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: 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 2.8% per year. As bilateral trade costs have fallen by 3.1% per year on average, we find a strong negative correlation between observed trade cost and markup changes. Markups have increased less in high-income countries than in other countries.
(together with Ngo Van Long, McGill University)
Abstract: This paper considers a principal-agent relationship where the agent chooses the degree of uncertainty. An increase in uncertainty is measured by a mean-preserving spread. Using the family of uniform distributions, we show that the least dispersion maximizes aggregate welfare while the agent prefers some dispersion but not the maximum dispersion. Consequently, a hold-up problem arises as the agent's choice does not maximize expected aggregate welfare.
Foreign market entry and merger policies with economies of scale
(together with Jaeyeon Kim, Cape Treton University, and Halis Murat Yildiz, Toronto Metropolitan University)
Abstract: This paper investigates the equilibrium entry mode of a foreign firm into a domestic market that can export, do a greenfield investment or acquire one or two domestic firms. We also scrutinize the optimal merger policy of the host country and whether it can induce the most preferred entry mode. We find that acquisitions are more likely with sufficiently large economies of scale, and this is also the endogenous outcome of optimal merger policies. Furthermore, the host government can induce the most preferred market structure if and only if the foreign firm always wants to acquire at least one domestic firm. Our findings suggest that a strict merger policy is more likely to be optimal as the greenfield investment cost rises. Finally, the national merger policy can be excessive as monopolization may raise aggregate world welfare if the benefits from economies of scale are substantial.
Incomplete versus Complete CBAM
(together with Onur Koska, University of Canterbury)
Abstract: This paper studies the implications of an incomplete carbon border adjustment mechanism (CBAM), which covers only primary inputs, versus a complete CBAM, which also includes the carbon content of final goods. Using a model with vertical separation in production and upstream market power, we delineate the effects of both policies on producer and consumer welfare, abatement and pollution for a given tax rate of a country imposing a CBAMagainst countries that have no such tax. We find that an incomplete CBAM does not necessarily imply more abatement and may even increase a non-CBAM country's pollution emissions. We also show that the source country has an incentive to adopt the tax rate only if the market for the final good is sufficiently small to begin with.
On the Deadweight Loss from Financial Frictions in Foreign Market Entry
(together with Horst Raff, University of Kiel, and Michael Ryan, Western Michigan University)
Abstract: This paper sets up a model of incomplete information and incomplete contracts in order to explain the impact of financial frictions
on foreign market entry. It considers both the frictions caused by the lending and the collateral channel at the same time, and it shows that bothchannels lead to less foreign market entry. However, while both an increase in the collateral frictions and in productivity increases the entry distortion and the deadweight loss, an increase in the refinancing cost reduces both. Thus, we show that any welfare-improving realloaction effect to more productive firms due to trade and/or FDI liberalization is smaller in the presence of financial frictions.
On the Design of a Carbon Border Adjustment Mechanism
(together with Martin Richardson, Australian National University, and Halis Murat Yildiz, Toronto Metropolitan University)
Abstract: We identify a condition in a general equilibrium model of trade with tariff bindings under which a customs union (CU) can design a carbon border adjustment mechanism (CBAM) that induces other countries to adopt the CU’s carbon tax. Trade liberalization makes this easier and so would help the CU ‘export’ its climate policies. We then show in an oligopoly model of trade that, when the non-member country is sufficiently large relative to member countries, the optimal carbon tax is higher when the CU maximizes CU welfare than if it were to maximize global welfare and under such a case, border tariff adjustments would go beyond the difference in carbon taxes in order to ‘level the playing field’ in all markets. We also consider a case where CU is constrained by the World Trade Organization (WTO) in its optimum design of CBAM and show that CU members still benefit from having a constrained CBAM relative to the ’no CBAM’ case.
(together with Onur Koska, University of Canterbury)
Abstract: In many auctions, the seller's private signal matters for the valuation of bidders, and the only signaling device available to the seller is the reserve price. This paper discusses the role of secret versus public reserve prices in this context. A public reserve price is announced before the auction starts, and a secret reserve price is disclosed after the highest bid has been reached. Bids in a secret reserve price regime will be based on the expected type. In a public reserve price regime, incentive compatibility may require a seller having received a good signal to set a larger than payoff-maximizing reserve price. We employ a rational signaling refinement to show that a secret (public) reserve price design qualifies as an equilibrium if this reserve price distortion is large (small).
The costs and benefits of mediocrity: Endogenous auction design in procurement
(together with Andrea Tulli, University of Tübingen)
Abstract: We study bidding in a broad class of price-based procurement mechanisms in which the lowest bid does not always win. These mechanisms are used when cost overruns and non-compliance affect contract execution. We first characterize equilibrium bidding behavior in a general setting with endogenous winning probabilities. We then analyze mixed auction formats in which bidders face uncertainty about the allocation rule, as in the Italian system where a lowest-price or average bid rule is selected based on participation. We show that increasing reliance on the latter improves compliance but raises bids and expected payments, highlighting a trade-off between contract performance and allocative efficiency.
The (Non-)Neutrality of Value-Added Taxation
(together with Georg Schneider, University of Bonn, and Georg Thunecke, Max Planck Institute for Tax Law and Public Finance)
Abstract: Border adjustment taxes like the value-added tax (VAT) are commonly regarded to promote efficiency and equity due to their de jure trade neutrality. We analyse the effects of the VAT on trade in final goods in the European Union (EU) from 1988 to 2019. We find that the VAT is de facto non-neutral. A one percentage point VAT increase implies a 5.45% reduction of foreign imports relative to internal trade. These effects are not driven by institutional quality, EU accession, or preferential Common Market access.
Upstream competition with non-linear pricing
(together with Ngo Van Long, McGill University)
Abstract: This paper models upstream competition between two firms that sell inputs to a downstream firm whose productivity is private information. We transform the two-dimensional distribution of positively correlated productivities into a single distribution of privately known parameters in order to develop the optimal non-linear (quadratic) equilibrium pricing schemes. We show that both the linear component prices and the fixed fees increase with the degree of competition among upstream firms while the discount declines with it. Furthermore, we show that the downstream firm's profit increases with an increase in heterogeneity measured by a mean-preserving spread if the distribution is sufficiently compact to begin with.