Working Papers

International Trade and Earnings Inequality: A New Factor Content Approach (Joint with Paul Carrillo, Arnaud Costinot, Dave Donaldson and Dina Pomeranz)

New paper - December 2020

We develop a new factor content approach to study the impact of trade on inequality. Our analysis generalizes the theoretical results of Deardorff and Staiger (1988) and improves on past empirical implementations of these results. Combined with unique administrative data from Ecuador, our approach yields measures of individual-level exposure to exports and imports, for both capital and labor income, as well as estimates of the incidence of such exposure across the income distribution. We find that international trade raises earnings inequality in Ecuador, especially in the upper-half of the income distribution. However, the drop in inequality experienced by Ecuador over the last decade would have been less pronounced in the absence of trade.

Aggregate Implications of Firm Heterogeneity: A Nonparametric Analysis of Monopolistic Competition Trade Models (Joint with Costas Arkolakis and Sharat Ganapati)

New paper - November 2020

We measure the role of firm heterogeneity in counterfactual predictions of monopolistic competition trade models without parametric restrictions on the distribution of firm fundamentals. We show that two bilateral elasticity functions are sufficient to nonparametrically compute the counterfactual aggregate impact of trade shocks, and recover changes in economic fundamentals from observed data. These functions are identified from two semiparametric gravity equations governing the impact of bilateral trade costs on the extensive and intensive margins of firm-level exports. Applying our methodology, we estimate elasticity functions that imply an impact of trade costs on trade flows that falls when more firms serve a market because of smaller extensive margin responses. Compared to a baseline where elasticities are constant, firm heterogeneity amplifies both the gains from trade in countries with more exporter firms, and the welfare gains of European market integration in 2003-2012.

Technological Transition with Skill Heterogeneity Across Generations (Joint with Martin Beraja and Nitya Pandalai-Nayar)

Updated on June 2020

We study how inequality, skills, and economic activity adjust over time to technological innovations. We develop a theory of technological transitions where economies adjust through two margins: (i) within-generation reallocation of workers with heterogeneous skills, and (ii) cross-generation changes in the skill distribution driven by entering generations investing in skills. We then characterize the equilibrium dynamics, showing that they resemble those of a q-theory of skill investment where q is lifetime inequality. Technological transitions are slower and more unequal whenever innovations are biased towards economic activities intensive in skills which differ more from those used in the rest of the economy—i.e., technology-skill specificity is higher. This is because the first margin is weaker and the second stronger. Lastly, we document that recent cognitive-biased innovations caused responses in occupational composition and training which were strong for younger generations but weak for older ones. This evidence is consistent with high technology-skill specificity, implying that cognitive-biased transitions are particularly slow and unequal because they are mainly driven by changes in the skill distribution across generations.

General Equilibrium Effects in Space: Theory and Measurement (Joint with Costas Arkolakis and Federico Esposito)

Supplemental Material: Online Appendix

Updated on June 2020

How do international trade shocks affect spatially connected regional markets? We answer this question by extending shift-share empirical specifications to incorporate general equilibrium effects that arise in spatial models. In partial equilibrium, regional shock exposure has a shift-share structure: it is the average shock weighted by regional exposure shares in revenue and consumption. General equilibrium responses of employment and wages in each market are the sum, across all regions, of these shift-share measures times bilateral reduced-form elasticities determined by the economy's spatial links. We use this reduced-form representation of the model to efficiently estimate the bilateral elasticities exploiting exogenous variation in shock exposure across markets. Finally, we study the general equilibrium impact of the "China shock’’ on U.S. CZs using our model-consistent generalization of the specification in Autor et al. (2013). We find that indirect effects from the shock exposure of other markets reinforce the negative impact of the market’s own shock exposure, leading to employment and wage losses that are significantly larger than those reported in the existing literature.

Worker Heterogeneity, Wage Inequality, and International Trade: Theory and Evidence from Brazil

This paper proposes a new approach to quantify the distributional effects of international trade. The starting point of my analysis is a Roy-like model where workers are heterogeneous in terms of their comparative and absolute advantage. In this environment, I show that the schedules of comparative and absolute advantage (i) determine changes in the average and the variance of the log-wage distribution, and (ii) are nonparametrically identified from the cross-regional variation in the sectoral responses of employment and wages to observable shifters of sector labor demand. I then use these theoretical results to quantify the distributional consequences of the recent movements in world commodity prices in Brazil. I find that shocks to world commodity prices account for 5-10% of the fall in Brazilian wage inequality between 1991 and 2010.

Refereed Publications

Shift-Share Designs: Theory and Inference (Joint with Michal Kolesàr and Eduardo Morales)

Supplemental Material: Stata Code; Matlab Code; R Code; Online Appendix

The Quarterly Journal of Economics, 134(4): 1949-2010, 2019

We study inference in shift-share regression designs, such as when a regional outcome is regressed on a weighted average of sectoral shocks, using regional sector shares as weights. We conduct a placebo exercise in which we estimate the effect of a shift-share regressor constructed with randomly generated sectoral shocks on actual labor market outcomes across U.S. Commuting Zones. Tests based on commonly used standard errors with 5% nominal significance level reject the null of no effect in up to 55% of the placebo samples. We use a stylized economic model to show that this overrejection problem arises because regression residuals are correlated across regions with similar sectoral shares, independently of their geographic location. We derive novel inference methods that are valid under arbitrary cross-regional correlation in the regression residuals. We show using popular applications of shift-share designs that our methods may lead to substantially wider confidence intervals in practice.

Nonparametric Counterfactual Predictions in Neoclassical Models of International Trade (Joint with Arnaud Costinot and Dave Donaldson)

American Economic Review, 107(3): 633-89, 2017. (Lead Article)

We develop a methodology to construct nonparametric counterfactual predictions, free of functional form restrictions on preferences and technology, in neoclassical models of international trade. First, we establish the equivalence between such models and reduced exchange models in which countries directly exchange factor services. This equivalence implies that, for an arbitrary change in trade costs, counterfactual changes in the factor content of trade, factor prices, and welfare only depend on the shape of a reduced factor demand system. Second, we provide sufficient conditions under which estimates of this system can be recovered nonparametrically. Together, these results offer a strict generalization of the parametric approach used in so-called gravity models. Finally, we use China's recent integration into the world economy to illustrate the feasibility and potential benefits of our approach.