Work in progress

This section presents you my recent, but not yet published or submitted research activities in alphabetic, not chronological order (and in no way in order of relevance). Comments and suggestions are very much appreciated. You find other versions of my papers and publications also on my IDEAS page.

Disentangling frictions across the world: markups versus trade costs

(together with Benedikt Heid, Universitat Jaume I)

Abstract: Standard methods to quantify how trade cost changes affect international trade abstract from market power. We develop a structural framework that allows us to quantify the evolution of aggregate bilateral trade costs and markups over time. With minimal assumptions, we can disentangle aggregate markup and trade cost changes from observed changes in trade flows. We apply our method to trade data between 1990 and 2015 for the world's 100 largest economies. We find that across all country pairs, on average, bilateral aggregate markups have increased by 6.8\% per year. Since bilateral aggregate trade costs have fallen, we find a strong negative correlation between observed trade cost and markup changes. Finally, our framework allows us to quantify how markups affect the welfare gains from trade liberalization. We find that, on average, welfare gains would be about a third larger if markups were constant.

Endogenous multihoming and network effects: Playstation, Xbox, or both?

(together with Hans Kind and Øystein Foros, Norwegian School of Economics)

Abstract: Competition between firms that sell incompatible varieties of network products might be fierce, because it is important for each of them to attract a large number of users. The literature therefore predicts that stronger network effects decrease prices and profits. We show that this prediction hinges critically on an implicit or explicit assumption that each consumer buys only one of the varieties offered in the market (singlehoming consumers). We show that multihoming (some consumers buy more than one variety) may arise endogenously if the number of exclusive features that each variety offers is sufficiently high. In sharp contrast to the conventional prediction under consumer singlehoming, we further show that both prices and profits could increase in the strength of the network effects if (some) consumers multihome. However, this does not necessarily imply that profits are higher under multihoming than under singlehoming. On the contrary, multihoming might constitute a prisoner s dilemma for the firms, in the sense that they could make higher profits if each consumer bought only one of the varieties.

Endogenous Uncertainty

(together with Ngo Van Long, McGill University)

Abstract: This note considers a principal-agent relationship where the agent chooses the degree of uncertainty. An increase in uncertainty, measured by a mean-preserving spread, has a positive effect if it increases the upper bound, due to no distortion at the top. At the same time, however, it implies more distortions below the top. We show by an example of a uniform distribution that the agent may not prefer a maximum dispersion. A hold-up problem arises as the agent's choice of the degree of uncertainty does not maximise aggregate welfare, given that the principal cannot commit to compensate the agent fro the welfare-maximizing dispersion.

Import Tariffs and Transport Prices

(together with Dominik Boddin, Deutsche Bundesbank)

Abstract: This paper discusses how import tariffs interact with transport prices in episodes of trade liberalization. We develop a model of a transport industry that operates under imperfect competition and economies of scale. Double marginalization due to market power reduces the effect of trade liberalization, while a larger trade volume may support them due to economies of scale. We use a large data set of maritime transport data and combine it with tariff data to find that economies of scale beat market power: a decline in the tariff implies a decline in freight rates.

Inventory, Sourcing, and the Effects of Trade Costs: Theory and Empirical Evidence

(together with Chris Muris, McMaster University, Horst Raff, University of Kiel, and Nicolas Schmitt, Simon Fraser University)

Abstract: We develop a dynamic model of inventory investment and trade to examine how firms adjust to changes in international trade costs when facing a risk of stockouts due to demand uncertainty and order lead times for imports. We study two strategies firms may use to avoid stockouts, namely holding inventories of imports, and engaging in dual sourcing. Both strategies are shown to magnify the protective effects of trade costs. Using transaction-level data for a U.S. steel wholesaler experiencing an episode of Section-201 tariffs, we find strong evidence consistent with this magnification effect. Higher tariffs are shown to significantly reduce both the inventory-sales and the import-sales ratios, as the firm adjusts its stockout avoidance strategies.

Reserve Prices as Signals

(together with Onur Koska, University of Canterbury)

Abstract: This paper discusses the role of reserve prices when bidders' valuations depend positively on the seller's private signal. We distinguish between a public reserve price, announced before the auction starts, and a secret reserve price, disclosed after the highest bid has been reached. The public reserve price regime may warrant a distortion as a good seller type may have to increase the reserve price beyond payoff-maximization in order to be able to credibly signal her type. We introduce and determine a rational signaling equilibrium which adds two domination-based conditions to the belief structure of a weak perfect Bayesian equilibrium. We show that a public reserve price design qualifies as an equilibrium if the distortion is not too large.

(together with Georg Schneider, University of Bonn, and Georg Thunecke, Max Planck Institute for Tax Law and Public Finance)

Abstract: This paper employs a structural gravity model and novel value-added tax (VAT) regime data to investigate the impact of VAT rate changes on imports and domestic production of final goods. We demonstrate that the VAT is both non-neutral and discriminatory. A one percentage point VAT increase reduces aggregate imports and internal trade by 3.05% and implies a 5.4 to 7.9% reduction of foreign imports relative to internal trade. Based on these results we conduct a counterfactual equilibrium analysis and illustrate that VAT rate changes imply substantial welfare effects for an average country in the European Union.

Structural Gravity and the Gains from Trade under Imperfect Competition

(together with Benedikt Heid, Universitat Jaume I)

Abstract: The structural gravity model is the workhorse model in international trade to estimate the drivers of trade costs. We show that such estimates not only reflect trade costs but also aggregate market power. We extend the canonical gravity model to oligopoly and generalize the standard welfare formula for trade cost changes. We propose a new estimation procedure that allows us to disentangle exogenous trade frictions and endogenous aggregate market power distortions. Our method can be easily implemented in standard gravity data sets, and we illustrate it by analyzing the competition and welfare effects of the European Single Market. We find that without it, domestic aggregate markups in EU member countries would increase by 2 to 6 percent. Welfare effects of trade liberalization are larger due to changes in competition among domestic and foreign firms.

The Economics of the Global Minimum Tax

(together with Guttorm Schjelderup, Norwegian School of Economics)

Abstract: This paper shows that the OECD inclusive framework of Pillar Two fails to implement the claimed 15% minimum corporate tax for all subsidiaries of multinational corporations that are not shell companies. The reason is that the Substance-based Income Exclusion of Pillar Two allows to tax-deduct payroll costs and user costs of intangible assets twice from the tax base of the top-up tax. Employing a standard multinational firm model, we show that Pillar Two changes the employment, investment and import incentives. For a sufficiently large cost share of labor and/or capital, the Substance-based Income Exclusion is equivalent to a production subsidy.

The Impact of Peer-to-Peer Lending on Small Business Loans

(together with Jin-Hyuk Kim, University of Boulder at Colorado)

Abstract: We investigate the impact of peer-to-peer lending on the small business loans originated by US depository institutions that are subject to the Community Reinvestment Act. We present a model where a borrower can choose between a traditional bank and a crowdlending platform and show that the entry of crowdlending can induce a switching effect as well as a credit expansion effect. Using the staggered entry of LendingClub across states between 2009 and 2017, we find that the platform entry reduced the small business loans originated by banks, in particular, in the low- or moderate-income tracts as well as in the distressed middle-income tracts with a high poverty rate. A conservative estimate suggests that the crowdlending entry may have reduced the aggregate lending volume to small businesses.