Publications
Publications
Gravity with History: On Incumbency Effects in International Trade (with Peter Egger, Reto Föllmi and David Torun) - forthcoming at the Journal of the European Economic Association
Media: VoxEU
Gravity with History: On Incumbency Effects in International Trade (with Peter Egger, Reto Föllmi and David Torun) - forthcoming at the Journal of the European Economic Association
Media: VoxEU
Abstract
We introduce incumbency effects into a tractable dynamic model of international trade. The framework nests the canonical Melitz (2003)-Chaney (2008) model as a special case. The key novelty is that fixed costs of market access decrease with tenure. As a consequence, there is less market exit and entry in response to a shock. We derive a gravity equation and show that, ceteris paribus, countries that liberalized their trade relationship earlier trade more today. We provide supporting evidence for the underlying mechanism and derive an augmented ACR formula (Arkolakis et al., 2012) for the gains from trade that accounts for incumbency effects. A quantitative analysis suggests that our mechanism can explain up to 25% of countries’ home shares and that the gains from trade are, on average, 10% larger when accounting for incumbency effects. The analysis further reveals novel distributional effects of trade that benefit real wages but reduce profits.
Inequality, Openness, and Growth through Creative Destruction (2024, with Adrian Jäggi and Maik Schneider) - Journal of Economic Theory 222: 105887
Abstract
We examine how inequality and openness interact in shaping the long-run growth prospects of developing countries. To this end, we develop a Schumpeterian growth model with heterogeneous households and non-homothetic preferences for quality. We show that inequality affects growth very differently in an open economy as opposed to a closed economy: If the economy is close to the technological frontier, the positive demand effect of inequality on growth found in closed-economymodels may be amplied by international competition. In countries with a larger distance to the technology frontier, however, rich households satisfy their demand for high quality via importing, and the effect of inequality on growth is smaller than in a closed economy and may even be negative. We show that this latter theoretical prediction is in line with basic patterns in the data, both when considering industry-level growth in export quality and when considering growth in GDP per capita.
Quality Differentiation, Comparative Advantage, and International Specialization Across Products (2024) - European Economic Review 170: 104869
Best paper award at the Conference Celebrating 200 Years of Ricardian Trade Theory
Abstract
We introduce quality differentiation into a Ricardian model of international trade. We show that (1) quality differentiation allows industrialized countries to be active across the full board of products, complex and simple ones, while developing countries systematically specialize in simple products, in line with novel stylized facts. (2) Quality differentiation may thus help to explain why richer countries tend to be more diversified and why, increasingly over time, rich and poor countries tend to export the same products. (3) Quality differentiation implies that the gains from inter-product trade mostly accrue to developing countries. (4) Guided by our theory, we use a censored regression model to estimate the link between a country's GDP per capita and its export quality. We find a much stronger relationship than when using OLS, in line with our theory.
On the Design of Effective Sanctions: The Case of Bans on Exports to Russia (2024, with Ricardo Hausmann and Muhammed Yildirim), Economic Policy 39(117): 109–153
Abstract
We build on Baqaee and Farhi (2019, 2021) and derive a theoretically-grounded criterion that allows targeting bans on exports to a sanctioned country at the level of ∼5000 6-digit HS products. The criterion implies that the costs to the sanctioned country are highly convex in the market share of the sanctioning parties. Hence, there are large benefits from coordinating export bans among a broad coalition of countries. Applying our results to Russia reveals that sanctions imposed by the EU and the US in response to Russia’s invasion of Ukraine are not systematically related to our arguments once we condition on Russia’s total imports of a product from participating countries. We discuss drivers of these differences, and then provide a quantitative evaluation of the export bans to show that (i) they are very effective with the welfare loss typically ∼100 times larger for Russia than for the sanctioners; (ii) improved coordination of the sanctions and targeting sanctions based on our criterion allows to increase the costs to Russia by about 80% with little to no extra cost to the sanctioners; and (iii) there is scope for increasing the cost to Russia further by expanding the set of sanctioned products.
From Local to Global: A Theory of Public Basic Research in a Globalized World (2023, with Hans Gersbach and Samuel Schmassmann), European Economic Review 160: 104530
Abstract
We analyze public basic research in a multi-country, multi-industry environment with international trade. Basic research generates ideas, which firms take up in applied research to develop new varieties. A country's specialization in international trade thus determines which ideas can be commercialized domestically. We demonstrate that the equilibrium is consistent with key empirical patterns. We then show that national investments may cause inefficiencies along three dimensions: (1) There is typically too little total investment in basic research. (2) Basic research is too heavily concentrated in industrialized countries. (3) Basic research is potentially insufficiently directed to support innovation in complex, high-tech industries. These inefficiencies can rationalize international coordination of basic research investments or support policies such as the Bayh Dole Act.
How to weaken Russian oil and gas strength (2022, with Ricardo Hausmann, Agata Loskot-Strachota, Axel Ockenfels, Simone Tagliapietra, Guntram Wolff, and Georg Zachmann), Science (Letter) 376(6592): 469
Longer version: Bruegel and Harvard CID Working Paper
Media: Deutschlandfunk Nova, Business Insider
Abstract
In the wake of the Russian aggression against Ukraine, major sanctions have been imposed by Western countries, most notably with the aim of limiting Russia’s access to hard international currency. However, Russia remains the world’s first exporter of oil and gas, and at current energy prices this provides large hard currency revenues. As the war continues, European governments are under increased pressure to scaleup their energy sanctions, following measures taken by the United States, the United Kingdom, Canada and Australia. Given the inelasticity of Russia’s oil and gas supply, the most efficient way for Europe to sanction Russian energy would not be an embargo, but the introduction of an import tariff that can be used flexibly to control the degree of economic pressure on Russia.
Horrible Trade-offs in a Pandemic: Poverty, Fiscal Space, Policy, and Welfare (2022, with Ricardo Hausmann), World Development 153:105819
Media: the Conversation, Complexity (SFI Podcast), Harvard Growth Lab, VoxEU, Growth Lab Best of 2020, HKS Newsletter
Abstract
We analyze how poverty and a country’s fiscal space impact policy and welfare in times of a pandemic. We introduce a subsistence level of consumption into a tractable heterogeneous agent framework, and use this framework to characterize optimal joint policies of a lockdown and transfer payments. In our model, a more stringent lockdown helps fighting the pandemic, but it also deepens the recession, which implies that poorer parts of society find it harder to subsist. This reduces their compliance with the lockdown, and may cause deprivation of the very poor, giving rise to an excruciating trade-off between saving lives from the pandemic and from deprivation. Transfer payments help mitigate this trade-off. We show that, ceteris paribus, the optimal lockdown is stricter in richer countries and the aggregate death burden and welfare losses smaller. We then consider a government borrowing constraint and show that limited fiscal space lowers the optimal lockdown and welfare, and increases the aggregate death burden during the pandemic. This is particularly true in societies where a larger fraction of the population is in poverty. We discuss evidence from the literature and provide reduced-form regressions that support the relevance of our main mechanisms. We finally discuss distributional consequences and the political economy of fighting a pandemic.
Macroeconomic Rationales for Public Investments in Science [Working Paper] (2021, with Hans Gersbach and Maik Schneider), Economic Inquiry 59(2):575-599 (lead article)
Abstract
What is the economic rationale for investing in science? Based on an open economy model of creative destruction, we characterize four key factors of optimal investment in basic research: the stage of economic development, the strength of the manufacturing base, the degree of openness, and the share of foreign-owned firms. For each of these factors, we analyze its bearings on optimal basic research investment. We then show that the predicted effects are consistent with patterns observed in the data and discuss how the factor-based approach might inform basic research policies.
Taxation, Innovation, and Entrepreneurship [Working Paper] (2019, with Hans Gersbach and Maik Schneider), The Economic Journal 129(620): 1731–1781
Media: Phys.org
Abstract
We explore optimal and politically feasible growth policies consisting of basic research investments and taxation. We show that the impact of basic research on the general economy rationalises a taxation pecking order with high labour taxes and low profit taxes. This scheme induces a significant proportion of agents to become entrepreneurs, thereby rationalising substantial investments in basic research fostering their innovation prospects. These entrepreneurial economies, however, may make a majority of workers worse off, giving rise to a conflict between efficiency and equality. We discuss ways of mitigating this conflict, and thus strengthening political support for growth policies.