aggregate sales growth which is about half found by previous studies. To bridge the gap between previous findings and mine, I show that my quantitative results require deviations from Gibrat's law in which firm-level volatility and size are negatively related. I find that firm-level volatility declines at a substantially higher rate in size than previously found. Hence, the largest firms in the economy cannot be driving a sub-stantial fraction of macroeconomic volatility. I show that the explanatory power of granularity gets cut by at least half whenever the size-variance relationship, as estimated in the micro-level data, is taken into account. To uncover the economic mechanism behind this phenomenon, I construct an analytically tractable framework featuring random growth and a Kimball aggrega-tor. Under this setup, larger firms respond less to productivity shocks as the elasticity of demand is decreasing in size. Additionally, the model predicts a positive (negative) relationship between firm-level mark-ups (growth) and size. I confirm the predictions of the model by estimating size-varying price elasticities on unique product-level data from the Census of Manufactures (CM) and structurally estimating mark-ups using plant-level information from the Annual Survey of Manufactures (ASM).
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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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