Research
Working Papers
Trade and Market Power in Product and Labor Markets
This paper studies the effects of endogenous firm-level market power in input and product markets on both equilibrium prices and wages as well as the gains from trade using a general equilibrium model with heterogeneous firms. Firm-level prices and wages are functions of two endogenous distortions: (i ) a markup of price over marginal cost that depends on product market shares and (ii ) a markdown of wages relative to marginal revenue product that depends on labor market shares. Both distortions cause large firms to be too small relative to their local labor market competitors compared to a setting with perfect competition in input and product markets. Opening to trade reallocates market shares in product and labor markets towards countries' large firms, which can reduce misallocation but also increases the labor market power of these firms. After estimating the structural parameters of the model using Indian plant-level data, I show that accounting for endogenous labor market power implies only small welfare losses due to misallocation and therefore a negligible increase in the gains from trade. Trade has significantly larger effects on firms' markups than on their markdowns. Nevertheless, because of the increase in large firms' input market power, there is a redistribution of the gains from trade from workers' wages to firms' profits.
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Intellectual Property Rights, Asymmetric Information, and the Make-or-Buy Decision
I study how the strength of a country's intellectual property rights affects the firm's choice between vertical integration and outsourcing of an input supplier. In my model the firm faces a tradeoff: outsourcing increases the incentive for suppliers to invest in the relationship, but enables suppliers to use the firm's non-excludable knowledge capital outside of the relationship. Asymmetric information implies that some outsourcing relationships break down in equilibrium, which allows suppliers to obtain rents and results in ex post inefficiencies. The size of these inefficiencies depends non-monotonically on the strength of intellectual property rights. At low levels of intellectual property rights, small increases in their strength make outsourcing less desirable compared to integration. This is contrary to existing models where the value of an outsourcing relationship typically increases in the strength of intellectual property rights.
Works in Progress
Trade and Diffusion of Embodied Technology (with S. Ayerst, F. Ibrahim, and S. Rachapalli)
We examine international knowledge spillovers through the trade of technology embodied in products. We use patent data to construct measures of embodied technology and knowledge linkages across sectors. Empirically, we find that an increase in the trade of embodied knowledge increases spillovers to downstream innovative sectors. Next, we construct a tractable dynamic model of trade by multi-product firms. Firms add products to their portfolio either by inventing new products or innovating on existing products produced by other firms. Firms exit the economy when they either can no longer produce any frontier products or are unwilling to pay the associated fixed cost of operation. Opening to trade causes low productivity firms to exit the market, which reallocates resources to high productivity firms. Additionally, opening to trade increases knowledge spillovers, and this increases local innovation and causes firms to exit more frequently. Finally, we use the empirical measures of embodied knowledge to quantify the model. The quantitative model predicts that knowledge spillovers increase the aggregate gains from trade, and the dispersion of these gains across firms. This is driven by higher firm turnover relative to a trade model without knowledge spillovers.
Learning and Diffusion (with S. Ayerst)
How do best practices diffuse through the economy? We explore the role of employees learning on-the-job as a source of diffusion. We study a model in which researchers learn to manage new firms by imitating their current employers. New firms inherit the originating firm’s innovative type (i.e. best practices) and steal market share in the product market. Imitation contributes to aggregate growth by (1) improving the quality of innovations by the originating firm; and (2) improving the distribution of firm types. However, the possibility of losing market share to future imitators decreases incentives for firms to innovate, lowering growth. We calibrate the model to match empirical evidence on researcher mobility and firm types using US patent data. We use the quantitative model to assess ownership rights to incumbent firms on growth. Increasing protection lowers entry and worsens the distribution of firm types but increases investment by incumbent firms.