Optimal Spatial Reallocation

Optimal Spatial Reallocation

by | Jul 1, 2017 | by Cecile Gaubert & Pablo Fajgelbaum, Grant, International Trade & Development, Research

by Cecile Gaubert & Pablo Fajgelbaum (UCLA)

For a draft of the paper, see here.

The geographic distribution of economic activity within a country is an equilibrium object that balances agglomeration and congestion forces, and, by doing so, determines aggregate productivity and welfare. In this project, we ask: from the perspective of aggregate welfare, is this equilibrium efficient? Given an observed spatial equilibrium, what is the optimal spatial reallocation that leads to maximize welfare, and how can a federal planner implement this spatial reallocation?

See poster.

 

Topics

Development

Initiatives

International Trade & Development

Resource Misallocation in European Firms: The Role of Constraints, Firm Characteristics and Managerial Decisions

Resource Misallocation in European Firms: The Role of Constraints, Firm Characteristics and Managerial Decisions

by | Jul 1, 2017 | by Yuriy Gorodnichenko, Grant, International Trade & Development, Research

by Yuriy Gorodnichenko

For a draft of the paper, see here.

The objective of this project was to study (mis)allocation of resources using a new survey from the European Investment Bank (EIB) and existing surveys run by the European Bank of Reconstruction and Development (EBRD). The main appeal of these surveys was information about various margins of adjustment as well as questionnaires consistent across a broad range of countries. The survey run the EBRD turned out to be less useful than originally anticipated: while the questionnaires are consistent across countries in a given wave of the survey, there were changes in the questionnaires across waves which limits the usefulness of the surveys for time series analyses. As a result, most of the work focused on the EIB survey.

Using the EIB data, we show that the dispersion in the use of resources among EU firms is large: about 50 percent wider than what has been found by previous studies for the US. We develop a simple dynamic theoretical framework of profit maximizing firms and estimate the dispersion of the marginal revenue product of capital (MRPK) and the marginal revenue product of labor (MRPL) in the EU and individual countries. Our calculations suggest that reducing the EU dispersion in marginal revenue products to US levels – a change that would likely require many significant policy reforms – could increase the EU’s GDP by more than 20 percent.

We also use of Machado-Mata decomposition to construct counterfactual distributions of marginal revenue products for each country (Machado and Mata, 2005). This decomposition exercise helps us to understand better whether the observed variation in marginal revenue products is brought about by either (i) cross-country differences in firm characteristics or (ii) cross-country differences in how the business, institutional and policy environment guides the allocation of resources across heterogeneous firms, i.e. how regression coefficients on characteristics are “priced” into outcomes.

We find that cross-country variation in the dispersion of marginal revenue products is largely driven by differences in a country’s business, institutional and policy environment rather than by differences in firm characteristics per se. This result is important because it provides large-scale microeconomic evidence that institutions matter to explain the variation in marginal revenue products across EU firms. Using the example of Greece and Germany, we show that the dispersion of marginal revenue products is wider among firms in Greece than in Germany. However, the results suggest that if German firms were moved to Greece, they would not be more efficient than Greek firms: the dispersion of marginal revenue products for German firms would be even wider than the one actually observed in Greece. The Greek business, policy and institutional environment seems to be relatively ineffective in reducing the dispersion of marginal returns across firms. If Greek firms were to be moved to Germany instead, they would be almost as efficient than German firms: the standard deviation of this counterfactual distribution is much closer to the actual distribution of marginal revenue products in Germany. In other words, the German business, institutional and policy environment appears to help improve the equalization of returns across heterogeneous firms.

Topics

Development

Initiatives

International Trade & Development

China and the SDR: Financial Globalization Through the Back Door

China and the SDR: Financial Globalization Through the Back Door

by | Jul 1, 2017 | by Barry Eichengreen & Guangtao Xia, Financial Globalization, Grant, Research

by Barry Eichengreen and Guangtao Xia

See paper.

The authors analyze the motives for China’s special drawing rights (SDRs) campaign. They argue that the campaign was a strategy used by the champions of financial liberalization in China to force the pace of reform. It was also a strategy with significant risks. Reaching agreement with the International Monetary Fund (IMF) on adding the renminbi to the currency basket required a judgment that the currency was freely usable for cross-border transactions. Achieving that agreement in turn required relaxing China’s comprehensive system of capital controls, and ensuring that a larger volume of cross-border capital flows was consistent with financial stability required domestic reforms to strengthen the financial system. But this was a strategy with limits. History is replete with examples of countries that have used external financial liberalization to create pressure for domestic reform. Unfortunately, the domestic reforms needed for the sustainability of those external measures do not always follow. External liberalization does not automatically weaken the influence of domestic interests resisting reform. When resistance is intense, the liberalization of cross-border financial flows can remain out in front of accompanying reforms of domestic financial governance and regulation. The result in this case can be volatile capital movements with destabilizing financial consequences, which is what China experienced in 2015.

 

Topics

Capital flows

Initiatives

Financial Globalization

Immersion Therapy

Immersion Therapy

by | Jul 1, 2017 | by Noam Yutchman, Grant, International Business Education, International Trade & Development, Research

by Noam Yutchman

As of 2015, 330,000 Mainland Chinese students attended U.S. universities, accounting for 31.5% of the international student body. What are the consequences of immersion in a foreign society on students studying away from home? In particular, what are the effects of immersion in a democratic society on students brought up under an authoritarian regime? In this project we study several dimensions of the effects of exposure to U.S. institutions on Chinese students’ political attitudes and behavior. We first aim to document the evolution of students’ views over time. Theoretically, exposure to the U.S. might lead Chinese students’ attitudes to become more politically liberal; however, it might lead to ideological “backlash” and greater political conservatism. It is important to note that students studying abroad have very different incentives to assimilate from long-term migrants: around 70-80% of Chinese students return home, so assimilation into U.S. society might be socially costly in the long run. We also plan to examine the role of social interactions in shaping political views among Chinese students in the U.S. Social networks will shape the information sets of students and also determine a range of incentives to access particular information and express particular views. Finally, we plan to conduct an experiment on the effects of early access to previously inaccessible news media on Chinese students’ experiences in the U.S. Working with partners in the media sector (e.g., the New York Times’ Asia Office), we plan to offer free access to the New York Times to a random subset of students whom we study.

 

Topics

Development, Education

Initiatives

International Trade & Development, International Business Education

Global vs. Local Banking: A Double Adverse Selection Problem

Global vs. Local Banking: A Double Adverse Selection Problem

by | Jul 1, 2017 | by Leslie Sheng Shen, Fellowship, Financial Globalization, Research

by Leslie Sheng Shen (UC Berkeley)

A summary of this research is provided here.

This paper provides a new theory of credit allocation in financial systems with both global and local banks, and tests it using cross-country loan-level data. I first point out that the traditional theory in banking and corporate finance of firm-bank sorting based on hard versus soft information does not explain the sorting patterns between firms and global versus local banks. In light of this puzzle, I propose a new perspective: global banks have a comparative advantage in extracting global information, and local banks have a comparative advantage in extracting local information. I formalize this view in a model in which firms have returns dependent on global and local risk factors, and each bank type can observe only one component of the firms’ returns. This double information asymmetry creates a segmented credit market with a double adverse selection problem: in equilibrium, each bank lends to the worst type of firms in terms of the unobserved risk factors. Moreover, I show that the adverse selection problem has important macroeconomic implications. When one of the bank types faces a funding shock, the adverse selection affects credit allocation at both the extensive and intensive margins, generating spillover and amplification effects through adverse interest rates. I formally test the model using empirical strategies that tightly map to the model set-up. I find firm-bank sorting patterns, and effects of US and Euro area monetary policy shocks on credit allocation that support the model predictions. This evidence reveals a novel adverse selection channel of international monetary policy transmission.

Photo source: blog.iese.edu

 

Topics

Capital flows

Initiatives

Financial Globalization