Productivity, Fair Wage and Offshoring Domestic Jobs

Size: px
Start display at page:

Download "Productivity, Fair Wage and Offshoring Domestic Jobs"

Transcription

1 Productivity, Fair Wage and Offshoring Domestic Jobs Xi Chen July 7, 2017 Preliminary draft Abstract This paper develops a general equilibrium model with monopolistic competition that incorporates: (i) a sector of heterogeneous firms that differ in their productivity, (ii) a fair wage condition where firms pay a real wage that exceeds the market-clearing level and varies with productivity and (iii) an open economy in which a part of production process can be moved to foreign countries. I use this model to examine how the fair wage consideration influences the local labor market when firms may choose to offshore certain activities in order to minimize their domestic labor costs. The model predicts that an increasing fairness (that tightens the wage-productivity nexus) affects the domestic employment in a non-monotonic fashion via both extensive and intensive margin. It is also shown that the non-monotonicity occurs only in the offshorable sector. A crucial parameter that regulates the interplay between wage, productivity, offshoring and domestic employment is the elasticity of substitution between domestic and foreign labor inputs. Keywords: Heterogeneous firms, offshoring, fair wage, employment JEL codes: D21, D24, F12, F16, J23 STATEC Research, 13, rue Erasme, L-1468 Luxembourg. Tel: xi.chen@statec.etat.lu This paper is a part of the research project supported by Fonds National de la Recherche (Luxembourg). 1

2 1 Introduction In a globalized economy, firms increasingly rely on their foreign production units, which is referred to in the literature as offshoring or production service outsourcing. This allows firms to produce at a lower cost, to raise their revenue and eventually leads to higher employment level. However, the effects of offshoring are highly contested (Scheve and Slaughter, 2001). Much of the public concern is due to the expectation that cheaper foreign inputs may replace tasks previously done by domestic labor, and cause displacement of workers and lower the social welfare (Feenstra and Hanson, 1995, 1997). The deteriorated labor market condition from the financial crisis of 2008 has exacerbated the public discontent with globalization and allowed the rise of populist political movements around the globe. The two determinants of firms offshoring behavior are wage and productivity. The aim of this paper is to study how the relationship between wage and productivity influences the economy when firms may choose to offshore certain activities in order to minimize their domestic labor costs. In particular, I examine the implications offshoring under the fair wage condition. Using a matched sample of one million French workers and a half million employing firms, Abowd et al. (1999) found that controlling for individual effects, high wage firms are more productive and more profitable. From the theoretical perspective, one way to explain this result is the theory of gift exchange an idea originated from Akerlof (1982). The key assumption behind this theory is that workers have a preference for fairness and condition their effort on the offered wage. They provide a higher level of effort in exchange for a wage above some reference level that is considered as fair. Profit maximizing firms under the fair wage consideration may find it optimal to offer a wage that exceeds the market-clearing level. In the heterogeneous firm framework, the definition of fairness may vary depending on firms characteristics. Thus, this rent-sharing mechanism implies that ex-ant identical workers may face different compensation treatment in the equilibrium, with an offered wage correlated to certain aspects of their employers characteristics. Abowd et al. (1999) s finding relates rent-sharing to firms performance, and suggests that more successful firms set higher reference compensation level and pay higher wages. This yields, in particular, a correlation between wage and productivity. In an open economy where the production is offshorable, the correlation between wage and productivity could imply that more productive firms have the incentive to relocate a larger part of their production to foreign countries because they are facing a domestic labor cost, which is higher than the market-clearing level. Indeed, there are some empirical studies that shows more productive firms tend to be more 2

3 active in offshoring (Tomiura, 2005, 2007). Thus, these empirical observations raise the concern that in an open economy with higher correlation between wage and productivity, more productive firms may hire less domestic workers that implies a greater magnitude of job destruction due to offshoring. However, this scenario only describes one aspect of the productivity-employment nexus. Numerous studies reassure us by showing that more productive firms are generally larger in terms of employment (Bernard et al., 2007). Clearly, in an open economy firms productivity can be translated into employment via different conflicting channels. For instance, more productive firms are more likely to serve not only their domestic market but also the international markets, which generates higher employment to answer the higher demands (Melitz, 2003). In this paper, I limit the analysis in a sector where the only international activity is offshoring, exporting and FDI are excluded. This paper develops a general equilibrium model with monopolistic competition that incorporates three key features of open economies. First, the paper focuses on the composition and dynamics in an industry comprised of heterogeneous firms (Melitz, 2003). Second, the model allows for labor market frictions, which is characterized by workers preference for a fair wage (Egger and Kreickemeier, 2009). Third, the model depicts an open economy where firms have access to the international labor markets and may replace the tasks previously done by their domestic workers with the cheaper foreign inputs (Groizard et al., 2014). Using this model, I examine how the fair wage consideration in an offshorable sector affects the equilibrium variables, including market entry requirement, number of active firms, domestic employment and welfare. The model predicts that an increasing fairness (that tightens the wage-productivity nexus) affects the domestic employment in a non-monotonic fashion via both extensive and intensive margin. It is also shown that the non-monotonicity occurs only in the offshorable sector. A crucial parameter that regulates the interplay between wage, productivity, offshoring and domestic employment is the elasticity of substitution between domestic and foreign labor inputs. This shows that examining how different inputs have been used is crucial for the understanding of trade-labor nexus. I begin in Section 2 with a brief literature review. I then present in the Section 3 the main features of a monopolistic competition framework in which firms production technology is characterized by an unspecified cost structure. The reason that I start the discussion with general functions is that, first it simplifies the exposition and allows readers to apply these findings in other contexts, but more importantly it shows in a general way the equilibrium implications of production technology. In the literature of heterogeneous firms, most of studies assume that firms differ in 3

4 their productivity, and more productive firms produce at a lower marginal cost. A typical example is Melitz (2003), where he considers a single factor model that firms marginal cost is simply the inverse of their productivity. Egger and Kreickemeier (2009) adds a fair wage condition into the Melitz (2003) model, where productivity also influences the marginal cost via the wage channel. This extension yields a nonlinear relationship between marginal cost and productivity. On the one hand, more productive firms have lower marginal cost for a given wage. On the other hand, more productive firms also pay higher wage that leads to higher marginal cost. The aim of my paper is to study the offshoring under the fair wage consideration in the domestic labor market. This means the analysis should feature a two factor model with the domestic and foreign labor inputs. In addition, the wages offered in the domestic market vary with firms productivity. Thus, by minimizing the cost, firms choose their optimal labor composition. This setup has two implications on the specification of production technology. First, the relationship between firms marginal cost and productivity becomes highly non-linear (compared to Egger and Kreickemeier, 2009) with an additional offshoring channel through which productivity influences the marginal cost. Second, the technical change in this model is non-neutral in the sense that an improvement (or deterioration) in productivity may bias the technology toward one of the production factors. In Section 3, I present results at a level of generality that includes both features, thus pave the way for the analysis under more specific functional forms. The static equilibrium of the general model is characterized by an entry threshold productivity level that only the firms have higher productivity than this value becomes active. Note that in this paper, I limit the analysis to the case where firms draw their productivity from an exogenous distribution, and the productivity is the only source of firm heterogeneity. A first results in the Section 3 is that the existence and uniqueness of the equilibrium depend on whether the marginal cost increases or decreases as productivity raises. Then, I study the impact of a hypothetical technology shock on the equilibrium, in particular its effects on average profit, entry threshold productivity and equilibrium mass of producing firms. The analysis shows that the effects of technology shocks depend on whether the marginal cost of more productive firms is more or less sensible to the change in the technology, in other words, the relationship between productivity and the elasticity of marginal cost with respect to the technology parameter in question. Section 4 introduces an offshoring model based on Groizard et al. (2014) s approach where firms choose an optimal offshoring level by comparing the wage in their domestic labor market to the foreign markets. Following Egger and Kreick- 4

5 emeier (2009), I then specify a fair wage condition in Section 5 that the wage is determined by an equation with two components. First, this wage setting depends on the external environment, in particular the opportunity costs of firms outside option: offshoring a part of production aboard. I consider this opportunity cost as the market-clearing level. Firms under the fair wage consideration offer a real wage above this market-clearing level. Second, this wage setting also has an internal component that reflects the variation of fairness (or the reference compensation level) across heterogeneous firms. I assume that fair wage is an increasing function of firms productivity. The characterization of offshoring behavior and fair wages determines a specific production technology. Then, using results from the general model, I analyze the equilibrium implications of changes in two technology parameters: (i) the average offshoring cost; (ii) the level of fairness concern, which affect the external and internal components of the fair wage condition, respectively. The average offshoring cost sets the sector s reference wage; the fairness parameter ties firms offered wages to their productivity. I found that increasing offshoring cost has a clearcut effect on the equilibrium, while the effect of increasing fairness is non-monotonic and depends crucially on firms offshoring level and the elasticity of substitution between domestic and foreign labor input. In Section 6, I focus on labor implications of the fair wage condition in the context of offshorable production. The first question that I asked in this section is at the firm-level: given the fact that more productive firms pay higher wage and offshore more, are productive firms hire less domestic workers? The finding points out that the domestic labor demand depends crucially on two elasticity parameters, the elasticity of substitution between domestic and foreign labor and the elasticity of substitution between varieties of differentiated goods. This analysis adds a piece to the puzzle of how fair wage and offshoring influence the domestic labor market. Based on the answer to the first question and results derived in previous sections, I address a main research question of this paper: how an increase in fairness concern that tightens wage-productivity nexus, affects the the domestic employment in an offshorable sector? Under the fair wage consideration, there is a great number of channels through which the fairness parameter can affect the domestic employment. Intuitively, an increase in fairness affects directly firms domestic labor cost and indirectly their offshoring decision, which change the marginal cost structure and the production technology of individual firms. This technology shock then alters the equilibrium with two implications on the sector domestic employment: the extensive and intensive margin. The extensive margin reflects the impact of increasing fairness on the equilibrium mass of producing firms. The intensive margin reflects 5

6 the impact on the average labor demand of a firm. The model predicts that an increasing fairness affects the domestic employment in a non-monotonic fashion via both extensive and intensive margin. A crucial parameter that regulates the effects of fairness on domestic employment is the elasticity of substitution between domestic and foreign labor inputs. The numerical simulation of the model is also provided in th Section 5 and 6 to illustrate the findings. Section 7 provides the final remarks. 2 Background The seminal paper of Melitz (2003) provides a highly tractable theoretical framework for modelling firms export decisions, in which heterogeneous firms face entry costs. The Melitz model is the main workhorse for dealing with various issues in international economics. 1 There are, however, two important questions that the Melitz-type model does not provide answers for. First, Melitz (2003) assumes perfect competition in the labor market. All firms in his model face the same labor cost and neither trade nor productivity affects workers real wage. The second missing component of the Melitz model is pointed out by Bernard et al. (2007) that following (Krugman, 1979; Melitz, 2003), the new theories of heterogeneous firms were developed exclusively to explain export behavior and yield few predictions in other aspects of firms international activities, such as importing or offshoring. Egger and Kreickemeier (2009) addresses the first limitation by adding a fair wage condition into the Melitz (2003) model. In this framework, firm performance is linked with workers welfare, as more productive firms pay higher wages. Then they analyze the impact of export liberalization on wage inequality and unemployment under the fair wage consideration. 2 A similar model is Helpman et al. (2010), where heterogeneous firms face an uncertainty on ex post match-specific workers ability shocks. In this framework, wages are the outcome of a bargaining process that depends on firm performance and screening ability. Thus, using the search and matching theory, Helpman et al. (2010) is also able to generate a within-industry wage variation for ex ante homogeneous workers. The two papers represent a growing body of literature that combines trade theory with various forms of labor frictions, which also includes Helpman and Itskhoki (2010); Amiti and Davis (2012); Egger and Kreickemeier (2012). Following Egger and Kreickemeier (2009), the current heterogeneous firm model 1 (Redding, 2011) provides a survey of recent theoretical literature on heterogeneous firms and trade. 2 The earlier studies on the implications of the fair wage also include Akerlof and Yellen (1990); Fehr and Gächter (2000). 6

7 with fair wage consideration addresses only one aspect of globalization: exporting. However, the role of imports and offshoring for labor market outcomes has featured more prominently in both public and academic debate. 3 Biscourp and Kramarz (2007) find that there is a strong correlation between increasing imports and job destruction in France, while exports are positively associated with job creation. Mitra and Ranjan (2010) develops a theoretical model with perfect competitive markets that highlights the effects of offshoring on the domestic labor market. In the Mitra and Ranjan model, firms have an outside option, where domestic labor can be substituted by imported intermediate goods. The outside option gives additional bargaining power to trading firms in the wage negotiation. Thus, the model predicts that the trade opening leads to a reduction of employment and a decline of wage in the sector that labor is offshorable. Groizard et al. (2014) proposes a heterogeneous firm model with monopolistic competition and analyzes the employment implications of a change in offshoring cost. They find a decline in offshoring costs affects labor reallocation both within a firm and between them. The two key parameters determining this effect are the elasticity of substitution between domestic and foreign labor, and the elasticity of substitution between varieties of differentiated goods. The current paper inherits most of its features from Groizard et al. (2014) s offshoring model, and combines them with Egger and Kreickemeier (2009) s fair wage consideration. The two closely related papers are Grossman and Helpman (2007) and Mitra and Ranjan (2013), which also study the impact of workers preference for fairness on firms organization of production in an open economy where the domestic tasks are offshorable. However, the current paper differs from these papers in two aspects. First, both Grossman and Helpman (2007) and Mitra and Ranjan (2013) focus on understanding how fairness and substitution between skill and unskilled co-workers can influence firms behavior and the labor market outcomes. In a different setting, I examine the relationship between domestic and foreign worker, and its implications on the domestic labor market. Second, the two papers assume the perfect competition in the product market and homogeneous firms, while my paper is set in the monopolistic competition framework with heterogeneous firms. 3 In a general sens, there is few conceptual differences between importing foreign inputs and relocating domestic jobs abroad. 7

8 3 A general framework In this section, I start with a brief outline of demand and production with an unspecified cost structure; I then describe the equilibrium and derive the existence and uniquenesses condition. Finally, I study the impact of a hypothetical technology shock on the equilibrium. 3.1 Demand Following Melitz (2003), the demand of final goods is characterized by the monopolistic competition (Dixit and Stiglitz, 1977). The consumer s preferences over a continuum of final good varieties is modeled by a CES function: Q = [ M 1 σ ω Ω ] σ q(ω) σ 1 σ dω σ 1, (1) where Ω is the measure of set that representing the mass of available varieties M. Q can be considered as an aggregate good with the aggregate price defined as ] 1 P = [M 1 p(ω) 1 σ 1 σ dω, (2) ω Ω where q(ω) and p(ω) are the quantity and price of the individual variety; σ > 1 is the elasticity of substitution between any two varieties. This aggregate good is the numéraire with the normalized aggregate price P = 1. Thus, the aggregate expenditure R coincides with Q. The representative consumer maximizes her utility or consumption of aggregate good subjected to the budget constraint. Solving the consumer s problem yields the Marshallian demand equation of a given variety, ω: q(ω) = p(ω) σ Q M. (3) 3.2 Production There is a continuum of firms, each producing a different variety ω. Before the production, each producer pays a sunk cost of entry, f e and draws its productivity, which is distributed with the probability density function g(φ) and the cumulative distribution function G(φ). Productivity shock is the only source of heterogeneity in this model. After observing its productivity, firm could choose to exit immediately because the market is not profitable, and there is also a constant rate δ that firm is forced to exit due to some natural disasters. 8

9 In this section, I do not restrict the discussion to a specific form of production technology. Instead, I consider a general cost structure that exhibits constant marginal cost with a fixed overhead cost. This means that the fixed cost is incurred only once each production period and the marginal cost does not vary with the level of production. All firms face the same fixed cost denoted by f, but have different level of marginal cost depending on their productivity, i.e., c(φ) > 0 for all φ. In following discussion, I do not restrict the functional form of the marginal cost function, expect Assumption 1. The general model covers a large range of underlying production technologies, which can be multiple factors, non-linear in productivity and may exhibit Hick-neutral or non-neutral technical change. Assumption 1. Firms with higher productivity produce at lower marginal cost, i.e., c(φ) < 0, for all values of φ. The variable profit of a firm that produces one variety of good equals the revenues net of the associated costs. The profit maximization yields a pricing rule: p(φ) = σ c(φ). (4) σ 1 Based on (3) and (4), we can express firms revenue and net profit as function of productivity: 3.3 Firm entry and exit r(φ) = p(φ) 1 σ Q M ; (5) π(φ) = r(φ) σ f. (6) There is a large unbounded pool of potential entrants into the final good sector. Any firm has a productivity draw φ < φ will immediately exit, where φ is the threshold value that identifies the least productivity level of active firms with the zero cutoff profit (ZCP) condition, π(φ ) = 0. For any firm has a productivity draw φ φ, the net profit can be expressed as π(φ, φ ) = [ ] (1 σ) c(φ) f f. (7) c(φ ) Now, I define a weighted average of productivity level φ in the way that p(φ) = P = 1. Given a threshold value, φ, this average productivity is determined implic- 9

10 itly by [ ] 1 σ c(φ) g(φ φ φ )dφ = 1. (8) φ c(φ) The direct implications of this definition are the following. The proofs are reported in Appendix A.1 and 2. Lemma 1. Given Assumption 1, the average productivity, φ(φ ) is an increasing function of the threshold value, φ. Lemma 2. The definition of φ implies that, (i) the average revenue defined as r φ r(φ)g(φ φ φ )dφ, equals the revenue of a φ firm, i.e., r = r(φ); (ii) the average profit defined as π φ π(φ)g(φ φ φ )dφ, equals the revenue of a φ firm, i.e., π = π(φ). Equation (8) shows that the average productivity depends implicitly on the range of productivity levels within the sector, which is endogenously determined by φ a self-selection process. Using the implicit function theorem, Lemma 1 indicates that how the endogenous self-selection process affects the average productivity. The choice of average defined in (8) also provides two convenient identities where the average revenue or profit within the sector equals the revenue or profit of an average productive firm (Lemma 2). Since the mass of potential entrants is unbounded, the net value of entry should equal to zero to ensure an static equilibrium. This is the so-called free entry (FE) condition: π = δf e 1 G(φ ). (9) Using the ZCP condition and the FE condition, we can determine a pair of π and φ that characterizes the equilibrium. The existence and uniqueness of this equilibrium are guarantied by the following condition. The proof is proved in Appendix A.3. Proposition 1. Given Assumption 1, the equilibrium characterized by (7), (8) and (9) exists and is unique. In this model, the aggregate final good serves as numéraire with P = 1. Then, using (2) and the pricing rule, we can write the equilibrium mass of producing firms as a function of φ: M = [ ] 1 σ σ σ 1 c(φ), (10) 10

11 which completes the characterization of the stationary equilibrium. The model so far is standard in every respect except for the manner in which the production technology is represented. In Section 4 and 5, I will present a more specific model with offshorable production and fair wage consideration. 3.4 Impact of a technology shock on the equilibrium In this subsection, I examine how changes in the production technology affects the average revenue, the average profit, the entry requirement and the equilibrium mass of producers. To do this, I add a generic technology parameter into the marginal cost function, i.e., c(φ; γ), and analyze the equilibrium response to a change in this parameter. For simplicity of exposition, I make the following assumption. The results in the opposite case can be obtained in a similar way. Assumption 2. The marginal cost function satisfies c(φ;γ) γ 0 for all φ and γ. I first introduce the following elasticity, e(φ; γ), which measures how sensitive the marginal cost is to a change in the technology. In the general case, this elasticity varies with firms productivity. This implies that heterogeneous firms have different sensibility to a change in their technology parameter. The following result shows that the variation of this elasticity across heterogeneous firms is crucial for determining the effect of a technology shock on the equilibrium. e(φ; γ) = 1 c(φ; γ) c(φ; γ) γ (11) Proposition 2. Given Assumption 1 and 2, (i) if e(φ;γ) > 0 (or e(φ;γ) < 0), an increase in γ (with other conditions remaining the same) leads to lower (or higher) average revenue r and average profit π for a given φ ; (ii) if e(φ;γ) = 0, the effect of γ on average revenue and profit vanishes. The intuition behind Proposition 2 is the following. Under the ZCP condition, given a fixed pair of σ and f, the net profit of a φ-firm (7) is determined by the ratio c(φ) c(φ ) that compares its marginal costs with the one of a φ -firm. The effect of a technology shock on φ-firm s net profit depends on how responsive the marginal cost is to the change at different productivity levels. For instance, when the technology shock affects the marginal cost of all types of firms in the same way, i.e., e(φ;γ) = 0, then 11

12 the effects are canceled out in (7). Under Assumption 2, when more productive firms is more sensible to the shock e(φ;γ) > 0, a change in the technology parameter will have a negative impact on firms net profit. Proposition 2 shows the impact of increasing γ on the average revenue and the average profit by replacing φ with φ. Since the technology parameter only affects the ZCP condition and does not alternate the FE condition, then we can obtain the following result using the implicit fucntion theorem. Proposition 3. Given Assumption 1 and 2, if e(φ;γ) > 0 (or e(φ;γ) < 0), an increase in γ (with other conditions remaining the same) leads to lower (or higher) φ. Proposition 2 and 3 show that we can determine the effects of a change in technology on the average revenue, the average profit and the entry requirement by only examining whether the marginal cost of more productive firms is more or less sensible to the change. In particular, the sign of e(φ;γ) determines the sign of r, π and γ γ. The proofs are given in Appendix A.4 and 5. These results are also useful for γ examining the effect of technology shock on other variables of interest. For instance, the derivative of equilibrium mass with respect to γ is M γ = σ σ 1 (1 σ) g(φ ) 1 G(φ ) σ (σ 1) σ 1 (1 σ) [ c(φ) 1 σ c(φ ) 1 σ] (12) γ σ c(φ) c(φ) γ g(φ φ φ )dφ. φ When e(φ;γ) and c(φ) γ is positive, γ are positive. Thus, we have the following result. is negative according to Proposition 3; [ c(φ) 1 σ c(φ ) 1 σ] Corollary 1. Given Assumption 1 and 2, if e(φ;γ) > 0, an increase in γ (with other conditions remaining the same) leads to fewer active firms. Otherwise, the response of M to an increase in γ is ambiguous. The expression (12) informs us about how a change in γ affects M through a series of channels. The change in γ affects the entry requirement φ. At the same time, it also affects the average productivity φ in the sector and the marginal cost function of individual firms. Thus, it is difficult to draw a clear cut conclusion in the case of M, and the response of M is likely to be non-monotonic with respect to the technology shock. In the remaining sections of this paper, I introduce a more specific model and derive both analytical and numerical results. 12

13 4 An offshoring model Now, I present a model where firms can relocate a part of its production to foreign countries, in order to benefit from a cheaper labor force. To model firms offshoring activity, I follow the Groizard et al. (2014, p.226-p.227) s approach. Considering a production that consists of a continuum of tasks in the interval α [0, 1]. The quantity of output produced by a φ firm is [ ˆα q(φ) = φ q f (α) ρ 1 0 ρ dα + 1 ˆα ] ρ q d (α) ρ 1 ρ 1 ρ dα, (13) where two types of labor input are required in the production. The labor inputs is inelastically supplied from the domestic market of size L d and the foreign market of size L f. Firms choose an optimal level of offshoring, i.e., ˆα that the tasks in the range of [0, ˆα] are executed using the foreign labor, while the tasks in the range of [ˆα, 1] are executed using the domestic labor. For a given task α, q f (α) denotes the firms per-task requirement of foreign labor, and q d (α) denotes the firms per-task requirement of domestic labor. ρ is the elasticity of substitution between domestic labor and foreign labor inputs. equivalent to one unit of domestic labor. Assuming that one unit of foreign labor is not Let λ and k(α) denote the additional cost of making foreign labor compatible with domestic production. Thus, a task α can be executed by either hiring one unit of domestic labor or λk(α) > 1 units of foreign labor. λ is a fixed offshoring cost, while k(α) is task-specific offshoring cost. The tasks in [0, ˆα] are ordered in the way that higher indexed tasks require higher offshoring cost, which implies that k(α) is strictly increasing in α. Thus, the higher indexed tasks can be viewed as headquarter tasks, which are more difficult to be relocated. Groizard et al., (2014, Lemma 1) shows that the production function can be expressed in terms of total labor demand as [ q(φ) = φ λ 1 ρ 1 ρ K(ˆα) ρ 1 ρ l ρ f ] ρ + (1 ˆα) 1 ρ 1 ρ l ρ d ρ 1, (14) where K(ˆα) = ˆα 0 k(α)1 ρ dα; l f denotes the total foreign labor demand of a φ-firms; l d denotes its total domestic labor demand. This function has the CES functional form, but unlike the classic CES function its share parameters, λ 1 ρ 1 ρ K(ˆα) ρ and (1 ˆα) 1 ρ depend on the optimal level offshoring, ˆα. Using the duality theorem the 13

14 marginal cost function is c(φ) = 1 φ [ K(ˆα) (λwf ) 1 ρ ] + (1 ˆα)w 1 ρ 1 1 ρ d, (15) where w d and w f denote the domestic and foreign wages, respectively. Firms cost minimizing behavior implies that cost of offshoring a task equals the cost of producing it using domestic labor, i.e., λk(ˆα)w f = w d, which determines an optimal level of ˆα. The main analysis of this paper can be carried out without a specific functional form of k(.). However, I assume that k(.) is an exponential fucntion of α to facilitate reading of the model. This choice also reflect that higher the indexed tasks are extremely hard to relocate to a foreign countries, such as the managerial positions at firms headquarter. This choice yields the following optimal offshore intensity: ( ) wd ˆα = log. (16) λw f Firms offshore only if the foreign wage is sufficiently low with respect to the domestic one. The derivation of (13), (14), (15) and (16) is reported in Appendix B. 5 Fair wage consideration The aim of this paper is to understand how the fair wage consideration in the domestic wage setting influences the economy when firm can move some production offshore. Before turning to this question, I first introduce an explicit definition of fairness. I assume that domestic workers have a preference for fairness in sense of Akerlof (1982), and condition their effort on the wage they are paid. The foreign workers, on other hand, have no bargaining power over the wage setting. They are paid at the same wage and providing the same effort. Considering a benchmark case where the market-clearing wage in the domestic market equals the average cost of hiring foreign labor, i.e., w d = λw f. In this case, firms will use only the domestic labor input. Under the fair wage consideration, workers provide an effort level above the required minimum in exchange for a real wage above a reference compensation that is consideration as fair. In response, firms may set an optimal wage that exceeds the market-clearing level, in order to guarantee their domestic workers effort level, i.e, w d λw f. Therefore, the offshoring occurs under the fair wage consideration. The empirical results in Abowd et al. (1999) suggest a positive correlation between wages and firms productivity. This may reflect the fact that heterogeneous firms face different fairness criteria, and the reference wage varies with productivity. Similar to Egger and Kreickemeier (2009), 14

15 I consider a fair wage condition that has tow components: one internal determinant (firms productivity) and one external determinant (hiring cost of foreign labor). The two forces are regulated by the fairness parameter, θ [0, 1], which measures the tightness in the wage-productivity nexus. w d (φ) = φ θ (λw f ) 1 θ. (17) When θ = 0, the domestic wage equals the average cost of hiring foreign worker, which implies ˆα = 0. Thus, the model reduces to the autarky case in Melitz (2003). Note that the autarky also emerges in the case where offshoring is simply not allowed, i.e., ˆα = 0, but the fair wage condition remains (θ 0), as in Egger and Kreickemeier (2009). In the former case, the autarky is due to lack of incentives, while the autarky is imposed in the latter case. When θ 0, the domestic wage varies with firms productivity, which in turn implies that the optimal offshoring level ˆα is also function of productivity. Thus, heterogeneous firms under the fair wage consideration, face different domestic wage and choose to offshore at different levels. This feature distinguishes the proposed model from the one in Groizard et al. (2014), where all heterogeneous firms have the same level of offshoring. The current model is also more in line with the empirical findings (Tomiura, 2005, 2007). In the following sections, I discuss how the fair wage condition influence the equilibrium by focusing on the two parameters in (17): the average offshoring cost λ and the fairness parameter θ. 5.1 Offshoring equilibrium under the fair wage consideration Now, I introduce some restrictions on the fair wage condition. Given the definition of fair wage, if φ > λw f, increasing θ will lead to higher domestic wage, thus higher marginal cost. If φ < λw f, increasing θ will lead to lower domestic wage, and lower marginal cost. However the latter case is not economically viable because workers do not require fairness to decrease their wage. At the same time, ˆα(φ) 1 imposes an upper bound on firms productivity level, i.e., φ exp( 1)λw θ f. Therefore, in the following analysis, I will only focus on the case of Assumption 3. Assumption 3. λw f φ exp( 1 θ )λw f. This assumption together with equations (15), (16) and (17) characterize a specific production model that I examine in the rest of this paper. I start the analysis 15

16 of this model by summarizing in Lemma 3 the role of productivity, φ, offshoring cost, λ and fairness parameter, θ on firms optimal offshoring level, ˆα. Lemma 3. Given (16),(17) and Assumption 3, with other conditions remaining the same (i) more productive firms offshore more, i.e., ˆα > 0 (ii) higher fixed offshoring cost leads to lower offshoring level more, i.e., ˆα λ < 0 (iii) higher fairness leads to higher offshoring level, i.e., ˆα θ > 0. The intuition behind Lemma 3 (i) is that more productive firms also face higher wage, thus prefer to offshore more to the foreign countries where wage is lower and independent of their productivity. The slope of function ˆα(φ) depends on both for- ˆα eign labor cost and productivity, i.e., = θ. Lemma 3 (ii) simply shows that φ higher fixed offshoring cost increases the domestic labor s competitiveness. Thus, firms will less rely on offshoring. The effect of decreasing λ also depends on the fairness parameter, i.e., ˆα = θ λ λ the effect of offshoring cost.. This shows higher fairness in the economy magnifies In an extreme cases where θ = 0, the domestic wage equals the foreign labor cost, thus firm s incentive to offshore vanishes. An increase in θ makes the domestic wage gradually departs from the foreign labor cost. Lemma 3 (iii) states that higher fairness leads to higher offshoring level. The response of ˆα to θ depends on φ, i.e., ˆα θ = log φ log(λw f). This shows that an increase in θ raises disproportionately the domestic labor cost of high productivity firms, thus give them more incentive to offshore. For the low productive firms, the increase has relatively limited impact on their domestic labor payroll and offshoring decision. Replacing the domestic wage in (15) and (16) with the fair wage defined in (17), we can rewrite the marginal cost as c(φ) = 1 φ w d(φ)h(φ), (18) where h(φ) {k[ˆα(φ)] ρ 1 K[â(φ)] + 1 â(φ)} 1 1 ρ. Note that when θ = 0, and the wage is normalized to one, we obtain a classic marginal cost function that has been widely used in the trade literature: the marginal cost equals the inverse of productivity (Melitz, 2003). The expression (18) illustrates three channels through which productivity affects the marginal cost: a direct productivity effect, a wage effect and an offshoring effect. Although they are not independent to each other, 16

17 but we can discuss them individually in order to see how productivity affects the marginal cost. First, we look that the case where firms do not have the access to the foreign labor market, i.e., h(φ) = 1. Then, the term 1 captures the direct φ productivity effect, which means more productive firms have lower marginal cost. At the same time, the fair wage condition implies that more productive firms pay higher wage, thus face higher marginal cost. Combing the opposite forces, we can show that overall more productive firms operate at a lower marginal cost. Now, firms are allowed to offshore, the term h(φ) captures the offshore-induced cost reduction. Given Assumption 3, the average foreign labor [ cost (λw ] f ) is lower than the domestic wf wage, then it can be showed that c(φ), w d(φ) for ˆα > 0 and c < 0. This φ φ ˆα means that offshoring allows firm to operate at a lower marginal cost. I summarized the role of productivity on the marginal cost in Lemma 4 (i). Lemma 4. Given the production technology defined in (16),(17), (18) and Assumption 3, with other conditions remaining the same (i) more productive firms operate at a lower marginal cost, i.e., c < 0; (ii) higher fixed offshoring cost leads to higher marginal cost, i.e., c λ > 0; (iii) higher fairness leads to higher marginal cost, i.e., c θ > 0 The derivative of w d (φ) and the derivative of h(φ) with respect to λ are both positive. Therefore, higher offshoring cost leads to higher marginal cost, as stated in Lemma 4 (ii). Comparing to offshoring cost, the effect of fairness is less clear cut. On the one hand, higher fairness leads to higher wage, thus increase the marginal cost. On the other hand, higher fairness leads to higher offshoring level, which in turn decreases the marginal cost. However, we can show that the wage effect dominates the offshoring effect in our case. Thus, higher fairness leads to higher marginal cost, Lemma 4 (iii). In addition, we can also use Lemma 4 (i) to show that more productive firms charge a lower price, produce more, receive a higher revenue and variable profit. Using Lemma 4 (ii) and (iii), we can show that a decrease of fixed offshoring cost or fairness leads to a lower price, thus higher production, revenue and variable profit for a given level of productivity. The proofs of Lemma 3 and 4 are given in Appendix A.6 and 7. In the heterogeneous firm model, a key component of the analysis is to examine how productivity is transmitted into firms production cost. In Melitz (2003) and many other similar studies, the marginal cost is simply inverse of productivity. Egger and Kreickemeier (2009) introduces the fair wage condition and allows wage to 17

18 vary with productivity, thus opens an additional channel where productivity can influence the marginal cost. As (18) showed, the proposed model goes a step further by taking into account offshoring with the additional term h(φ). One implication of this extension is that the marginal cost becomes a highly non-linear function of productivity, and improvements in productivity is non-neutral. Recalling the general results in Section 3, I now examine the equilibrium under this specific model. First, Proposition 1 and Lemma 4 (i) indicate that the model with the marginal cost defined as in (16), (17) and (18) has a unique equilibrium. Then, using Proposition 2, 3, Lemma 4 (ii) and (iii), we can examine the impacts of λ and θ on the equilibrium. 1 c(φ) Let e λ (φ) denotes, and we can show that e c(φ) λ λ(φ) is monotonically increasing in φ (see proofs in Appendix A.8). Thus, I obtain Corollary 2 using Proposition 3. Note that an increase in λ may reflect higher tax on offshoring or other barriers that prevent firms to relocate their production aboard. Corollary 2 shows the economic consequences of such measures. Previously, I showed that average productivity is an increasing function of threshold productivity, thus the decline in φ caused by higher offshoring cost implies a lower φ. In addition, higher offshoring cost also leads to lower average profit and fewer active firms. Corollary 2. An increase in the fixed offshoring cost (λ) causes a decline in the threshold productivity level (φ ) in the new equilibrium. Unlike the offshoring cost, the effect of increasing fairness parameter is less clearcut. Let e θ (φ) denotes the elasticity of marginal cost with respect to fairness parameter, i.e., ; the derivative of this elasticity with respect to productivity 1 c(φ) c(φ) θ is e θ = 1 { 1 ˆα(φ) ˆα(φ) φ x(φ) + 1 ˆα(φ) + ˆα(φ)[1 ˆα(φ)][1 } exp[ˆα(φ)](ρ 1) ], (19) [x(φ) + 1 ˆα(φ)] 2 where x(φ) = 1 exp[ˆα(φ)]ρ 1 > 0. In order to understand this expression, we can begin 1 ρ with a simpler version: a closed economy under fair wage consideration (similar to Egger and Kreickemeier, 2009). In this case, the marginal cost function is c(φ) = w d (φ)/φ with e θ (φ) = log(φ) log(λw f ), which yields a positive e θ = 1. Thus, φ in the closed economy, the marginal cost of more productive firms is always more sensible to the fairness increase. Using Proposition 2 and 3, we can find the similar result as in Egger and Kreickemeier(2009, Proposition 1) that higher θ lowers φ. However, the opening to offshoring changes e θ (φ) into a non-monotonic fucntion 1 of φ. The first term in (19), captures the autarky case that increasing θ raises φ disproportionately the domestic labor costs among heterogeneous firms with lager 18

19 effects on more productive firms. At the same time, this technology shock also biases firms factor composition in a way that more productive firms rely more on their foreign labor force, which is offered a constant wage w f. This reduces the elasticity of marginal cost with respect to changes in θ for high productive firms. The combination of the two components then induces non-monotonicity in e θ (φ). We cannot draw a conclusive statement for the fairness parameter such as in Corollary 2. However, in some cases, it is possible to determine the sign of e θ. The following proposition shows that in two cases where the effect of increasing θ is determined. Otherwise, the effect is resulting from the interplay of opposite forces in (19). In the next subsection, I will use the numerical simulations to illustrate these results in a quantitative manner. Corollary 3. The effect of an increase in the fairness parameter θ on the equilibrium threshold productivity φ is non-monotonic and determined by the offshoring level and the elasticity of substitution between domestic and foreign labor inputs; an increase in θ causes (i) a decline in φ when ρ < 1 and ˆα(φ) < 0.5 for all φ; (ii) an increase in φ when ρ > 1 and ˆα(φ) > 0.5 for all φ; (iii) an ambiguous response in all other cases. 5.2 Numerical illustrations In this simulation exercise, I focused on the fairness parameter θ because of its ambiguous implications on th equilibrium. Without loss of generality, I normalize the offshoring cost λ and the foreign wage w f to one. Thus, the restriction in Assumption 3 becomes 1 φ exp( 1 ). Following Bernard et al. (2003) s estimates θ on U.S manufacturing plants, I set the elasticity of substitution across varieties σ = 3.8. The fixed production cost f is normalized to one. Following Bernard et al. (2007), I assume that the fixed production cost equals 5% of the sunk cost of entry, which yields f e = 20, and I set the probability of exogenous firm death δ = Firms draw their productivity from a Pareto distribution with a scale parameter of 1 and a shape parameter of s: g(φ) = sφ (s 1) and G(φ) = 1 φ s, where s = 3.4 that s > σ 1, as suggested in Bernard et al. (2007). The lower bound of productivity distribution is 1; the upper bound is 4. 19

20 To study the impact of an increase in θ on the equilibrium, I first solve the model for the threshold productivity φ by varying the fairness parameter θ within the interval of [0.1, 0.7]. Note that I set the highest fairness value to 0.7, to ensures that the upper bound of productivity distribution is always lower than exp(1/θ). Based on the equilibrium values of productivity threshold, I then calculate the corresponding average productivity φ, average profit π and mass of producing firms M. Figure 1 depicts the level of offshoring ˆα for three different values of θ = 0.2, 0.4 and 0.6. Figure 2 depicts the equilibrium values as fairness parameter increases from 0.1 to 0.7 for ρ = 0.5 and 15. ˆα θ = 0.2 θ = 0.4 θ = φ Figure 1: Offshoring level Figure 1 is an illustration of Lemma 3 (i) that more productive firms offshore more. Figure 1 also demonstrates that this function is concave and higher fairness in the economy or tighter the wage-productivity relationship magnifies the effect of productivity on firms offshore decision. Given Lemma 3, Figure 1 does not add new information. However, it can help us to understand the effect of increasing fairness θ on the equilibrium, as depicted in Figure 2. Figure 2 shows how the four main equilibrium values, φ, φ, π and M, vary with an increasing θ in two cases: (i) the domestic and foreign labor inputs are complements (ρ = 0.5) and (ii) the inputs are substitutes (ρ = 15). I start the 20

21 φ φ θ (a) Threshold productivity θ (b) Average productivity π/π (θ=.1) M/M (θ=.1) θ (c) Average profit (baseline at θ =.1) θ (d) Equilibrium mass (baseline at θ =.1) ρ = 0.5 ρ = 15 Figure 2: The effect of increasing fairness parameter θ on equilibrium values 21

22 discussion with Figure 2 (a) that depicts the most important equilibrium values: the threshold productivity φ, which regulates the market entry. The interpretation of this figure needs to be framed in the context illustrated in Figure 1. We observed that when fairness parameter is low (θ = 0.2), the offshoring level ˆα never reaches the threshold of 0.5 for the entire support of productivity distribution. In contrast, when θ = 0.6, ˆα exceeds rapidly 0.5. Corollary 3 points out that in two cases it is possible to determine the sign of e θ, thus to predict the effect of increasing θ on φ. Figure 2 (a) provides a numerical illustration of this result. First, considering the case where the inputs are complements (ρ = 0.5), φ declines as θ increases, see the solid curve. When θ is relatively small that ˆα is lower that 0.5, e θ θ > 0, which implies that < 0. Thus φ decreases as θ raises. When θ is relatively high that ˆα exceeds the threshold of 0.5, there are two conflicting forces in (19) for determining the sign of e θ.4 However, the solid curve depicted in Figure 2 (a) shows that the downward force is dominating under this calibration. Second, considering the case where the inputs are substitutes (ρ = 15, see the dash line), φ first decreases as θ raises with a downward slope smaller than the one with ρ = Then, as θ increases, ˆα exceeds the threshold level of 0.5, φ stops the decline and goes uphill. This observation complements Corollary 3, and it shows that the effect of an increase in the fairness parameter on the threshold productivity depends crucially on the combination of firms offshoring level and the elasticity of substitution between labor inputs. It also shows that the effect is non-monotonic and may exhibit an U-shape variation. I now turn to discussing other equilibrium values that follows φ. Give the definition of average productivity in (8), φ is an increasing function of φ (Lemma 1). Thus, we could expect to find a very similar picture in Figure 2 (b). Proposition 2 shows that how π reacts to a change in the technology parameter depends on the sign of e θ. When ρ < 1 and ˆα < 0.5, e θ is positive, which implies an increase in is negative, θ leads to lower π. In the opposite case where ρ > 1 and ˆα > 0.5, e θ an increase in θ leads to higher π. Figure 2 (c) confirms this prediction. When it comes to explain the effect of fairness parameter on the equilibrium mass of active firms M, we can use the derivative of M with respect to a technology parameter given in (12) and replace the generic parameter by θ. This expression shows that when θ is negative, an increase in θ leads to fewer active firms (Corollary 1). This is clearly what we can observed in Figure 2 (d), i.e. the solid curve with ρ = 0.5. When φ varies non-monotonically with θ in the case of ρ = 15, the response of M 4 Let 1 denotes the term 1 ˆα(φ) ˆα(φ) x(φ)+1 ˆα(φ) in (19), which is negative when ˆα > 0.5. Let 2 denotes ˆα(φ)[1 ˆα(φ)][1 exp[ˆα(φ)] (ρ 1) ] [x(φ)+1 ˆα(φ)] 2, which is positive when ρ < 1. 5 When ρ = 15, 1 becomes positive; 2 is negative. In this numerical example the positive term dominates, which implies e θ(φ) > 0 and θ < 0. 22

International Trade Lecture 14: Firm Heterogeneity Theory (I) Melitz (2003)

International Trade Lecture 14: Firm Heterogeneity Theory (I) Melitz (2003) 14.581 International Trade Lecture 14: Firm Heterogeneity Theory (I) Melitz (2003) 14.581 Week 8 Spring 2013 14.581 (Week 8) Melitz (2003) Spring 2013 1 / 42 Firm-Level Heterogeneity and Trade What s wrong

More information

Trade Costs and Job Flows: Evidence from Establishment-Level Data

Trade Costs and Job Flows: Evidence from Establishment-Level Data Trade Costs and Job Flows: Evidence from Establishment-Level Data Appendix For Online Publication Jose L. Groizard, Priya Ranjan, and Antonio Rodriguez-Lopez March 2014 A A Model of Input Trade and Firm-Level

More information

Firms in International Trade. Lecture 2: The Melitz Model

Firms in International Trade. Lecture 2: The Melitz Model Firms in International Trade Lecture 2: The Melitz Model Stephen Redding London School of Economics 1 / 33 Essential Reading Melitz, M. J. (2003) The Impact of Trade on Intra-Industry Reallocations and

More information

Heterogeneous Firms. Notes for Graduate Trade Course. J. Peter Neary. University of Oxford. January 30, 2013

Heterogeneous Firms. Notes for Graduate Trade Course. J. Peter Neary. University of Oxford. January 30, 2013 Heterogeneous Firms Notes for Graduate Trade Course J. Peter Neary University of Oxford January 30, 2013 J.P. Neary (University of Oxford) Heterogeneous Firms January 30, 2013 1 / 29 Plan of Lectures 1

More information

ECO2704 Lecture Notes: Melitz Model

ECO2704 Lecture Notes: Melitz Model ECO2704 Lecture Notes: Melitz Model Xiaodong Zhu University of Toronto October 15, 2010 1 / 22 Dynamic Industry Model with heterogeneous firms where opening to trade leads to reallocations of resources

More information

Class Notes on Chaney (2008)

Class Notes on Chaney (2008) Class Notes on Chaney (2008) (With Krugman and Melitz along the Way) Econ 840-T.Holmes Model of Chaney AER (2008) As a first step, let s write down the elements of the Chaney model. asymmetric countries

More information

Trade and Labor Market: Felbermayr, Prat, Schmerer (2011)

Trade and Labor Market: Felbermayr, Prat, Schmerer (2011) Trade and Labor Market: Felbermayr, Prat, Schmerer (2011) Davide Suverato 1 1 LMU University of Munich Topics in International Trade, 16 June 2015 Davide Suverato, LMU Trade and Labor Market: Felbermayr,

More information

Optimal Redistribution in an Open Economy

Optimal Redistribution in an Open Economy Optimal Redistribution in an Open Economy Oleg Itskhoki Harvard University Princeton University January 8, 2008 1 / 29 How should society respond to increasing inequality? 2 / 29 How should society respond

More information

Melitz Model: Heterogenous Firm Model of Trade

Melitz Model: Heterogenous Firm Model of Trade Melitz Model: Heterogenous Firm Model of Trade Seyed Ali Madanizadeh Sharif U. of Tech. May 7, 2014 Seyed Ali Madanizadeh (Sharif U. of Tech.) Melitz Model: Heterogenous Firm Model of Trade May 7, 2014

More information

The Stolper-Samuelson Theorem when the Labor Market Structure Matters

The Stolper-Samuelson Theorem when the Labor Market Structure Matters The Stolper-Samuelson Theorem when the Labor Market Structure Matters A. Kerem Coşar Davide Suverato kerem.cosar@chicagobooth.edu davide.suverato@econ.lmu.de University of Chicago Booth School of Business

More information

Offshoring, Exporting, and Jobs

Offshoring, Exporting, and Jobs Offshoring, Exporting, and Jobs Jose L. Groizard Departament d Economia Aplicada Universitat de les Illes Balears Priya Ranjan Department of Economics University of California, Irvine Antonio Rodriguez-Lopez

More information

International Economics B 9. Monopolistic competition and international trade: Firm Heterogeneity

International Economics B 9. Monopolistic competition and international trade: Firm Heterogeneity .. International Economics B 9. Monopolistic competition and international trade: Firm Heterogeneity Akihiko Yanase (Graduate School of Economics) January 13, 2017 1 / 28 Introduction Krugman (1979, 1980)

More information

Trade and the Environment with Heterogeneous Firms

Trade and the Environment with Heterogeneous Firms Trade and the Environment with Heterogeneous Firms Claustre Bajona Ryerson University Paul Missios Ryerson University Andrea Pierce Industry Canada VERY PRELIMINARY AND INCOMPLETE. Please do not quote

More information

Productivity: Theory and Evidence

Productivity: Theory and Evidence Agency Problem, Trade Liberalization and Aggregate Productivity: Theory and Evidence Cheng Chen University of Hong Kong and Boston University Abstract Evidence shows that trade liberalization mitigates

More information

Labor Market Rigidities, Trade and Unemployment

Labor Market Rigidities, Trade and Unemployment Labor Market Rigidities, Trade and Unemployment Elhanan Helpman Harvard and CIFAR Oleg Itskhoki Princeton Chicago Booth May 2011 1 / 30 Motivation Institutional differences as a source of comparative advantage

More information

Heterogeneous Firm, Financial Market Integration and International Risk Sharing

Heterogeneous Firm, Financial Market Integration and International Risk Sharing Heterogeneous Firm, Financial Market Integration and International Risk Sharing Ming-Jen Chang, Shikuan Chen and Yen-Chen Wu National DongHwa University Thursday 22 nd November 2018 Department of Economics,

More information

International Trade Gravity Model

International Trade Gravity Model International Trade Gravity Model Yiqing Xie School of Economics Fudan University Dec. 20, 2013 Yiqing Xie (Fudan University) Int l Trade - Gravity (Chaney and HMR) Dec. 20, 2013 1 / 23 Outline Chaney

More information

Location, Productivity, and Trade

Location, Productivity, and Trade May 10, 2010 Motivation Outline Motivation - Trade and Location Major issue in trade: How does trade liberalization affect competition? Competition has more than one dimension price competition similarity

More information

The Effect of Globalization in a Semi Endogenous Growth Model with Firm Heterogeneity, Endogenous International Spillover, and Trade

The Effect of Globalization in a Semi Endogenous Growth Model with Firm Heterogeneity, Endogenous International Spillover, and Trade The Effect of Globalization in a Semi Endogenous Growth Model with Firm Heterogeneity, Endogenous International Spillover, and Trade Katsufumi Fukuda 1 August 3, 214 Abstract This paper shows that globalization

More information

THE IMPACT OF TRADE ON INTRA-INDUSTRY REALLOCATIONS AND AGGREGATE INDUSTRY PRODUCTIVITY

THE IMPACT OF TRADE ON INTRA-INDUSTRY REALLOCATIONS AND AGGREGATE INDUSTRY PRODUCTIVITY Econometrica, Vol. 71, No. 6 (November, 2003), 1695 1725 THE IMPACT OF TRADE ON INTRA-INDUSTRY REALLOCATIONS AND AGGREGATE INDUSTRY PRODUCTIVITY BY MARC J. MELITZ 1 This paper develops a dynamic industry

More information

Partial privatization as a source of trade gains

Partial privatization as a source of trade gains Partial privatization as a source of trade gains Kenji Fujiwara School of Economics, Kwansei Gakuin University April 12, 2008 Abstract A model of mixed oligopoly is constructed in which a Home public firm

More information

MIT PhD International Trade Lecture 19: Trade and Labor Markets (Theory)

MIT PhD International Trade Lecture 19: Trade and Labor Markets (Theory) 14.581 MIT PhD International Trade Lecture 19: Trade and Labor Markets (Theory) Dave Donaldson Spring 2011 Today s Plan 1 2 3 4 5 Overview: Use of asignment models to study Trade and Labor Markets. Review

More information

Offshoring and skill-upgrading in French manufacturing: a Heckscher-Ohlin-Melitz view

Offshoring and skill-upgrading in French manufacturing: a Heckscher-Ohlin-Melitz view Offshoring and skill-upgrading in French manufacturing: a Heckscher-Ohlin-Melitz view Juan Carluccio (Banque de France and U. of Surrey) Alejandro Cuñat (University of Vienna) Harald Fadinger (University

More information

University of Konstanz Department of Economics. Maria Breitwieser.

University of Konstanz Department of Economics. Maria Breitwieser. University of Konstanz Department of Economics Optimal Contracting with Reciprocal Agents in a Competitive Search Model Maria Breitwieser Working Paper Series 2015-16 http://www.wiwi.uni-konstanz.de/econdoc/working-paper-series/

More information

Aggregation with a double non-convex labor supply decision: indivisible private- and public-sector hours

Aggregation with a double non-convex labor supply decision: indivisible private- and public-sector hours Ekonomia nr 47/2016 123 Ekonomia. Rynek, gospodarka, społeczeństwo 47(2016), s. 123 133 DOI: 10.17451/eko/47/2016/233 ISSN: 0137-3056 www.ekonomia.wne.uw.edu.pl Aggregation with a double non-convex labor

More information

Impact of Tariff under Hecksher-Ohlin Comparative Advantage Setting and Firm Heterogeneity

Impact of Tariff under Hecksher-Ohlin Comparative Advantage Setting and Firm Heterogeneity Impact of Tariff under Hecksher-Ohlin Comparative Advantage Setting and Firm Heterogeneity ERASMUS UNIVERSITY ROTTERDAM Erasmus School of Economics Department of Economics Supervisor: Dr. J. Emami Namini

More information

UNIVERSITY OF NOTTINGHAM. Discussion Papers in Economics

UNIVERSITY OF NOTTINGHAM. Discussion Papers in Economics UNIVERSITY OF NOTTINGHAM Discussion Papers in Economics Discussion Paper No. 07/05 Firm heterogeneity, foreign direct investment and the hostcountry welfare: Trade costs vs. cheap labor By Arijit Mukherjee

More information

Factor price overshooting with trade liberalization: theory and evidence

Factor price overshooting with trade liberalization: theory and evidence Factor price overshooting with trade liberalization: theory and evidence Julian EMAMI NAMINI and Ricardo A. ÓPEZ February 15, 2012 Abstract We develop an intra industry trade model with human capital and

More information

Theory Appendix for: Buyer-Seller Relationships in International Trade: Evidence from U.S. State Exports and Business-Class Travel

Theory Appendix for: Buyer-Seller Relationships in International Trade: Evidence from U.S. State Exports and Business-Class Travel Theory Appendix for: Buyer-Seller Relationships in International Trade: Evidence from U.S. State Exports and Business-Class Travel Anca Cristea University of Oregon December 2010 Abstract This appendix

More information

1 Dynamic programming

1 Dynamic programming 1 Dynamic programming A country has just discovered a natural resource which yields an income per period R measured in terms of traded goods. The cost of exploitation is negligible. The government wants

More information

Comments on Michael Woodford, Globalization and Monetary Control

Comments on Michael Woodford, Globalization and Monetary Control David Romer University of California, Berkeley June 2007 Revised, August 2007 Comments on Michael Woodford, Globalization and Monetary Control General Comments This is an excellent paper. The issue it

More information

Effects of Wealth and Its Distribution on the Moral Hazard Problem

Effects of Wealth and Its Distribution on the Moral Hazard Problem Effects of Wealth and Its Distribution on the Moral Hazard Problem Jin Yong Jung We analyze how the wealth of an agent and its distribution affect the profit of the principal by considering the simple

More information

NBER WORKING PAPER SERIES INTERNATIONAL WELFARE AND EMPLOYMENT LINKAGES ARISING FROM MINIMUM WAGES. Hartmut Egger Peter Egger James R.

NBER WORKING PAPER SERIES INTERNATIONAL WELFARE AND EMPLOYMENT LINKAGES ARISING FROM MINIMUM WAGES. Hartmut Egger Peter Egger James R. NBER WORKING PAPER SERIES INTERNATIONAL WELFARE AND EMPLOYMENT LINKAGES ARISING FROM MINIMUM WAGES Hartmut Egger Peter Egger James R. Markusen Working Paper 15196 http://www.nber.org/papers/w15196 NATIONAL

More information

Reallocation Effects in the Specific Factors and Heckscher-Ohlin. Models under Firm Heterogeneity

Reallocation Effects in the Specific Factors and Heckscher-Ohlin. Models under Firm Heterogeneity Reallocation Effects in the Specific Factors and Heckscher-Ohlin Models under Firm Heterogeneity Eddy Bekkers University of Bern Robert Stehrer The Vienna Institute for International Economic Studies -

More information

Trade Expenditure and Trade Utility Functions Notes

Trade Expenditure and Trade Utility Functions Notes Trade Expenditure and Trade Utility Functions Notes James E. Anderson February 6, 2009 These notes derive the useful concepts of trade expenditure functions, the closely related trade indirect utility

More information

Characterization of the Optimum

Characterization of the Optimum ECO 317 Economics of Uncertainty Fall Term 2009 Notes for lectures 5. Portfolio Allocation with One Riskless, One Risky Asset Characterization of the Optimum Consider a risk-averse, expected-utility-maximizing

More information

Price Discrimination and Trade in Intermediate Goods (Preliminary Draft)

Price Discrimination and Trade in Intermediate Goods (Preliminary Draft) Price Discrimination and Trade in Intermediate Goods (Preliminary Draft) Anna Ignatenko March 3, 2018 Abstract In this paper, I document the existence of price discrimination in firm-to-firm cross-border

More information

Dynamic Selection and the New Gains from Trade with. Heterogeneous Firms

Dynamic Selection and the New Gains from Trade with. Heterogeneous Firms Dynamic Selection and the New Gains from Trade with Heterogeneous Firms Thomas Sampson London School of Economics & CEP November 202 Abstract This paper develops an open economy growth model in which firm

More information

Market Reforms in the Time of Imbalance: Online Appendix

Market Reforms in the Time of Imbalance: Online Appendix Market Reforms in the Time of Imbalance: Online Appendix Matteo Cacciatore HEC Montréal Romain Duval International Monetary Fund Giuseppe Fiori North Carolina State University Fabio Ghironi University

More information

Lecture 3: International trade under imperfect competition

Lecture 3: International trade under imperfect competition Lecture 3: International trade under imperfect competition Agnès Bénassy-Quéré (agnes.benassy@cepii.fr) Isabelle Méjean (isabelle.mejean@polytechnique.edu) www.isabellemejean.com Eco 572, International

More information

For students electing Macro (8702/Prof. Smith) & Macro (8701/Prof. Roe) option

For students electing Macro (8702/Prof. Smith) & Macro (8701/Prof. Roe) option WRITTEN PRELIMINARY Ph.D EXAMINATION Department of Applied Economics June. - 2011 Trade, Development and Growth For students electing Macro (8702/Prof. Smith) & Macro (8701/Prof. Roe) option Instructions

More information

The Role of the Most Favored Nation Principle of the GATT/WTO in the New Trade Model

The Role of the Most Favored Nation Principle of the GATT/WTO in the New Trade Model The Role of the Most Favored Nation Principle of the GATT/WTO in the New Trade Model Wisarut Suwanprasert Vanderbilt University December 206 Abstract I study the impact of the Most Favored Nation (MFN)

More information

Monopolistic competition models

Monopolistic competition models models Robert Stehrer Version: May 22, 213 Introduction Classical models Explanations for trade based on differences in Technology Factor endowments Predicts complete trade specialization i.e. no intra-industry

More information

Quality, Variable Mark-Ups, and Welfare: A Quantitative General Equilibrium Analysis of Export Prices

Quality, Variable Mark-Ups, and Welfare: A Quantitative General Equilibrium Analysis of Export Prices Quality, Variable Mark-Ups, and Welfare: A Quantitative General Equilibrium Analysis of Export Prices Haichao Fan Amber Li Sichuang Xu Stephen Yeaple Fudan, HKUST, HKUST, Penn State and NBER May 2018 Mark-Ups

More information

Labor-market Volatility in a Matching Model with Worker Heterogeneity and Endogenous Separations

Labor-market Volatility in a Matching Model with Worker Heterogeneity and Endogenous Separations Labor-market Volatility in a Matching Model with Worker Heterogeneity and Endogenous Separations Andri Chassamboulli April 15, 2010 Abstract This paper studies the business-cycle behavior of a matching

More information

Moral Hazard: Dynamic Models. Preliminary Lecture Notes

Moral Hazard: Dynamic Models. Preliminary Lecture Notes Moral Hazard: Dynamic Models Preliminary Lecture Notes Hongbin Cai and Xi Weng Department of Applied Economics, Guanghua School of Management Peking University November 2014 Contents 1 Static Moral Hazard

More information

Distribution Costs & The Size of Indian Manufacturing Establishments

Distribution Costs & The Size of Indian Manufacturing Establishments Distribution Costs & The Size of Indian Manufacturing Establishments Alessandra Peter, Cian Ruane Stanford University November 3, 2017 Question Selling manufactured goods involves costs of distribution:

More information

The Costs of Losing Monetary Independence: The Case of Mexico

The Costs of Losing Monetary Independence: The Case of Mexico The Costs of Losing Monetary Independence: The Case of Mexico Thomas F. Cooley New York University Vincenzo Quadrini Duke University and CEPR May 2, 2000 Abstract This paper develops a two-country monetary

More information

Entry, Trade Costs and International Business Cycles

Entry, Trade Costs and International Business Cycles Entry, Trade Costs and International Business Cycles Roberto Fattal and Jose Lopez UCLA SED Meetings July 10th 2010 Entry, Trade Costs and International Business Cycles SED Meetings July 10th 2010 1 /

More information

Expansion of Network Integrations: Two Scenarios, Trade Patterns, and Welfare

Expansion of Network Integrations: Two Scenarios, Trade Patterns, and Welfare Journal of Economic Integration 20(4), December 2005; 631-643 Expansion of Network Integrations: Two Scenarios, Trade Patterns, and Welfare Noritsugu Nakanishi Kobe University Toru Kikuchi Kobe University

More information

Inequality, Costly Redistribution and Welfare in an Open Economy

Inequality, Costly Redistribution and Welfare in an Open Economy Inequality, Costly Redistribution and Welfare in an Open Economy Pol Antràs Harvard University Alonso de Gortari Harvard University Oleg Itskhoki Princeton University October 12, 2015 Antràs, de Gortari

More information

0. Finish the Auberbach/Obsfeld model (last lecture s slides, 13 March, pp. 13 )

0. Finish the Auberbach/Obsfeld model (last lecture s slides, 13 March, pp. 13 ) Monetary Policy, 16/3 2017 Henrik Jensen Department of Economics University of Copenhagen 0. Finish the Auberbach/Obsfeld model (last lecture s slides, 13 March, pp. 13 ) 1. Money in the short run: Incomplete

More information

All-Around Trade Liberalization and Firm-Level Employment: Theory and Evidence from China

All-Around Trade Liberalization and Firm-Level Employment: Theory and Evidence from China All-Around Trade Liberalization and Firm-Level Employment: Theory and Evidence from China Antonio Rodriguez-Lopez University of California, Irvine Miaojie Yu Peking University October 2017 Abstract Chinese

More information

Haiyang Feng College of Management and Economics, Tianjin University, Tianjin , CHINA

Haiyang Feng College of Management and Economics, Tianjin University, Tianjin , CHINA RESEARCH ARTICLE QUALITY, PRICING, AND RELEASE TIME: OPTIMAL MARKET ENTRY STRATEGY FOR SOFTWARE-AS-A-SERVICE VENDORS Haiyang Feng College of Management and Economics, Tianjin University, Tianjin 300072,

More information

GT CREST-LMA. Pricing-to-Market, Trade Costs, and International Relative Prices

GT CREST-LMA. Pricing-to-Market, Trade Costs, and International Relative Prices : Pricing-to-Market, Trade Costs, and International Relative Prices (2008, AER) December 5 th, 2008 Empirical motivation US PPI-based RER is highly volatile Under PPP, this should induce a high volatility

More information

Competition and risk taking in a differentiated banking sector

Competition and risk taking in a differentiated banking sector Competition and risk taking in a differentiated banking sector Martín Basurto Arriaga Tippie College of Business, University of Iowa Iowa City, IA 54-1994 Kaniṣka Dam Centro de Investigación y Docencia

More information

Reallocation Effects in the Specific Factors and Heckscher-Ohlin. Models under Firm Heterogeneity

Reallocation Effects in the Specific Factors and Heckscher-Ohlin. Models under Firm Heterogeneity Reallocation Effects in the Specific Factors and Heckscher-Ohlin Models under Firm Heterogeneity Eddy Bekkers Johannes Kepler University Linz Robert Stehrer The Vienna Institute for International Economic

More information

Transport Costs and North-South Trade

Transport Costs and North-South Trade Transport Costs and North-South Trade Didier Laussel a and Raymond Riezman b a GREQAM, University of Aix-Marseille II b Department of Economics, University of Iowa Abstract We develop a simple two country

More information

The Effects of Dollarization on Macroeconomic Stability

The Effects of Dollarization on Macroeconomic Stability The Effects of Dollarization on Macroeconomic Stability Christopher J. Erceg and Andrew T. Levin Division of International Finance Board of Governors of the Federal Reserve System Washington, DC 2551 USA

More information

New Trade Theory I. Part A: Simple monopolistic competition model. Robert Stehrer. The Vienna Institute for International Economic Studies - wiiw

New Trade Theory I. Part A: Simple monopolistic competition model. Robert Stehrer. The Vienna Institute for International Economic Studies - wiiw Part A: Simple monopolistic competition model The Vienna Institute for International Economic Studies - wiiw May 15, 217 Introduction 1 Classical models 1 Explanations based on technology and/or factor

More information

International Trade: Lecture 3

International Trade: Lecture 3 International Trade: Lecture 3 Alexander Tarasov Higher School of Economics Fall 2016 Alexander Tarasov (Higher School of Economics) International Trade (Lecture 3) Fall 2016 1 / 36 The Krugman model (Krugman

More information

Trade and Technology Asian Miracles and WTO Anti-Miracles

Trade and Technology Asian Miracles and WTO Anti-Miracles Trade and Technology Asian Miracles and WTO Anti-Miracles Guillermo Ordoñez UCLA March 6, 2007 Motivation Trade is considered an important source of technology diffusion...but trade also shapes the incentives

More information

Entry on Export Markets and Firm-Level Performance Growth: Intra-Industrial Convergence or Divergence?

Entry on Export Markets and Firm-Level Performance Growth: Intra-Industrial Convergence or Divergence? Fondazione Eni Enrico Mattei Working Papers -7-20 Entry on Export Markets and Firm-Level Performance Growth: Intra-Industrial Convergence or Divergence? Florian Mayneris CORE, florian.mayneris@uclouvain.be

More information

Standard Risk Aversion and Efficient Risk Sharing

Standard Risk Aversion and Efficient Risk Sharing MPRA Munich Personal RePEc Archive Standard Risk Aversion and Efficient Risk Sharing Richard M. H. Suen University of Leicester 29 March 2018 Online at https://mpra.ub.uni-muenchen.de/86499/ MPRA Paper

More information

International Trade Lecture 5: Increasing Returns to Scale and Monopolistic Competition

International Trade Lecture 5: Increasing Returns to Scale and Monopolistic Competition International Trade Lecture 5: Increasing Returns to Scale and Monopolistic Competition Yiqing Xie School of Economics Fudan University Nov. 22, 2013 Yiqing Xie (Fudan University) Int l Trade - IRTS-MC

More information

Pass-Through Pricing on Production Chains

Pass-Through Pricing on Production Chains Pass-Through Pricing on Production Chains Maria-Augusta Miceli University of Rome Sapienza Claudia Nardone University of Rome Sapienza October 8, 06 Abstract We here want to analyze how the imperfect competition

More information

The Margins of Global Sourcing: Theory and Evidence from U.S. Firms by Pol Antràs, Teresa C. Fort and Felix Tintelnot

The Margins of Global Sourcing: Theory and Evidence from U.S. Firms by Pol Antràs, Teresa C. Fort and Felix Tintelnot The Margins of Global Sourcing: Theory and Evidence from U.S. Firms by Pol Antràs, Teresa C. Fort and Felix Tintelnot Online Theory Appendix Not for Publication) Equilibrium in the Complements-Pareto Case

More information

FDI with Reverse Imports and Hollowing Out

FDI with Reverse Imports and Hollowing Out FDI with Reverse Imports and Hollowing Out Kiyoshi Matsubara August 2005 Abstract This article addresses the decision of plant location by a home firm and its impact on the home economy, especially through

More information

Misallocation and the Distribution of Global Volatility: Online Appendix on Alternative Microfoundations

Misallocation and the Distribution of Global Volatility: Online Appendix on Alternative Microfoundations Misallocation and the Distribution of Global Volatility: Online Appendix on Alternative Microfoundations Maya Eden World Bank August 17, 2016 This online appendix discusses alternative microfoundations

More information

A Factor-Proportions Theory of Endogenous Firm Heterogeneity

A Factor-Proportions Theory of Endogenous Firm Heterogeneity A Factor-Proportions Theory of Endogenous Firm Heterogeneity Taiji Furusawa Hitotsubashi University Hitoshi Sato Institute of Developing Economies This Draft: December 27 Abstract In the model where the

More information

Trade liberalisation, heterogeneous firms and endogenous investment PRELIMINARY DRAFT

Trade liberalisation, heterogeneous firms and endogenous investment PRELIMINARY DRAFT Trade liberalisation, heterogeneous firms and endogenous investment Gonzague Vannoorenberghe University of Mannheim 05/05/2008 PRELIMINARY DRAFT Abstract This paper develops a Melitz (2003) type model

More information

Discussion Papers In Economics And Business

Discussion Papers In Economics And Business Discussion Papers In Economics And Business The Effect of Technology Choice on Specialization and Welfare in a Two-Country Model Yukiko Sawada Discussion Paper 15-10 Graduate School of Economics and Osaka

More information

Aggregate Demand and the Dynamics of Unemployment

Aggregate Demand and the Dynamics of Unemployment Aggregate Demand and the Dynamics of Unemployment Edouard Schaal 1 Mathieu Taschereau-Dumouchel 2 1 New York University and CREI 2 The Wharton School of the University of Pennsylvania 1/34 Introduction

More information

Monopolistic competition: the Dixit-Stiglitz-Spence model

Monopolistic competition: the Dixit-Stiglitz-Spence model Monopolistic competition: the Dixit-Stiglitz-Spence model Frédéric Robert-Nicoud October 23 22 Abstract The workhorse of modern Urban Economics International Trade Economic Growth Macroeconomics you name

More information

Chapter 9 Dynamic Models of Investment

Chapter 9 Dynamic Models of Investment George Alogoskoufis, Dynamic Macroeconomic Theory, 2015 Chapter 9 Dynamic Models of Investment In this chapter we present the main neoclassical model of investment, under convex adjustment costs. This

More information

Zipf s Law, Pareto s Law, and the Evolution of Top Incomes in the U.S.

Zipf s Law, Pareto s Law, and the Evolution of Top Incomes in the U.S. Zipf s Law, Pareto s Law, and the Evolution of Top Incomes in the U.S. Shuhei Aoki Makoto Nirei 15th Macroeconomics Conference at University of Tokyo 2013/12/15 1 / 27 We are the 99% 2 / 27 Top 1% share

More information

Unemployment equilibria in a Monetary Economy

Unemployment equilibria in a Monetary Economy Unemployment equilibria in a Monetary Economy Nikolaos Kokonas September 30, 202 Abstract It is a well known fact that nominal wage and price rigidities breed involuntary unemployment and excess capacities.

More information

Optimal Negative Interest Rates in the Liquidity Trap

Optimal Negative Interest Rates in the Liquidity Trap Optimal Negative Interest Rates in the Liquidity Trap Davide Porcellacchia 8 February 2017 Abstract The canonical New Keynesian model features a zero lower bound on the interest rate. In the simple setting

More information

Trade Liberalization and Job Flows

Trade Liberalization and Job Flows Trade Liberalization and Job Flows By Jose Luis Groizard, Priya Ranjan, and Jose Antonio Rodriguez Lopez First version: January 2010 This version: June 2010 Abstract This paper presents theory and evidence

More information

Chapter II: Labour Market Policy

Chapter II: Labour Market Policy Chapter II: Labour Market Policy Section 2: Unemployment insurance Literature: Peter Fredriksson and Bertil Holmlund (2001), Optimal unemployment insurance in search equilibrium, Journal of Labor Economics

More information

A Simple Theory of Offshoring and Reshoring

A Simple Theory of Offshoring and Reshoring A Simple Theory of Offshoring and Reshoring Angus C. Chu, Guido Cozzi, Yuichi Furukawa March 23 Discussion Paper no. 23-9 School of Economics and Political Science, Department of Economics University of

More information

Distortionary Fiscal Policy and Monetary Policy Goals

Distortionary Fiscal Policy and Monetary Policy Goals Distortionary Fiscal Policy and Monetary Policy Goals Klaus Adam and Roberto M. Billi Sveriges Riksbank Working Paper Series No. xxx October 213 Abstract We reconsider the role of an inflation conservative

More information

Income distribution and the allocation of public agricultural investment in developing countries

Income distribution and the allocation of public agricultural investment in developing countries BACKGROUND PAPER FOR THE WORLD DEVELOPMENT REPORT 2008 Income distribution and the allocation of public agricultural investment in developing countries Larry Karp The findings, interpretations, and conclusions

More information

The Measurement Procedure of AB2017 in a Simplified Version of McGrattan 2017

The Measurement Procedure of AB2017 in a Simplified Version of McGrattan 2017 The Measurement Procedure of AB2017 in a Simplified Version of McGrattan 2017 Andrew Atkeson and Ariel Burstein 1 Introduction In this document we derive the main results Atkeson Burstein (Aggregate Implications

More information

Working Paper: Cost of Regulatory Error when Establishing a Price Cap

Working Paper: Cost of Regulatory Error when Establishing a Price Cap Working Paper: Cost of Regulatory Error when Establishing a Price Cap January 2016-1 - Europe Economics is registered in England No. 3477100. Registered offices at Chancery House, 53-64 Chancery Lane,

More information

Lastrapes Fall y t = ỹ + a 1 (p t p t ) y t = d 0 + d 1 (m t p t ).

Lastrapes Fall y t = ỹ + a 1 (p t p t ) y t = d 0 + d 1 (m t p t ). ECON 8040 Final exam Lastrapes Fall 2007 Answer all eight questions on this exam. 1. Write out a static model of the macroeconomy that is capable of predicting that money is non-neutral. Your model should

More information

Dynamic Selection and the New Gains from Trade with. Heterogeneous Firms

Dynamic Selection and the New Gains from Trade with. Heterogeneous Firms Dynamic Selection and the New Gains from Trade with Heterogeneous Firms Thomas Sampson London School of Economics & CEP March 2013 Abstract This paper develops an open economy growth model in which firm

More information

Melitz meets Pissarides: Firm heterogeneity, search unemployment and trade liberalization

Melitz meets Pissarides: Firm heterogeneity, search unemployment and trade liberalization Melitz meets Pissarides: Firm heterogeneity, search unemployment and trade liberalization Gabriel Felbermayr, Julien Prat, and Hans-Jörg Schmerer PRELIMINARY VERSION April 2007 Abstract Motivated by strong

More information

CEO Attributes, Compensation, and Firm Value: Evidence from a Structural Estimation. Internet Appendix

CEO Attributes, Compensation, and Firm Value: Evidence from a Structural Estimation. Internet Appendix CEO Attributes, Compensation, and Firm Value: Evidence from a Structural Estimation Internet Appendix A. Participation constraint In evaluating when the participation constraint binds, we consider three

More information

Taxing Firms Facing Financial Frictions

Taxing Firms Facing Financial Frictions Taxing Firms Facing Financial Frictions Daniel Wills 1 Gustavo Camilo 2 1 Universidad de los Andes 2 Cornerstone November 11, 2017 NTA 2017 Conference Corporate income is often taxed at different sources

More information

Introducing nominal rigidities. A static model.

Introducing nominal rigidities. A static model. Introducing nominal rigidities. A static model. Olivier Blanchard May 25 14.452. Spring 25. Topic 7. 1 Why introduce nominal rigidities, and what do they imply? An informal walk-through. In the model we

More information

Effects on the cross-country difference in the minimum. wage on international trade, growth and unemployment

Effects on the cross-country difference in the minimum. wage on international trade, growth and unemployment Effects on the cross-country difference in the minimum wage on international trade, growth and unemployment Chihiro Inaba Department of Economics, Kobe University Katsufumi Fukuda Hiroshima University

More information

Ramsey s Growth Model (Solution Ex. 2.1 (f) and (g))

Ramsey s Growth Model (Solution Ex. 2.1 (f) and (g)) Problem Set 2: Ramsey s Growth Model (Solution Ex. 2.1 (f) and (g)) Exercise 2.1: An infinite horizon problem with perfect foresight In this exercise we will study at a discrete-time version of Ramsey

More information

Ph.D. Preliminary Examination MICROECONOMIC THEORY Applied Economics Graduate Program June 2017

Ph.D. Preliminary Examination MICROECONOMIC THEORY Applied Economics Graduate Program June 2017 Ph.D. Preliminary Examination MICROECONOMIC THEORY Applied Economics Graduate Program June 2017 The time limit for this exam is four hours. The exam has four sections. Each section includes two questions.

More information

A Solution to Two Paradoxes of International Capital Flows. Jiandong Ju and Shang-Jin Wei. Discussion by Fabio Ghironi

A Solution to Two Paradoxes of International Capital Flows. Jiandong Ju and Shang-Jin Wei. Discussion by Fabio Ghironi A Solution to Two Paradoxes of International Capital Flows Jiandong Ju and Shang-Jin Wei Discussion by Fabio Ghironi NBER Summer Institute International Finance and Macroeconomics Program July 10-14, 2006

More information

International Development and Firm Distribution

International Development and Firm Distribution International Development and Firm Distribution Ping Wang Department of Economics Washington University in St. Louis February 2016 1 A. Introduction Conventional macroeconomic models employ aggregate production

More information

Trading Company and Indirect Exports

Trading Company and Indirect Exports Trading Company and Indirect Exports Kiyoshi Matsubara June 015 Abstract This article develops an oligopoly model of trade intermediation. In the model, manufacturing firm(s) wanting to export their products

More information

Understanding the Distributional Impact of Long-Run Inflation. August 2011

Understanding the Distributional Impact of Long-Run Inflation. August 2011 Understanding the Distributional Impact of Long-Run Inflation Gabriele Camera Purdue University YiLi Chien Purdue University August 2011 BROAD VIEW Study impact of macroeconomic policy in heterogeneous-agent

More information

A unified framework for optimal taxation with undiversifiable risk

A unified framework for optimal taxation with undiversifiable risk ADEMU WORKING PAPER SERIES A unified framework for optimal taxation with undiversifiable risk Vasia Panousi Catarina Reis April 27 WP 27/64 www.ademu-project.eu/publications/working-papers Abstract This

More information

Does Encourage Inward FDI Always Be a Dominant Strategy for Domestic Government? A Theoretical Analysis of Vertically Differentiated Industry

Does Encourage Inward FDI Always Be a Dominant Strategy for Domestic Government? A Theoretical Analysis of Vertically Differentiated Industry Lin, Journal of International and Global Economic Studies, 7(2), December 2014, 17-31 17 Does Encourage Inward FDI Always Be a Dominant Strategy for Domestic Government? A Theoretical Analysis of Vertically

More information