Job market paper

Abstract:

This paper develops and estimates an open economy dynamic general equilibrium model to introduce and quantify a new mechanism through which openness influences productivity. The model features matching frictions in the labor market and endogenous demand elasticities in product markets. Because openness affects demand elasticities, it influences productivity through several channels. First, higher demand elasticities make firms’ employment decisions more sensitive to their idiosyncratic productivity shocks. This causes aggregate job turnover to rise, and thereby tends to raise unemployment. Second, this same increase in job turnover means that workers are moved more frequently from less to more efficient firms. Finally, to the extent that openness reduces the cross-firm dispersion in markups, it likewise tends to reduce the distortionary wedges between firms' marginal revenue products.

Counterfactual analysis quantifies theses trade-induces impacts on job turnover, unemployment, and labor misallocation. I show a 10 percentage point reduction in import tariffs combined with a 12 percent reduction in the iceberg trade cost raises job turnover, unemployment, and aggregate income (in steady state) by roughly 8, 17, and 22 percent, respectively. These effects would be almost four times smaller if demand elasticities are not allowed to respond to openness.

Working Papers


"Optimal Trade Policy for Less Financially Developed Economies,"

with Mehran Ebrahimian (The Wharton School of the University of Pennsylvania), [Draft coming soon]

Abstract:

This paper empirically shows that financial development does not matter for the growth of finance-dependent industries in closed countries, and finance-dependent industries do not benefit from trade openness in less financially developed economies. That is, financial development and country-wide trade openness are complements. We explain these empirical results using a theory of international trade with heterogeneously financially constrained countries and strategic default on loans. In a closed economy, high output price and economic rent for potential producers in the finance-dependent sector support investment using external-financing. Trade with a more financially developed country lowers the output price in the finance-dependent sector, while shrinking this sector. As a result, the economic rent would flow out to the more financially developed economy, and, thereby, the less financially developed country may lose from trade.


"Quantifying the Effects of Sanctions: Evidence from Iranian Plant-Level Manufacturing Data,"

with Poorya Kabir (Columbia Business School), [Draft coming soon]

Abstract:

This paper investigates the consequences of the sanctions imposed on Iran in 2008, using Iranian Census of Manufacturing dataset. The Census data is an annual survey of all manufacturing plants with more than 50 employees, and a sample of plants with 10-49 employees from 2003 to 2011. A rare feature of this dataset is the inclusion of prices and physical quantities of all inputs and outputs, which is helpful in decomposing values into the price and quantity changes by looking at narrowly defined inputs (outputs). We find that firms’ profit margin fall, on average, by 6% in 2009 relative to 2007. This fall in profit margin comes from an increase in wages and other costs of firms relative to sales, rather than their (imported) material input usage. Wages and other costs increased by roughly 20% and 8% relative to sales.

We also investigate the heterogeneity of effects of sanctions across the firm size distribution. The reduction in profit margin is more pronounced in small firms. Compared to larger firms, smaller firms do not face higher costs, while their sales fall more sharply. Half of the reduction in sales is accounted for by the output price fall and the other half by a reduction in the output quantity.

We further investigate the cross-industry consequences of sanctions. Changes in an industry’s profit margin are likely to depend on whether the goods affected by sanctions were its inputs, or were competing with its outputs. We hypothesize that industries exposed to sanctions in their input markets face a reduction in profits. However, industries that faced less output competition may benefit from sanctions. We construct input and output exposure for each industry to empirically investigate the hypothesis. Since sanctions were mostly imposed by European countries, input (output) exposure is constructed as the total value of imported inputs (outputs) from European countries normalized by total input (output) of the industry.

Work in Progress

"Variable Demand Elasticities, Job Turnover, and Firm-Specific Skills"

"Variable Demand Elasticities and the Shimer Puzzle"