Working Papers
Production Clustering and Offshoring (Revise and Resubmit at American Economic Journal: Microeconomics) |
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I introduce a quantifiable model of international production that allows for a production chain of any length, any number of sourcing countries, and weak assumptions on the structure of production and trade costs. Furthermore, the production process does not have to be perfectly sequential, and the final goods can be made from any number of independent subchains. I show that in this model allocation decisions on different stages of production are interdependent, which generates a new channel of proximity-concentration trade-off. The presence of trade costs makes firms cluster their production in certain countries, while trade liberalization allows firms to fragment their production more and exploit productivity differences between countries more efficiently. I then present a general equilibrium heterogeneous firms model in which every firm solves the allocation problem described above. In this model, the distribution of firms’ productivity is endogenous with respect to trade costs: trade liberalization leads to a distribution that stochastically dominates the old one, thus leading to an increase in welfare. I use the model to decompose the welfare gains from trade liberalization through two channels:cheaper intermediate inputs and a more efficient production structure. I apply the model to the data and study Chinese joining the WTO. I calibrate the model and find that a more efficient production structure accounts for approximately 12% of gains from trade.
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Oligopoly and Oligopsony in International Trade (under review) (with Luca Macedoni) |
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We study the effects of international trade on firms' oligopsony power in inputs markets. Combining international trade data with measures of market concentration, we find that higher oligopsony power is associated with higher unit prices of export goods, and this effect is much larger than the effect of oligopoly power in final goods markets. We build a theoretical model of international trade in which firms are oligopolists in the market for final goods and oligopsonists in the market for inputs. Trade liberalization in one market reduces firms' market power in such market, but it has the opposite effect in the other market. In particular, international trade between oligopolists in final goods markets causes oligopsony power to increase. Calibrating our model for the US, we find that the reduction in domestic markups generated by international trade are 30-50% lower due to the presence of oligopsony power.
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PPML, Gravity, and Heterogeneous Trade Elasticites (under review) (with Xinbei Zhou) |
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The gravity equation is the most popular empirical tool among trade economists. Two of the most common approaches to estimating it are the ordinary least squares (OLS) and Poisson pseudo-maximum likelihood (PPML) estimators, with PPML often being preferred over OLS because it does not lead to bias if the error term of the regression is heteroskedastic. We show theoretically and document in a series of Monte Carlo simulations that when trade elasticity is not constant between country pairs, the OLS and PPML estimates of the gravity equation have different interpretations: OLS estimates the average elasticity, and PPML estimates the elasticity of the average. Furthermore, we employ international trade data and show that most of the differences between the PPML and OLS estimates of distance elasticity are explained by the difference in the interpretation of the coefficients. The bias of the OLS estimator associated with the error term heteroskedasticity accounts for 8-30% of the difference between the estimates relative to what was previously found in the literature.
Shadow Offshoring and Input Complementarity (with Edwin Jiang)We introduce a two-country quantifiable model of international production of a complex good that consists of multiple parts. Production of any pair of parts in the same country exhibits pair-specific cost complementarity and, consequently, decisions on production locations are interrelated, which generates rich patterns of clustering. We use the World Input-Output Database to estimate the model for the case of US production and find that these complementarity costs are highly heterogeneous between industries and, on average, account for 1.94% of total production costs. Gains from trade associated with the decrease in these costs, which we interpret as non-tariff trade liberalization, are 3-6 times larger compared to the case of a decrease in tariffs. Finally, using our model, we construct an index of international integration, which, unlike standard measures, accounts for not only total costs of parts produced abroad but also what parts are produced and how similar these parts are between each other. We find that this index is a better predictor of the welfare consequences of trade liberalization than conventional measures of offshoring.
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