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.

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.

(together with Gerald Willmann, University of Bielefeld, and Phillip McCalman, University of Melbourne)

Abstract: This paper develops an efficiency theory of contingent trade policies. We model the competition for a domestic market between one domestic and one foreign firm as a pricing game under incomplete information about production costs. The cost distributions are asymmetric because the foreign firm incurs a trade cost to serve the domestic market. We show that the foreign firm prices more aggressively to overcome its cost disadvantage. This creates the possibility of an inefficient allocation, justifying the use of contingent trade policy on efficiency grounds. Despite an environment of asymmetric information, contingent trade policy that seeks to maximize global welfare can be designed to avoid the potential inefficiency. National governments, on the other hand, make excessive use of contingent trade policy due to rent shifting motives. We find that the expected inefficiency of national policy is larger (smaller) for low (high) trade costs compared to the laissez-faire case.

Dual Sourcing and Volatility in International Trade

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

Abstract: This paper develops a simple model of a firm selling a product subject to demand uncertainty and sourcing a homogeneous input from two different sources One source is domestic, immediate but expensive while the other is foreign, cheap but takes time before being available. We show that smooth trade liberalization paths exist, involving one or both sources, for both a high and a low degree of demand uncertainty. Furthermore, unsold inventories are always associated with the cheap foreign source, and positive and negative demand shocks have asymmetric effects on next period purchases. The variance of sales is large for moderate levels of trade liberalization, but small close to autarky and free trade. The variance of domestic sourcing, however, unambiguously decreases with trade liberalization.

International Agreements, Economic Sovereignty and Exit

(together with Martin Richardson, Australian National University)

Abstract: We develop a model in which it is uncertainty about the future domestic policy environment that both makes international cooperation attractive and induces the possibility of a nation reneging on such an international agreement. We show, in a fairly general setting in which the likelihood of exit is affected by the degree of cooperation, that the possibility of exit reduces the optimal degree of initial cooperation. "Full'' cooperation will never be optimal, and the optimal degree of cooperation will never be such as to "squeeze out'' any possibility of exit. However, an increase in global uncertainty may imply an increase in cooperation when exit risks are already large to begin with.

(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.

Media, fake news, and debunking

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

Abstract: We construct a Hotelling-type model of two media providers, each of whom can issue fake and/or real news and each of whom can invest in the debunking of their rival's fake news. The model assumes that consumers have an innate preference for one provider or the other and value real news. However, that valuation varies according to their bias favouring one provider or the other. We demonstrate a unique subgame perfect Nash equilibrium in which only one firm issues fake news and we show, in this setting, that increased polarization of consumers -- represented by a wider distribution -- increases the prevalence of both fake news and debunking expenditures and is welfare reducing. We also show, inter alia, that a stronger preference by consumers for their preferred provider lowers both fake news and debunking. Finally, we compare monopoly and duopoly market structures in terms of  "fake news" provision and show that a public news provider can be welfare improving.

The Economics of Investor Protection: ISDS versus National Treatment

(together with Wilhelm Kohler, University of Tübingen)

Abstract: Investor-state dispute settlements (ISDS) are supposed to protect foreign investors by indemnifying them if the host country's policies are causing "unjustified'' harm. This paper scrutinizes the effects of ISDS and national treatment provisions in a two-period model where foreign investment is subject to domestic regulation and a holdup problem. It shows that ISDS can mitigate the holdup problem and increases aggregate welfare, but comes with additional regulatory distortions for the first period. A national treatment provision avoids these regulatory distortions, but implies entry distortions because it makes the holdup problem also apply to domestic firms. If the domestic regulatory framework applies to many domestic firms, a national treatment provision welfare-dominates ISDS.

The Economics of Vendor Bids

(together with Ilke Onur, University of South Australia, and Onur Koska, Middle East Technical University)

Abstract: This study scrutinizes the implications of a vendor bid in an open ascending auction with a seller of an indivisible good and many potential buyers. The seller can set a reserve price, and both the seller and the bidders have private signals and interdependent values. We show that no strictly increasing reserve price function exists in the presence of a vendor bid. We also show that a vendor bid must be large enough to be credible, and thus vendor bids may not be used in equilibrium. The vendor will exercise her vendor bid option if and only if her private signal is large enough.

The Organization of International Trade

(together with Dominik Boddin, University of Kiel)

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.

When should bidders learn reserve prices?

(together with Onur Koska, Middle East Technical University)

Abstract: This paper discusses the role of reserve prices when the signal of each bidder is positively affiliated with the seller's signal. We distinguish three reserve price designs: a public reserve price, announced before the auction starts, a revealed reserve price, disclosed when a bid matches it, and a secret reserve price that is disclosed after the highest bid has been reached. We show that a public or a revealed reserve price are strategically equivalent, and we show that no seller will set a secret reserve price.