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.

Financial Frictions and Foreign Direct Investment: Evidence from Japanese Microdata

(together with Horst Raff, University of Kiel, and Michael Ryan, Western Michigan University)

Abstract: We use Japanese microdata for the period 1980 to 2000 to examine how financial market frictions affect foreign direct investment (FDI). We seek evidence for two possible transmission channels from financial shocks to FDI: (i) a collateral channel, whereby changes in the value of collateral affect investors’ ability to borrow; and (ii) a lending channel, whereby changes in bank health affect banks’ ability to lend. We find evidence that both transmission channels are statistically significant and economically important.

(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.

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.

(together with Ngo Van Long, McGill University)
Abstract: This note scrutinises the role of share parameters in CES production functions. It shows that a firm, when planning production or selecting a production process, aim at maximizing one share parameter at the expense of another in a CES environment. Interior solutions can exist only if factor prices are uncertain to begin with.

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 Scope of Auctions in the Presence of Downstream Interactions and Information Externalities

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

Abstract: We scrutinize the scope of auctions in the presence of downstream interactions and information externalities by using the topical example of a firm acquisition. We show that no mechanism exists that allows an investor to acquire a low-cost firm under incomplete information: a separating auction implies adverse selection and relies substantially on commitment to allocation and transfer rules. A pooling auction serves as a commitment device against ex-post opportunistic behavior and alleviates adverse selection. It can earn the investor a higher expected payoff than a separating auction, even when consistency is required as to qualify for a sequential equilibrium.

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.