Firm Size Distributions and Vertical Differentiation (together with William Connell)
Abstract
This paper shows that consumers' willingness to pay for quality in a particular sector results in an increase in the dispersion of the firm size distribution. We develop a standard model of endogenous input quality choice as to show how power law coefficients of firm size distributions are affected. We then empirically estimate power law coefficients for several European countries and sectors and find widespread confirmation of our theoretical prediction. We find power law coefficients to be significantly lower in industries where consumers value higher quality of products. This strongly confirms our prediction that firm size distributions are more dispersed in industries that value vertical differentiation. Since firm size distributions have been shown to matter for comparative advantage and the direction of bilateral trade flows, it is important to understand the determinants underlying the dispersion. (working paper Leuven, forthcoming).
Decomposing Firm-Product Appeal (with Bee Aw, Penn State - and - Yi Lee, Taiwain, National Tsing Hua University)
Abstract
Most trade models explain differences in performance of exporting firms via supply side characteristics such as productivity of the firm, quality of the product and the size of distribution networks in the destination country. This paper argues that an important omitted variable lies on the demand side, more specifically, in the differences in taste across consumers for firm-products. A failure to account for taste, results in an omitted variable bias in empirical work and an over-estimation of the supply side determinants in trade. We first develop a trade model that allows for the structural identification of both supply and demand side determinants of export revenue at firm-product level. We separately identify and quantify the importance of product quality and consumer tastes. Identifying taste as a determinant of firm appeal, distinct from firm productivity and product quality, offers several new insights. We find the relative importance of the demand versus the supply side components of firm-appeal to vary by country of destination. (CEPR paper, n° 12707).
Global Value Chains, Trade Shocks and Jobs. An Application to Brexit (with William Connell and Wouter Simons)
Abstract
This paper develops a novel approach to evaluate trade policy shocks. Previous studies typically rely on a traditional gravity approach between bilateral trade partners to assess trade shocks. However, a traditional gravity approach, either in gross output or in value added, overlooks a number of important issues and does not include 1) value chain linkages between domestic sectors; 2) global value chain linkages when trade between two countries is shipped via one or more third countries to a final destination; 3) the service content embedded in trade flows. This paper offers a more comprehensive framework. We develop a theoretical framework that captures all value chain linkages which results in a “new” gravity model. From the model we derive the complete inter-connectivity in value added between any bilateral pair of countries. We show how this corresponds to the Leontief matrix in sectoral input-output data such as WIOD which can then be used to assess the value added impact of any bilateral trade shock that may occur. We illustrate our approach with the case of Brexit between the EU and the UK. This leads to a set of new results on losses in value added and employment by country and sector for several Brexit scenarios. (working paper CEPR 2017)