Research

Publications

Why Special Economic Zones? Using Trade Policy to Discriminate Across Importers (appendices)

American Economic Review, (2020) 110(5): 1540-71.

Tariffs are generally assumed to depend on the product being imported, not the identity of the importer. However, special economic zones (SEZs) are a common and economically important policy tool used around the world to lower tariffs on selected intermediate goods for selected manufacturers. In effect, this creates a two-tiered tariff system: a firm in an SEZ faces a lower rate on a given product than the prevailing tariff faced by most buyers. I show theoretically that discrimination across buyers of the same good is optimal from the policymaker's perspective whenever a tax is intended to raise prices for sellers. This applies even when buyers are homogeneous, and is distinct from standard price discrimination. I build a model that applies this insight to protectionist tariffs on intermediate goods, and demonstrate that this mechanism motivates the use of SEZs. The model has substantial empirical traction, making specific predictions about about the form, composition, and size of zones in equilibrium. I investigate these predictions in a comprehensive new dataset on U.S. SEZs that I compiled from public records, and find that the implementation of zone policy is consistent with the theory, including in the way that it develops over time in response to exogenous changes in the import supply of particular intermediate goods.

Heteroskedastic Supply and Demand Estimation: Analysis and Testing (with Anson Soderbery)

Forthcoming at the Journal of International Economics

The Feenstra (1994) method is widely used in the international trade literature to estimate supply and demand elasticities. The method is mechanically an IV strategy, and we demonstrate that this has important implications for its application and reliability. The assumptions needed for it to yield unbiased estimates are stronger than previously understood, and in practice, estimates are subject to bias due to both weak instruments and violations of the exclusion restriction. We illustrate how these arise in context and show that standard tests identify estimates that are likely to be biased. In an application to U.S. import data, estimates of import demand and export supply elasticities are substantially lower among goods that pass standard tests relative to those that fail. We find evidence that this difference in elasticities reflects reduction of bias as well as some selection in the set of goods that tend to pass both tests. 

Working Papers

Cutting Out the Middleman: The Structure of Chains of Intermediation (with Meredith Startz) 

Revised and Resubmitted at the American Economic Review

Distribution of goods often involves chains of multiple intermediaries engaged in sequential buying and reselling. Why do such chains arise, and how will changes in their structure due to changes in policy or trade costs affect consumers? We show that internal economies of scale in trade costs naturally generate chains with multiple intermediaries, and that this suggests developing countries markets are more likely to be served via long chains. Contrary to common wisdom, cutting middlemen out can, but does not necessarily, benefit consumers. Instead, there is a fundamental tradeoff between costs and entry that means even pure reductions in trade costs can have perverse effects. The proposed mechanism is simple, but can account for empirical patterns in wholesale firm size, prices and markups that we document using original survey data on imported consumer goods in Nigeria. We estimate a structural version of the model for distribution of Chinese-made apparel in Nigeria, and describe endogenous restructuring of chains and the resulting impacts on consumer welfare in response to counterfactual changes in regulation, e-commerce technologies, and transport infrastructure. We find that cutting out middlemen has heterogeneous impacts across locations, but often harms more remote consumers. 

Where Do the Data Come From? Endogenous Classification in Administrative Data

Reject and Resubmit at the Quarterly Journal of Economics

Classification systems group heterogeneous objects such as products into categories called “codes” and define what level of policy, such as tariffs, will be applied to each group. I develop a theory of endogenous classification and show that accounting for the motives underlying the design of classification systems has important implications for empirical research. I build a model in which the choice of which things to group together reflects the objectives of a policymaker. A finer classification better targets policy but is harder to design and enforce. The degree to which heterogeneous objects are grouped together will vary across codes within a classification system and may be systematically related to policies and attributes of interest to both the econometrician and the policymaker. Taking the classification of U.S. imports as a leading example, I show that its design is consistent with this theory. Product codes vary greatly in their size and specificity – codes are more subdivided when tariffs are high, and when codes are more subdivided goods within them are more similar. Heterogeneity in product attributes within codes leads to large biases when estimating parameters such as demand and supply elasticities. I show that the amount of heterogeneity and therefore the size of this bias is correlated with tariffs as expected under a theory of endogenous classification, and correcting it changes our understanding of important empirical relationships such as the one between tariffs and demand elasticities.

Work in Progress:

Optimal Trade Policy with General Non-Separability

Canonical models of trade policy assume that consumption and production decisions are separable across goods. However, much recent work on trade policy investigates mechanisms which violate these assumptions, such as global supply chains or selective tariff reductions on intermediates. In these settings, general analytical solutions for optimal trade policy are not known, and consequently much recent works relies on simplifying assumptions or computational methods to characterize optimal policy. In this paper I develop analytical solutions for optimal trade policy in a general setting with non-separable demand and supply, and including both protectionism and terms-of-trade manipulation. I also estimate the relevant parameters in a model-consistent way. To demonstrate the effectiveness of this approach, I use the model to estimate political weights for traded industries in the U.S., and I show that incorporating cross-industry forces (such as intermediates use) changes the resulting estimates significantly.

Foxes and Hedgehogs: The Determinants of Labor Market Adjustment Costs (with Hannes Schwandt and Sharon Traiberman)

There is significant evidence that labor markets adjust slowly to trade shocks, suggesting that workers face large costs to move between sectors, locations and occupations. These costs are key parameters and potential targets of policy to ease the unequal effects of trade, but are typically estimated as model residuals for broad groups of individuals. We investigate the source of adjustment costs at the individual level, and focus on the role of personality in shaping outcomes. Following workers in the German Socio-economic Panel who experience job loss following either plant closures or exposure to import shocks, we find personality is a key mediator of worker-level outcomes like employment, household earnings, and take-up of public benefits, as well as adjustment behaviors like industry and occupation switching. In particular, neuroticism has large negative effects on worker adjustment; these effects are in many cases larger than more standard labor market variables such as education. We then examine how heterogeneity in individual-level adjustment costs drives the dynamics of labor market adjustment and the distributional impacts of trade shocks, and plays a role in explaining the recent sharp negative outcomes for some workers due to trade shocks.

Exclusions for Sale? Tariff Exemptions in the US-China Tariff War (with Davin Chor and Binging Li)

Special Economic Zones in Developing Countries