Dissecting Gravity: From Customs Forms to Country-Level Trade Flows

Dissecting Gravity: From Customs Forms to Country-Level Trade Flows

by | Jul 1, 2018 | by Dmitry Livdan; Vladimir Sokolov; & Amir Yadon, Grant, International Trade & Development, Research

by Dmitry Livdan, Vladimir Sokolov and Amir Yadon

For a draft of the paper, see here.

Using a novel data set for Russian exporters allowing for the exact firm-to-firm distances, this project investigates the micro-foundations of gravity by testing at all levels of trade flows: individual cargo, firm, and country. We find that distance does a poor job explaining variation in individual cargo values as most of its explanatory power is absorbed by the recipient fixed effects and transportation dummies. At the firm level the export value increases/decreases with distance with/without the recipient fixed effects in the gravity specification. In addition, the classic gravity holds at the country level in spite of Chaney (2016) gravity sufficiency conditions being violated for Russian exporters. To rationalize these findings, we propose that for gravity to hold at the country level, the firm-level level extensive trade margin — the number of shipments — has to decline faster than the intensive trade margin — value-per-shipment — increases with distance. We develop a network based model of firm-to-firm trade to support our empirical evidence.

 

Topics

Development

Initiatives

International Trade & Development

The effects of joining Multinational Supply Chains: New Evidence from Firm-to-Firm Linkages

The effects of joining Multinational Supply Chains: New Evidence from Firm-to-Firm Linkages

by | Jul 1, 2018 | by Isabela Manelici; Jose-P. Vasquez; & Alonso Alfaro-Urena, International Trade & Development, Research

by Isabela Manelici and Jose-P. Vasquez (UC Berkeley), with Alonso Alfaro-Urena (Banco Central de Costa Rica)

See here for a draft of the paper.

Using administrative data tracking all firm-to-firm transactions in Costa Rica, we investigate the effects of becoming a supplier to multinational corporations (MNCs). Event-study estimates reveal that after starting to supply MNCs domestic firms experience strong and persistent improvements in firm performance, including gains of 6-9% in revenue-based measures of total factor productivity (TFPR) four years after. Moreover, their business with buyers other than the first MNC buyer grows by 20%. This growth is due to both higher average sales and having more buyers. To interpret these changes in business with others, we propose a simple theoretical framework. When we do not account for the extensive margin of new buyers, we estimate gains in the productivity residual similar to TFPR estimates. Around half of these gains are due to an improved ability to match with new buyers. Finally, we survey domestic firms and MNCs for additional insight. We learn that becoming suppliers to MNCs is transformative for domestic firms, with changes ranging from new managerial practices to better reputation. These changes arise from interactions during which MNCs communicate their expectations and advice on how to meet them, and from the efforts of new suppliers to rise up to the challenge.

Topics

Development

Initiatives

International Trade & Development

Progressive Taxation and Tax Revenue Across Development

Progressive Taxation and Tax Revenue Across Development

by | Jul 1, 2018 | by Gabriel Zucman & Anders Jensen, International Trade & Development, Research

by Gabriel Zucman (UC Berkeley) and Anders Jensen (Harvard Kennedy School)

For a presentation of this research, see here.

Why do developing countries have low tax-to-GDP ratios? Is it because they are not able to tax (due, e.g., to the informal structure of the economy) or because they are not trying to tax (due, e.g., to political economy reasons leading to low tax rates on high-income earners)? To address this question, this project aims at estimating tax progressivity in a large set of countries across levels of development, by combining national account data, tax statistics, and legislative information. This will allow us to analyze whether tax progressivity can account for differences in tax-to-GDP ratios across development levels today. As a useful benchmarking exercise, we will equalize tax progressivity across developing countries, assuming no behavioral responses, in order to estimate the share of the tax revenue gap that can be explained by lower taxes on top-earners.

Topics

Development

Initiatives

International Trade & Development

Estimating Sector-Level Economies of Scale

Estimating Sector-Level Economies of Scale

by | Jul 1, 2018 | by Andres Rodriguez-Clare; Dominick Bartelme; Arnaud Costinot; & Dave Donaldson, Grant, International Trade & Development, Research

By Andres Rodriguez-Clare, UC Berkeley, Dominick  Bartelme, University of Michigan,  Arnaud Costinot, MIT, and Dave Donaldson, Stanford University

                 For a preliminary version of the paper, see here.

Sector-level economies of scale matter for economic development, industrial policy, and the consequences of trade liberalization. As of yet, however, the literature has not converged on a definitive answer regarding their existence and even less an estimate of their magnitude and variation across sectors. For example, most quantitative trade papers explicitly or implicitly assume that the sector-level scale elasticity is either zero or equal to the inverse of the trade elasticity. This paper develops a two-step strategy for estimating sector-level scale elasticities using bilateral trade data. First, a revealed preference approach is used to compute the productivity of each sector-country cell from observed bilateral trade flows. Second, a market access approach is used to construct demand shifters that vary across sector-country cells. The scale elasticity (a supply side parameter) is recovered from a regression of productivity on sector size using the constructed demand shifters as instrumental variables. Prelim- inary results suggest that economies of scale are positive but not as large as those implicitly imposed in many leading quantitative trade models.

Photo source: blogs.terrapinn.com

Topics

Development

Initiatives

International Trade & Development

Indian Demonetization & Real Effects

Indian Demonetization & Real Effects

by | Jul 1, 2017 | by Mauricio Ulate; Rupal Kamdar & Walker Ray, Fellowship, Financial Globalization, International Trade & Development, Research

by Mauricio Ulate, Rupal Kamdar and Walker Ray

On November 8, 2016, India stopped accepting all 500 and 1,000 rupee (approximately 7 and 15 dollars) notes, its two largest bills, as legal tender. This removed about 86% of cash in circulation. New 500 and 2,000 rupee notes were eventually issued, but the process of printing them and getting them distributed to the states took longer than anticipated. Around 98% of transactions in India occur in cash, so demonetization had profound consequences, with long queues at banks, low daily limits on withdrawals of the new bills, and certain sectors of the economy slowing down significantly. The move was done for motives related to counterfeiting and money laundering and, as such, was unrelated to the state of the Indian macro-economy. This is why it could serve as a natural experiment to study the real effects of monetary shocks, price rigidities and relative substitution patterns following a liquidity crunch. This project intends to use disaggregated data on prices and quantities of different consumption categories across regions in India to study these interesting topics. Preliminary results on the prices of agricultural goods seem to indicate that prices respond strongly and somewhat persistently to demonetization.

Topics

Development, Capital flows

Initiatives

International Trade & Development, Financial Globalization

Measuring Imperfect Competition in Product and Labor Markets: An Empirical Analysis using Plant Level Production Data

Measuring Imperfect Competition in Product and Labor Markets: An Empirical Analysis using Plant Level Production Data

by | Jul 1, 2017 | by Roman Zarate & Dario Tortarolo, Fellowship, International Trade & Development, Research

by Roman Zarate & Dario Tortarolo

For a draft of the paper, see here.

In this paper, we develop a simple theoretical model that allows us to disentangle empirically the extent of imperfect competition in product and labor markets using plant-level production data.

The model assumes profit-maximizing producers that face upward-sloping labor supply and downward-sloping product demand curves. We derive a reduced-form formula for the ratio between markdowns and markups based on De Loecker and Warzynski (2012). We use production function estimation techniques to estimate output elasticities and construct a measure of combined market power at the firm level. We proceed to separate product and labor market power by estimating firm-level residual labor supply elasticities instrumenting wages with intermediate inputs. The exclusion restriction implies that shifts in the labor supply are not correlated with changes in the use of intermediate inputs. Our results suggest that both markets exhibit imperfect competition, but variation across industries is driven by the ease of firms to set prices above marginal costs rather than wages below the marginal revenue productivity of labor.

On average, manufacturing plants charge prices 78% higher than marginal costs and pay wages 11% less than the marginal revenue productivity of labor. We find a negative correlation between product and labor market power and more elastic labor supply curves for unskilled workers. Moreover, we obtain a positive correlation between firms’ product market power and productivity, size and exporter status, and a negative correlation of these measures with labor market power.

In the last part, we estimate the relative gains of eliminating market power dispersion on allocative efficiency using the model developed by Hsieh and Klenow (2009). We find that market power dispersion in product markets is more important on TFP than labor market power, and that the negative correlation between the two measures of market power corrects in 7% the economic distortion derived from market power dispersion.

Topics

Development

Initiatives

International Trade & Development