Selected Publications

• Host-Country Financial Development and Multinational Activity

  June 2019

  European Economic Review, June 2019, 115: 192-220. With L. Kamran Bilir and Kalina Manova. [Appendix] Also: NBER Working Paper No. 20046. Vox EU.

  View Abstract
  This paper evaluates the influence of host-country financial conditions on the global operations of multinational firms. Using detailed U.S. data, we establish that financial development in a country is associated with relatively more entry by multinational affiliates, as well as with higher aggregate affiliate sales to the local market, back to the U.S. and to third destinations, with these effects being more pronounced in financially more vulnerable sectors. At the level of individual affiliates, by contrast, these forces are associated with relatively lower local sales and higher return and third-country sales. Yet at both aggregate and affiliate levels, the share of local sales in total sales is smaller, while the shares of U.S. and third-country sales are both bigger. These empirical regularities hold when using fixed effects to account for unobserved differences across country-years, sectors, and parent firms. We show theoretically that these patterns are consistent with host-country financial development affecting multinationals’ incentives for horizontal, vertical and platform FDI through two channels: a financing effect that induces affiliate entry and expansion by improving their access to external finance, and a competition effect that reorients affiliate sales away from the local market due to increased entry by credit-constrained domestic firms.

• Internalizing Global Value Chains: A Firm-Level Analysis

  April 2019

  Journal of Political Economy, April 2019, 127(2): 508-559. With Laura Alfaro, Pol Antràs, and Paola Conconi. [Appendix] [Data and Program Files] Also: NBER Working Paper No. 21582. Vox EU.

  View Abstract
  In recent decades, advances in information and communication technology and falling trade barriers have led firms to retain within their boundaries and in their domestic economies only a subset of their production stages. A key decision facing firms worldwide is the extent of control to exert over the different segments of their production processes. We describe a property-rights model of firm boundary choices along the value chain that generalizes Antra`s and Chor (2013). To assess the evidence, we construct firm-level measures of the upstreamness of integrated and non-integrated inputs by combining information on the production activities of firms operating in more than 100 countries with Input-Output tables. In line with the model’s predictions, we find that whether a firm integrates upstream or downstream suppliers depends crucially on the elasticity of demand for its final product. Moreover, a firm’s propensity to integrate a given stage of the value chain is shaped by the relative contractibility of the stages located upstream versus downstream from that stage, as well as by the firm’s productivity. Our results suggest that contractual frictions play an important role in shaping the integration choices of firms around the world.

• On the Measurement of Upstreamness and Downstreamness in Global Value Chains

  January 2018

  World Trade Evolution: Growth, Productivity and Evolution, 2018. Eds: Lili Yan Ing and Miaojie Yu. Routledge. With Pol Antràs. [Data and Program Files] [Slides] Also: NBER Working Paper No. 24185.

  View Abstract
  This paper offers four contributions to the empirical literature on global value chains (GVCs). First, we provide a succinct overview of several measures developed to capture the upstreamness or downstreamness of industries and countries in GVCs. Second, we employ data from the World Input-Output Database (WIOD) to document the empirical evolution of these measures over the period 1995-2011; in doing so, we highlight salient patterns related to countries’ GVC positioning – as well as some puzzling correlations – that emerge from the data. Third, we develop a theoretical framework – which builds on Caliendo and Parro’s (2015) variant of the Eaton and Kortum (2002) model – that provides a structural interpretation of all the entries of the WIOD in a given year. Fourth, we resort to a calibrated version of the model to perform counterfactual exercises that: (i) sharpen our understanding of the independent effect of several factors in explaining the observed empirical patterns in the period 1995-2011; and (ii) provide guidance for how future changes in the world economy are likely to shape the positioning of countries in GVCs.

• "The People Want the Fall of the Regime": Schooling, Political Protest, and the Economy

  August 2014

  Journal of Comparative Economics, August 2014, 42(3): 495-517. With Filipe R. Campante. [Online Appendix] [Data and Program Files]

  View Abstract
  We provide evidence that economic circumstances are a key intermediating variable for under- standing the relationship between schooling and political protest. Using the World Values Survey, we find that individuals with higher levels of schooling, but whose income outcomes fall short of that pre- dicted by their biographical characteristics, in turn display a greater propensity to engage in protest activities. We discuss a number of interpretations that are consistent with this finding, including the idea that economic conditions can affect how individuals trade off the use of their human capital between production and political activities. Our results could also reflect a link between education, “grievance”, and political protest, although we argue that this is unlikely to be the sole explanation. Separately, we show that the interaction between schooling and economic conditions matters too at the country level: Rising education levels coupled with macroeconomic weakness are associated with increased incumbent turnover, as well as subsequent pressures toward democratization.

• Organizing the Global Value Chain

  November 2013

  Econometrica, November 2013, 81(6): 2127-2204. With Pol Antràs. [Online Appendix] [Data and Program Files] [Slides] Also: NBER Working Paper No. 18163.

  View Abstract
  We develop a property-rights model of the firm in which production entails a continuum of uniquely sequenced stages. In each stage, a final-good producer contracts with a distinct supplier for the procurement of a customized stage-specific component. Our model yields a sharp characterization for the optimal allocation of ownership rights along the value chain. We show that the incentive to integrate suppliers varies systematically with the relative position (upstream versus downstream) at which the supplier enters the production line. Furthermore, the nature of the relationship between integration and “downstreamness” depends crucially on the elasticity of demand faced by the final-good producer. Our model readily accommodates various sources of asymmetry across final-good producers and across suppliers within a production line, and we show how it can be taken to the data with international trade statistics. Combining data from the U.S. Census Bureau’s Related Party Trade database and estimates of U.S. import demand elasticities from Broda and Weinstein (2006), we find empirical evidence broadly supportive of our key predictions. In the process, we develop two novel measures of the average position of an industry in the value chain, which we construct using U.S. Input-Output Tables.

• Schooling, Political Participation, and the Economy

  November 2012

  Review of Economics and Statistics, November 2012, 94(4): 841-859. With Filipe R. Campante. [Supplementary Appendix] [Data and Programs] Previously circulated as: "Schooling and Political Participation in a Neoclassical Framework: Theory and Evidence".

  View Abstract
  We investigate how the link between individual schooling and political participation is affected by country characteristics. Using individual survey data, we find that political participation is more responsive to schooling in land-abundant countries, and less responsive in human capital-abundant countries, even while controlling for country political institutions and cultural attitudes. We propose an explanation that centers on how individuals allocate the use of their human capital. A relative abundance of land (used primarily in the least skill-intensive sector) or a scarcity of aggregate human capital increases both the level of political participation and its responsiveness to schooling, by lowering the opportunity cost of production income foregone. We find related evidence that political participation is less responsive to schooling in countries with a higher skill premium, as well as within countries for individuals engaged in skilled occupations, suggesting that these patterns are indeed influenced by the opportunity cost of engaging in political rather than production activities. We argue that this framework can provide a joint explanation for patterns of political participation at the individual level and differences in public investment in education at the country level.

• Measuring the Upstreamness of Production and Trade Flows

  May 2012

  American Economic Review Papers and Proceedings, May 2012, 102(3): 412-416. With Pol Antràs, Thibault Fally, and Russell Hillberry. Longer version: NBER Working Paper No. 17819. [Data and Programs]

• Why was the Arab World Poised for Revolution? Schooling, Economic Opportunities, and the Arab Spring

  March 2012

  Journal of Economic Perspectives, Spring 2012, 26(2): 167-188. With Filipe R. Campante. [Supplementary Appendix] [Data and Programs] Also: The World Financial Review. Vox EU. International Herald Tribune.

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  What underlying long-term conditions set the stage for the Arab Spring? In recent decades, the Arab region has been characterized by an expansion in schooling coupled with weak labor market conditions. This pattern is especially pronounced in those countries that saw significant upheaval during the first year of the Arab Spring uprisings. We argue that the lack of adequate economic opportunities for an increasingly educated populace can help us understand episodes of regime instability such as the Arab Spring.

• Off the Cliff and Back? Credit Conditions and International Trade during the Global Financial Crisis

  May 2012

  Journal of International Economics, May 2012, 87(1): 117-133. Special issue symposium on the Global Dimensions of the Financial Crisis. With Kalina Manova. Also: NBER Working Paper No. 16174. NBER Digest. Vox EU.

  View Abstract
  We study the collapse of international trade flows during the global financial crisis using detailed data on monthly US imports. We show that credit conditions were an important channel through which the crisis affected trade volumes, by exploiting the variation in the cost of capital across countries and over time, as well as the variation in financial vulnerability across sectors. Countries with higher interbank rates and thus tighter credit markets exported less to the US during the peak of the crisis. This effect was especially pronounced in sectors that require extensive external financing, have limited access to trade credit, or have few collateralizable assets. Exports of financially vulnerable industries were thus more sensitive to the cost of external capital than exports of less vulnerable industries, and this sensitivity rose during the financial crisis. The quantitative implications of our estimates for trade volumes highlight the large real effects of financial crises and the potential gains from policy intervention.

• Unpacking Sources of Comparative Advantage: A Quantitative Approach

  November 2010

  Journal of International Economics, November 2010, 82(2): 152-167. [Supplementary Appendix] Also, please see: [Short Corrigendum]

  View Abstract
  This paper develops an approach for quantifying the importance of different sources of comparative advantage, by extending the Eaton and Kortum (2002) model to predict industry trade flows. In this framework, comparative advantage is determined by the interaction of country and industry characteristics, with countries specializing in industries whose production needs they can best meet with their factor endowments and institutional strengths. I estimate the model parameters using: (i) OLS; and (ii) a simulated method of moments procedure that accounts for the prevalence of zeros in the bilateral trade data. I apply the model to explore various quantitative questions, such as how much distance, Ricardian productivity, factor endowments, and institutions each matter for country welfare in the global trade equilibrium.

• Subsidies for FDI: Implications from a Model with Heterogeneous Firms

  June 2009

  Journal of International Economics, June 2009, 78(1): 113-125. [Appendix (Proofs)]

  View Abstract
  This paper analyzes the welfare effects of subsidies to attract multinational corporations when firms are heterogeneous in their productivity levels. I show that the use of a small subsidy raises welfare in the FDI host country, with the consumption gains from attracting more multinationals exceeding the direct cost of funding the subsidy program through a tax on labor income. This welfare gain stems from a selection effect, whereby the subsidy induces only the most productive exporters to switch to servicing the host’s market via FDI. I further show that for the same total subsidy bill, a subsidy to variable costs delivers a larger welfare gain than a subsidy to the fixed cost of conducting FDI, since a variable cost subsidy also raises the inefficiently low output levels stemming from each firm’s markup pricing power.

• Instability and the Incentives for Corruption

  March 2009

  Economics and Politics, March 2009, 21(1): 42-92. With Filipe R. Campante and Quoc-Anh Do. [Supplementary Appendix] [Data on Average Incumbent Tenure]

  View Abstract
  We investigate the relationship between corruption and political stability, from both theoretical and empirical perspectives. We propose a model of incumbent behavior that features the interplay of two effects: A horizon effect, whereby greater instability leads the incumbent to embezzle more during his short window of opportunity; and a demand effect, by which the private sector is more willing to bribe stable incumbents. The horizon effect dominates at low levels of stability, since firms are unwilling to pay high bribes and unstable incumbents have strong incentives to embezzle, whereas the demand effect gains salience in more stable regimes. Together, these two effects generate a non- monotonic, U-shaped relationship between total corruption and stability. On the empirical side, we find a robust U-shaped pattern between country indices of corruption perception and various measures of incumbent stability, including historically-observed average tenures of chief executives and governing parties: Regimes that are very stable or very unstable display higher levels of corruption when compared to those in an intermediate range of stability. These results suggest that minimizing corruption may require an electoral system that features some reelection incentives, but with an eventual term limit.

• Institutions, Wages and Inequality -- The Case of Europe and its Periphery (1500-1899)

  October 2005

  Explorations in Economic History, October 2005, 42(4): 547-566. Also: Harvard CID Graduate Student Working Paper Series No. 1.

  View Abstract
  This paper explores the long-run relationship between institutions and wage outcomes in Europe and its periphery. I find that cities that exercised stronger institutional protection of private property experienced: (i) higher levels of both skilled and unskilled real wages, as well as (ii) lower levels of inequality as measured by the skilled-unskilled wage ratio. While the first result corroborates existing work on the positive growth effects of better institutions, the second finding is more novel to the literature. Some explanations are proposed for how stronger institutions can cause an increase in the relative supply of skilled workers, thus lowering wage inequality.

Working Papers

• Did Trump's Trade War Impact the 2018 Election?

  January 2020 With Emily J. Blanchard and Chad P. Bown. NBER Working Paper No. 26434. [Data and Program Files].

  View Abstract
  We find that Republican candidates lost support in the 2018 congressional election in counties more exposed to trade retaliation, but saw no commensurate electoral gains from US tariff protection. The electoral losses were driven by retaliatory tariffs on agricultural products, and were only partially mitigated by the US agricultural subsidies announced in summer 2018. Republicans also fared worse in counties that had seen recent gains in health insurance coverage, affirming the importance of health care as an election issue. A counterfactual calculation suggests that the trade war (respectively, health care) can account for five (eight) of Republicans' lost House seats.

• The Political Economy Consequences of China's Export Slowdown

  December 2019

  With Filipe R. Campante and Bingjing Li. Under Review. [Slides] NBER Working Paper No. 25925. Also: ProMarket. U.S. News and World Report. MarketWatch. Tuck Knowledge in Practice.

  View Abstract
  We study how adverse economic shocks influence political outcomes in authoritarian regimes in strong states, by examining the export slowdown in China between 2013-2015. We exploit detailed customs data and the variation they reveal about Chinese prefectures’ underlying exposure to the global trade slowdown, in order to implement a shift-share instrumental variables strategy. Prefectures that experienced a more severe export slowdown witnessed a significant increase in incidents of labor strikes. This was accompanied by a heightened emphasis in such prefectures on upholding domestic stability, as evidenced from: (i) textual analysis measures we constructed from official annual work reports using machine-learning algorithms; and (ii) data we gathered on local fiscal expenditures channeled towards public security uses and social spending. The central government was subsequently more likely to replace the party secretary in prefectures that saw a high level of “excess strikes”, above what could be predicted from the observed export slow- down, suggesting that local leaders were held to account on yardsticks related to political stability.

• Modelling Global Value Chains: Approaches and Insights from Economics

  January 2019

  Chapter prepared for the Handbook of GVCs. Edward Elgar. Eds: Gereffi, Ponte, and Raj-Reichert.

  View Abstract
  In recent years, the emergence of global value chains in how firms organize their production strategies has drawn the attention of economists, particularly those in the field of international trade. This has spawned a growing body of applied theoretical work to capture the fragmentation of production and sourcing decisions across country borders. This chapter overviews this literature on economic models that speak to the broad phenomenon of global production. It elucidates the core modelling approaches that have been developed to understand the drivers behind these decisions, as well as their consequences for trade flows, labor markets, and aggregate welfare. The chapter also highlights how this modelling work complements key themes that have been developed in the broader social science literature on global value chains.

• Does Bank FDI Promote Firm FDI? Evidence from China's Outbound Multinational Activity

  June 2017

  With Tomoo Kikuchi and Jie Li. Draft in progress. [Slides]

• "Just Do Your Job": Obedience, Routine Tasks, and the Pattern of Specialization

  September 2017

   With Filipe R. Campante. September 2017 version. [Slides]

  View Abstract
  We study the interplay between cultural attitudes and the economic environment, focusing on attitudes towards obedience in the workplace. We establish two key stylized facts. First, at the country level, an upward shift in workplace obedience over time is associated with more exporting in industries that feature a high routine task content (“Specialization Fact”). Second, at the individual level, the degree of “export-routineness” in the economic environment that respondents were exposed to in their formative years – but not in their adult years – shapes the pro-obedience attitudes that they carry with them into the workforce (“Obedience Fact”). Together, these two facts show that cultural attitudes on workplace obedience respond systematically to economic incentives, and that such a culture in turn shapes the subsequent pattern of industry specialization. We develop an overlapping generations model of human capital investment and cultural transmission, to understand how this aspect of culture and specialization patterns in the economy are jointly determined in the long run. In particular, the model demonstrates the possibility of an “obedience trap”: countries may specialize in routine sectors (e.g., basic manufacturing) that foster a culture of obedience, at the expense of the development of more nonroutine production activities.

• Cumulative Innovation, Growth, and the Protection of Ideas

  December 2014

  With Edwin L.-C. Lai. December 2014 version. Under revision. Previously circulated as CESifo Working Paper No. 4407: "Cumulative Innovation, Growth, and Welfare-Improving Patent Policy".

  View Abstract
  We construct a tractable general equilibrium model of cumulative innovation and growth, in which new ideas strictly improve upon frontier technologies, and productivity improvements are drawn in a stochastic manner. The presence of positive knowledge spillovers implies that the decentralized equilibrium features an allocation of labor to R&D activity that is strictly lower than the social planner's benchmark, which suggests a role for patent policy. We focus on a "non-infringing inventive step" requirement (or "patent breadth"), which stipulates the minimum improvement to the best patented technology that a new idea needs to make for it to be patentable and non-infringing. We establish that there exists a finite patent breadth that maximizes the rate of innovation, as well as a separate optimal breadth that maximizes welfare, with the former being strictly greater than the latter. These conclusions are robust even when allowing for an additional instrument in the form of patent length policy.

• Obedience, Schooling, and Political Participation

  March 2010

  With Filipe R. Campante. March 2010 version.

  View Abstract
  This paper proposes a framework for understanding the joint evolution of cultural norms and human capital investment, and how these affect patterns of political participation. We first present some empirical evidence that cultural attitudes towards obedience systematically influence an individual’s propensity to engage in different political activities: obedience discourages more confrontational modes of political activity (such as public demonstrations), while raising participation in non-confrontational civic acts (such as voting). These cultural attitudes further appear to be determined in part by cultural transmission across generations. Motivated by this evidence, we develop a dynamic model in which human capital and obedience are both inputs in political and production activities. Individuals optimally choose how to allocate their human capital across these activities, taking their obedience levels as given. They also decide how much to invest in their child’s human capital and the degree of obedience to imbue them with. In a baseline case in which the economy features only one traditional sector (say, production-line manufacturing) in which obedience raises productivity, we find that the steady state features a strict complementarity between obedience and human capital: depending on other exogenous forces such as the productivity of human capital, a country could end up in either an “East Asian” steady state of high obedience, high human capital, and relatively non-confrontational politics, or in a converse “Latin American” steady state. However, a richer set of results emerges when we introduce a second production sector (innovation) in which obedience is counter-productive. In particular, a steady state in which obedience is low but human capital levels are high is now possible. Our approach thus illustrates how cultural norms, human capital accumulation, and political participation evolve as the economy advances.