Research

Job Market Paper: “Free Trade Agreements and the Environment” with P. Missios

In this paper, we explore the relationship between Free Trade Agreements (FTAs) and environmental policy, and the implications of negotiating environmental policy in trade agreements. As a domestic instrument not typically bound by pure trade agreements, countries will choose suboptimal environmental policy in order to advantage local firms and/or through not taking the full external effects of production (pollution) into account. This lowers the value of trade agreements, potentially changing the trade agreements that endogenously emerge in equilibrium. In a model with multiple asymmetric countries and different level of pollution spillovers, we examine the equilibrium agreements and determine how FTAs that cover both border instruments and environmental policy (deep FTAs) differ from the cases where border policies alone (shallow FTAs) are negotiated. We show that equilibrium level trade-only coalitions are not necessarily larger than trade-and-environment coalitions. Production asymmetry combined with the different level of pollution, for some countries, generates an incentive to opt out of any coalition (as those countries balance the gains from improved trade and greater pollution from increased production), while other countries attempt to push dirty production to foreign countries through agreements, both deep and shallow.

“Preferential Trade Agreements, Externalities and Domestic Policy” with P. Missios, submitted to American Economic Journal: Economic Policy

As multilateral trade barriers fall, there are increasing concerns that domestic policies will be used to undermine the welfare-enhancing globalization effects of tariff cooperation. We examine how the ability to use domestic instruments affects the formation of Free Trade Agreements (FTAs) and Customs Unions (CUs), and the resulting implications for the pursuit of free trade. In our comparative advantage-based asymmetric country framework, we examine how optimal tariffs relate to domestic policy choices, and how negotiated restrictions on trade policy affect both domestic policies and the incentives to enter different trade agreements. We show that externalities and unrestricted domestic policy can result in the same equilibrium trade agreements as the case with no externalities and no domestic policy, but can also lead to different equilibrium trade agreements, depending on the nature and extent of the externality and the degree of asymmetry across industries. Unlike previous work, the presence of domestic policy manipulation and externality asymmetry can lead to global free trade with customs unions but not with free trade agreements.s.

“In the Eye of the Storm: Firms and Capital Destruction in India” with J. Tschopp, M. Pelli, K. Eklou, submitted to Quantitative Economics

This paper examines the response of firms to capital destruction, using a new mea- sure of firm exposure to tropical storms as a negative exogenous shock on firms’ capital stock. Drawing on a panel of Indian manufacturing firms between 1995 and 2006, we establish that, depending on their strength, storms destroy up to 75.3% of the fixed assets of the median firm (in terms of its productivity and industry performance). We quantify the response of firm sales within and across industries and find effects akin to Schumpeterian creative destruction, where surviving firms build back better. Within an industry, the sales of less productive firms decrease disproportionately more, while across industries capital destruction leads to a shift in sales towards more performing industries. This build-back better effect is driven by firms active in multiple industries and, to a large extent, by shifts in the firm-level production mix within a firm’s active set of industries. Finally, while there is no evidence that firms adjust by investing in new industry lines, firms tend to abandon production in industries that exhibit lower comparative advantage.

“Monopolistic Competition with Credence Goods and Asymmetric Information”

The global markets for organic and GMO-free products are rapidly growing. Uncertainty about the quality of these products is critical, and consequently affects international trade in these goods. As credence goods (where the quality of the product is indeterminate to the consumer even after purchase), the markets for organic and GMO-free products differ considerably from experience goods markets. In particular, consumers cannot update their beliefs based on their experience with the product. As a result, consumers have to rely on certification, and producers, in order to face a full demand and charge higher prices, have little choice but to obtain this signal of their quality. To investigate this, we bring asymmetric information into the Melitz-Ottaviano (2008) model and analyze firms’ self-selection into different groups of domestic producers and exporters based on two levels of firms’ heterogeneity: productivity and credence quality, where both characteristics are not directly observable by consumers. High credence quality firms decide to self-select themselves into a group of certified domestic producers and exporters or to serve domestic and export markets without certification and get mixed in with their low credence quality counterparts after observing their level of credence quality, the cost of certification, and their marginal cost of production.

“Incentives to Form Joint International Trade and Environmental Agreements” with P. Missios

International trade, along with trade-promoting preferential trade agreements, are often criticized for their potential damaging effect on the environment. Further, there may exist incentives for governments to alter domestic environmental policies in order to affect their firms’ competitiveness and thereby increase the gains from trade. The growing number of trade agreements that include different environmental norms illustrates these concerns. To examine the different incentives to enter agreements and to manipulate industrial policy, we utilize a perfectly competitive two-country, comparative advantage model with cross-border externality spillovers. We analyze incentives to form pure environmental agreements, shallow (trade-only) agreements and deep (trade and domestic policy) agreements. We show that these agreements have very different outcomes in terms of world and country-specific welfares, trade specialization and environmental damages, and the extent to which the level of the externality and the degree of comparative advantage (production asymmetry) affect the incentives to enter these agreements.

“Exclusion, Self-Exclusion and Deep Trade Agreements”

Deep trade agreements include domestic policy restrictions regarding the environment, labour, intellectual property, health and investment, in addition to trade liberalization. In this paper, I develop a comparative advantage based model with asymmetric countries and both trade and domestic policy instruments, in order to find the differences in equilibrium trade agreements. In doing so, I examine how the incentives to join agreements differ between shallow (trade-only) and deep agreements, and how the inclusion of domestic policy restrictions affects the incentives of countries to free-ride, exclude other countries, or self-exclude. Depending on the asymmetry between industries and domestic externalities, these incentives may result in different compositions of trade agreements but still increase world welfare as deep agreements are chosen over shallow agreements.