Work In Progress

From Melitz to Ricardo: A Competitive Framework for Firm Selection and Trade 

Abstract

This paper reinterprets the Melitz (2003) model of firm heterogeneity and selection in a world of perfect competition. By removing monopolistic markups and assuming free entry and variable productivity across firms, the model provides a tractable and distortion-free environment for analyzing comparative advantage. Each sector is characterized by convex cost technologies, fixed and sunk costs, and a Pareto distribution of firm productivity. Entry and selection determine a cutoff productivity threshold in each sector, shaping prices and aggregate outcomes. Despite heterogeneous firms and positive profits for active producers, all profits are dissipated through entry costs, and the decentralized equilibrium is efficient. We derive closed-form expressions for equilibrium prices, output, and labor allocation, and use these to examine the determinants of comparative advantage. The model shares structural parallels with Eaton and Kortum (2002), particularly in its use of extreme value distributions and its potential for empirical application. Extensions to a multi-country setting offer a promising direction for future research on trade flows and welfare under perfect competition.

This paper is being developed with the assistance of OpenAI’s ChatGPT, which has contributed to the drafting, editing, and structuring of the model and exposition. For full transparency, a complete transcript of all interactions with ChatGPT is available here.

How international experience helps shape labor market outcomes, with Carl Davidson, Fredrik Heyman, Fredrik Sjöholm, and Susan Zhu

Abstract

This paper explores the influence of experience in foreign-owned firms on worker mobility, with a focus on Swedish companies acquired by foreign multinationals. We posit that international experience, by imparting knowledge about foreign operations, enhances an employee’s appeal to multinational enterprises (MNEs). By matching acquired firms with comparable control firms and utilizing a stacked difference-in-differences estimation methodology, we observe a significant impact of foreign acquisitions on job mobility. Our results indicate that foreign acquisitions raise the likelihood of a job switch to an MNE by approximately 4 percentage points, while concurrently decreasing the probability of a switch to a local firm by around 5 percentage points. Additional analyses reveal that the positive effect on mobility to MNEs is driven by learning opportunities stemming from increased trade linkages within multinational production networks and the implementation of advanced technologies subsequent to an acquisition. Furthermore, the annualized wage growth rate following acquisitions is found to be 1 percentage point higher for workers transitioning to MNEs compared to those remaining at the acquired firms, suggesting a steeper wage growth trajectory for employees moving to MNEs.

Trade and Labor Market Fluidity, with Carl Davidson

Idea/Abstract

This is a paper about how luck, skill, and experience interact to shape career paths in an economy that is open to trade.  This is a work in progress.  The model should be considered version 1.1.  Version 1.0 of the model can be found in recent papers by Bagger et al (2014) and Engbom (2022), both of which develop the model of job-to-job movement upon which we build.  Our contribution in this paper is to set their labor market in a world of international trade with heterogeneous firms in the spirit of Meltiz (2003).  Our contribution can also be viewed as a continuation of a research agenda that began with Davidson et al (2020, 2022).  In that earlier work, career paths were shaped by luck and experience only, as all workers were assumed to be innately the same.  

Production When Interpersonal Relationships Matter, with Carl Davidson

Idea

The fundamental idea stems from a thought that I’ve had for many years that the “social fabric” is an important input to utility.  My original idea was that people grow relationships at work and in their neighborhoods.  When forced to move or change jobs, they lose more than a wage, they also lose those relationships. Since the people “left behind” also lose those relationships, “moving costs” cannot fully represent this loss.

The idea is that people become more productive as they spend time working together.  This is relationship-specific capital and is different from an individual person’s experience or ability.  Replacing one person within a firm breaks that person’s relationship with every other person with whom he or she worked.  Even if the replacement worker has exactly as much ability and overall experience, the within-firm tenure clock gets set back to zero and overall productivity suffers.