A Theory on the Role of Wholesalers in International Trade based on Economies of Scope

Intermediaries and wholesalers play an important role in international trade. This paper develops a model of international trade with heterogeneous firms that offers an explanation of the existence of wholesalers. All exporting firms have to pay a fixed cost of establishing a distribution network in the foreign market. However, wholesalers possess a technology different to normal manufacturing firms: they can buy manufacturing goods domestically and sell in foreign markets and handle more than one good. A wholesaler therefore faces an additional fixed cost which is convex and monotonically increasing in the number of goods it ships. The entry of wholesale firms leads to productivity sorting. The most productive firms export on their own, as in the standard model, by paying a fixed cost to do so, while the least productive firms do not export. However, a range of firms with intermediate productivity levels export through international wholesalers. The existence of wholesale firms increases total exports and the number of firms that export. Moreover, a higher fixed cost of exporting leads to (i) a higher share of exported goods that is distributed by wholesalers, and (ii) a higher share of total exports that is distributed by wholesalers. The higher the fixed cost of exporting, the more important is the role of wholesalers since these can spread the fixed cost across more than one good. The wholesale technology therefore exhibits economies of scope. Finally, a larger fixed cost of exporting increases the scope of each wholesaler firm.heterogeneous firms; international trade; intermediation; wholesalers

The Global Arms Trade Network 1950-2007

We study the evolution of the global arms trade network using a unique dataset on all international transfers of major conventional weapons over the period 1950-2007. First, we provide a careful description of the characteristics of global arms trade using tools from social network analysis. Second, we relate our …findings to political regimes by studying whether differences in polity scores affect the likelihood of arms trade by estimating an augmented gravity equation. Our findings from the network analysis are much in line with common views of the Cold War. We see a clear division between the Warsaw Pact and NATO, with the Soviet Union being more central to the former than the United States to the latter. We find that differences in polity has a significant, negative effect on the likelihood of arms trade between two countries. The relationship is remarkably robust throughout the sample period and does not hold for trade in any other good that we investigate. The result suggests that democracies are indeed more likely to trade arms with other democracies than with autocracies since the former are not perceived as potential adversaries. We view this finding as evidence in favour of the Democratic Peace Theory.Arms Trade; Networks; Democracy; Autocracy; NATO; The Warsaw Pact

Firm Heterogeneity and Country Size Dependent Market Entry Costs

This paper introduces a market size dependent firm entry cost into the Helpman, Melitz and Yeaple (2004) (HMY) version of the Melitz (2003) model. This is a relatively small generalisation, which preserves the analytical solvability of the model. Nevertheless, our model yields several new results that are in line with data. First, the average productivity of firms located in a market increases in the size of the market. Second, the productivity of exporters is U-shaped with reference to export market size. Third, the productivity premium (the difference in average productivity) between exporters and non-exporters decreases in the home country size. Fourth, we derive a set of new results related to trade volume. It is shown that when the fixed entry cost of exporting declines, for instance as the result of economic integration, export shares converge. This prognosis is supported by the empirical section of the paper. Fifth, we use a multicountry version of our model to derive a gravity equation. Our specification yields a gravity equation a la Anderson and van Wincoop (2003), but where GDP per capita enters as an additional explanatory variable.heterogenous firms, market size, market entry costs

Country Size, Trade, and Productivity: An Analysis of Heterogenous Firms and Differential Beachhead Costs

This paper modifies the heterogenous firms and trade model by Melitz (2003) by explicitly modelling the beachhead cost of a firm in a new market as a function of market size. This leads to several new predictions compared to the standard model. In particular, the productivity of non exporters and exporters depends on market size. Moreover, manufacturing export shares vary inversely with market size. However, export shares converge (upwards) as markets are integrated. The empirical part of the paper offers support for our model specification.Heterogenous Firms; Market Size; Beachhead Costs

Service Outsourcing and Specialization: A Theory on Endogeneous Task Scope

We develop a model of outsourcing and trade in service inputs where the scope of tasks produced by both manufacturing firms and service providers is endogeneous. Manufacturing firms have to perform a fixed set of tasks in order to produce their final good but can decide to outsource some of these tasks to service providers, which, contrary to manufacturers, have the possibility to sell tasks to different manufacturers and thereby benefit from economies of scale in their task production. The key assumption is that the marginal cost of a firm (manufacturer or service provider) increases in the scope of tasks performed inside the firm: a firm which specializes in a narrow scope of tasks is more productive. Working against this incentive to produce as few tasks as possible "inhouse" is a fixed cost paid by each firm. The model yields several new predictions about trade liberalization and welfare as measured by aggregate productivity. An increase in the size of an economy raises the scale of all firms, facilitates greater specialization and therefore raises each firm's productivity. The model therefore generates gains from trade or larger market size through a "specialization effect" as opposed to the classical "variety effect" usually generated by models building on Dixit Stiglitz utility structures. Welfare increases due to adjustments in task scope allowed by the emergence of specialized service firms. Detailed Swedish data on what tasks (or occupations) are performed by workers is used to test this prediction. Indeed,we find that manufacturing firms in larger cities (controlling for firm size) perform fewer tasks inhouse than firms in smaller cities.service outsourcing; division of labour; productivity; specialization

Firm Heterogeneity and Country Size Dependent Market Entry Costs

This paper introduces a market size dependent firm entry cost into the Helpman, Melitz and Yeaple (2004) (HMY) version of the Melitz (2003) model. This is a relatively small generalisation, which preserves the analytical solvability of the model. Nevertheless, our model yields several new results that are in line with data. First, the average productivity of firms located in a market increases in the size of the market. Second, the productivity of exporters is U-shaped with reference to export market size. Third, the productivity premium (the difference in average productivity) between exporters and non-exporters decreases in the home country size. Fourth, we derive a set of new results related to trade volume. It is shown that when the fixed entry cost of exporting declines, for instance as the result of economic integration, export shares converge. This prognosis is supported by the empirical section of the paper. Fifth, we use a multicountry version of our model to derive a gravity equation. Our specification yields a gravity equation à la Anderson and van Wincoop (2003), but where GDP per capita enters as an additional explanatory variable.heterogenous firms, market size, market entry costs

Autocracies and Development in a Global Economy: A Tale of Two Elites

Data on the growth performances of countries with similar comparative (dis)advantage and political institutions reveal a striking variation across world regions. While some former autocracies such as the East Asian growth miracles have done remarkably well, others such as the Latin American economies have grown at much lower rates. In this paper, we propose a political economy explanation of these diverging paths of development by addressing the preferences of the country's political elite. We build a theoretical framework where factors of production owned by the political elites differ across countries. In each country, the incumbent autocrat will cater to the preferences of the elites when setting trade policy and the property rights regime. We show how stronger property rights may lead to capital accumulation and labor reallocation to the manufacturing sector. This, in turn, can lead to a shift in the comparative advantage, a decision to open up to trade and an inflow of more productive foreign capital. Consistent with a set of stylised facts on East Asia and Latin America, we argue that strong property rights are crucial for success upon globalization.Autocracy; Growth; Political Elites; Landowners; Capitalists; Growth Miracles; Trade; Comparative Advantage; Capital Mobility; Property Rights

Autocracies and Development in a Global Economy: A Tale of Two Elites

Data on the growth performances of countries with similar comparative (dis)advantage and political institutions reveal a striking variation across world regions. While some former autoc- racies such as the East Asian growth miracles have done remarkably well; others such as the Latin American economies have grown at much lower rates. In this paper; we propose a political economy explanation of these diverging paths of development by addressing the preferences of the country?s political elite. We build a theoretical framework where factors of production owned by the political elites di¤er across countries. In each country; the incumbent autocrat will cater to the preferences of the elites when setting trade policy and the property rights regime. We show how stronger property rights may lead to capital accumulation and labor reallocation to the manufacturing sector. This; in turn; can lead to a shift in the comparative advantage; a decision to open up to trade and an in?ow of more productive foreign capital. Consistent with a set of stylised facts on East Asia and Latin America; we argue that strong property rights are crucial for success upon globalization.Autocracy; Growth; Political Elites; Landowners; Capitalists; Growth Miracles; Trade; Comparative Advantage; Capital Mobility; Property Rights

Autocracies and Development in a Global Economy: A Tale of Two Elites

Data on the growth performances of countries with similar comparative (dis)advantage and political institutions reveal a striking variation across world regions. While some former autocracies such as the East Asian growth miracles have done remarkably well, others such as the Latin American economies have grown at much lower rates. In this paper, we propose a political economy explanation of these diverging paths of development by addressing the preferences of the country’s political elite. We build a theoretical framework where factors of production owned by the political elites differ across countries. In each country, the incumbent autocrat will cater to the preferences of the elites when setting trade policy and the property rights regime. We show how stronger property rights may lead to capital accumulation and labor reallocation to the manufacturing sector. This, in turn, can lead to a shift in the comparative advantage, a decision to open up to trade and an inflow of more productive foreign capital. Consistent with a set of stylised facts on East Asia and Latin America, we argue that strong property rights are crucial for success upon globalization.Autocracy, Growth, Political Elites, Landowners, Capitalists, Growth Miracles, Trade, Comparative Advantage, Capital Mobility, Property Rights

Autocracies and Development in a Global Economy: A Tale of Two Elites

This paper studies how comparative advantage and the political elites' endowments shape long-run performance in an economy with imperfect political institutions. In a capital-scarce economy, an autocrat catering to the needs of landowners favours openness to trade at an early stage of development, while an autocrat complying with the preferences of capitalists chooses to shelter the economy from trade. The trade regime interacts with economic institutions, and with policies on capital mobility, to govern capital accumulation. A landed autocrat neglects to improve institutions and blocks foreign capital to maximize extractable rents, leading the economy towards stagnation. By contrast, a capitalist autocrat strengthens institutions, which promotes manufacturing TFP growth, gradually shifts the comparative advantage towards manufacturing and renders the economy attractive to foreign investors. Allowing for trade and foreign capital inflows are thus complementary policies that provide an environment of growth and development in the capital autocracy