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.

An optimal investor state dispute settlement mechanism

Abstract: Investor state dispute settlements (ISDS) are supposed to protect a foreign investor against opportunistic behavior of a host country. This paper scrutinizes the optimal design of ISDS provisions that solve the holdup problem. It shows that an efficient investor protection mechanism requires a multilateral framework provided by a supranational institution. Furthermore, any ISDS compensation from the government to the investor must not be based on reductions in investor profits but on the host country's benefits.

Copyright Protection in the Digital Single Market

(together with Leander Stähler, Utrecht University)

Abstract: This paper scrutinizes the effects of the European Directive on Copyright in the Digital Single Market on platform competition in media markets. Platforms that are Online Content-Sharing Service Providers must have a license agreement with collective management organizations that control the content platform users may (or must not) upload to the platform. The paper explains the background and its implications, and it shows that the new directive may imply market concentration and an aggregate welfare loss. The reason is that only users of the large platform will be allowed to upload content if the content asset controlled by a collective management organization is sufficiently valuable and if network effects are strong.

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.

How Importers Hedge Demand Uncertainty: Inventory, Dual Sourcing and the Effect of Trade Policy

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

Abstract: This paper formulates a dynamic model of inventory investment to examine how importers may hedge uncertainty when importing intermediate goods takes time and orders have to be placed before the realization of demand is known. We consider two hedging strategies - building up inventory of imported goods, and using expensive domestic supplies to cover demand surges - and show how tariff protection affects hedging and hence inventory investment, the probability of stockouts and the import share. We find robust empirical evidence for these predictions from high-frequency transaction data for a U.S. steel wholesaler experiencing an episode of U.S. Section-201 tariffs on steel imports. In response to the tariff, inventories decline by up to 90%, accompanied by a significant decrease in the import share.

Investor State Dispute Settlement and Multinational Firm Behavior

(together with Guttorm Schjelderup, Norwegian School of Economics)

Abstract: Investor-state dispute settlements (ISDS) are supposed to become an integral part of multinational trade and investment agreements although the partner countries of these deals do not suffer from substantial institutional weakness. This paper shows why multinational firms lobby for ISDS also in this environment beyond the potential compensation an ISDS provision my offer. ISDS makes them more aggressive by increasing cost-reducing investment. Therefore, potential compensations to a foreign investor do not imply a zero-sum game, and competition with a domestic firm does not necessarily help but may imply even more excessive investment.

Issue Linkage versus Ring-Fencing in Trade Agreements

(together with Ngo Van Long, McGill University, and Martin Richardson, Australian National University)

Abstract: Issue linkage is often regarded as a means to achieve or improve international cooperation in the presence of a sovereignty constraint. This constraint implies that a country can leave an agreement whenever it likes, and it will do so if the perceived gains from leaving are larger than the gains from staying in the agreement. We set up a model of trade agreements in which future gains from cooperation are uncertain and it is bad realizations that may lead to exit. In this environment, we show that ring-fencing dominates issue linkage, even in the absence of complementarities between separate issues, if the degree of uncertaint is sufficiently large.

It ain't over until it's over: English auctions with subsequent negotiations

(together with Onur Koska, University of Canterbury)

Abstract: We consider a standard private value ascending bid auction and show that subsequent negotiations make a seller worse off. The reason is that the seller's optimal strategy does not change if she can make a take-it-or-leave-it offer to the highest bidder after the auction. Consequently, her expected revenues do not increase with subsequent negotiations, but decrease if the highest bidder has some bargaining power.

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.

Some Economics of Echo Chambers

(together with Martin Richardson, Australian National University)

Abstract: This paper analyzes competition between a media firm providing true information (news) and two "fake news" providers that create echo chambers. Information from the media firm is an experience good and consumers enjoy confirmation of their prior beliefs due to cognitive dissonances. We show that, even if real news is more valued than fake news, entry by fake news providers becomes more profitable with the variance of information. Furthermore, a public news provider makes entry for fake news providers harder compared to a profit-maximizing media firm.

Structural Gravity and the Gains from Trade under Imperfect Competition

(together with Benedikt Heid, University of Adelaide)

Abstract: We extend structural gravity models of bilateral trade flows to oligopolistic competition. We show that conventional gravity estimates do not only reflect trade costs but also market power. Our simple estimation procedure generalizes the standard gravity model and disentangles exogenous trade frictions and endogenous market power distortions. We use our estimated model to counterfactually increase trade costs by abolishing the European Single Market. We find that domestic firms' markups in EU member countries increase by 2 to 6 percent. Importantly, welfare effects of trade liberalization are much more pronounced due to the change in competition among domestic and foreign firms.

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.

The Organization of International Trade

(together with Dominik Boddin, Deutsche Bundesbank)

Abstract: This paper discusses how international trade is organized from export to trans-boundary transport to import. All evidence suggests that the transport sector is independent, exercises market power and may feature strong economies of scale. Using a large dataset of maritime transport costs, tariffs and export prices, we show that a decline in tariffs leads to a reduction in transport costs but has no effect on export prices. Furthermore, we show that an increase in freight rates leads to an increase in export prices. Our results are consistent only with international trade being organized in vertical partnerships.

Supplement (data description, do files, data)