International Trade, Foreign Investment, and the Formation of the Entrepreneurial Class

In this paper, I examine the argument that free trade may be harmful to less developed countries, because such international competition inhibits the formation of a local entrepreneurial class.I view the entrepreneur as the manager of the industrial enterprise, as well as the agent who bears the risks associated with industrial production. A two-sector model of a small open economy is developed in which the size of the entrepreneurial class is endogenous.It is shown that the entrepreneurial class is smaller under free trade than would be first-best optimal in the presence of efficient risk-sharing institutions such as stock markets. Nonetheless, there are potential gains from trade, and any protectionist policy that increases the number of entrepreneurs will have deleterious welfare consequences.

International Competition and the Unionized Sector

This paper studies the wage and employment behavior of a unionized sector that is confronted by an intensification of international competition. After developing a formal model of a monopoly union subject to majority rule, I study the response of a unionized sector operating under a seniority rule for layoffs and rehires to a trend decrease in the international price of its output. Conditions are provided to validate the casual argument that majority voting in unions and the seniority system together provide an explanation for the lack of union wage adjustment. A modified version of the model allows the job queue to deviate from a strict seniority ranking. In this context I ask, what importance can be attached to the seniority system in determining the wage response to international competition?

Paving the Way for Success in High School and Beyond: The Importance of Preparing Middle School Students for the Transition to Ninth Grade

P/PV's GroundWork series summarizes available evidence on a variety of social policy topics, providing a firm foundation for future work.This second brief in the series presents an overview of issues surrounding the ninth grade transition: why it is so important; why many middle school students find it so difficult; traits related to a successful transition; and what schools can do to ease difficulties in the transition. Research indicates that students unprepared to handle the transition are more likely to disengage from school, which in turn may lead to dropping out -- and a host of related problems, thus perpetuating a cycle of poverty for disadvantaged, low-income youth

Product Development and International Trade

We develop a multi-country, dynamic general equilibrium model of product innovation and international trade to study the creation of comparative advantage through research and development and the evolution of world trade over tune. In our model, firms must incur resource costs to introduce new products and forward-looking potential producers conduct R&D and enter the product market whenever profit opportunities exist Trade has both intra- industry and inter-industry components, and the different incentives that face agents in different countries for investment and savings decisions give rise to Intertemporal trade. We derive results on the dynamics of trade patterns and trade volume, and on the temporal emergence of multinational corporations

Party Discipline and Pork-Barrel Politics

Polities differ in the extent to which political parties can pre-commit to carry out promised policy actions if they take power. Commitment problems may arise due to a divergence between the ex ante incentives facing national parties that seek to capture control of the legislature and the ex post incentives facing individual legislators, whose interests may be more parochial. We study how differences in "party discipline" shape fiscal policy choices. In particular, we examine the determinants of national spending on local public goods in a three-stage game of campaign rhetoric, voting, and legislative decision-making. We find that the rhetoric and reality of pork-barrel spending, and also the efficiency of the spending regime, bear a non-monotonic relationship to the degree of party discipline.

Tariffs as Insurance: Optimal Commercial Policy When Domestic Markets Are Incomplete

Free trade is not optimal for a small country that faces uncertain terms of trade if some factors are immobile - ex post, and markets for contingent claims are incomplete. The government can improve social welfare by using commercial policy that serves as a partial substitute for missing insurance markets. Using a combination of analytical and simulation techniques we demonstrate that optimal policy for this purpose will often have an anti-trade bias. We also show that the usual preference by economists for factor or product taxes and subsidies over tariffs and export subsidies may not be justified in this context.

The Case for School-Based Integration of Services: Changing the Ways Students, Families and Communities Engage with their Schools

P/PV's GroundWork series summarizes available evidence on a variety of social policy topics, providing a solid foundation for future work.This first issue reviews the current literature about the potential benefits of simultaneously providing three services in school -- healthcare, out-of-school-time learning and family supports -- to boost students' educational outcomes. For disadvantaged, low-income youth, research indicates that access to these supports can play a key role in helping them surmount common obstacles to educational attainment. In addition to highlighting how each affects key outcomes such as learning, school connectedness (i.e., positive feelings about school) and access to needed services, this brief summarizes the potential benefits of offering these resources through a highly integrated, school-based model

Outsourcing versus FDI in Industry Equilibrium

We study the determinants of the extent of outsourcing and of direct foreign investment in an industry in which producers need specialized components. Potential suppliers must make a relationship-specific investment in order to serve each prospective customer. Such investments are governed by imperfect contracts. A final-good producer can manufacture components for itself, but the per-unit cost is higher than for specialized suppliers. We consider how the size of the cost differential, the extent of contractual incompleteness, the size of the industry, and the relative wage rate affect the organization of industry production.outsourcing, direct foreign investment, multinational corporations, imperfect contracting, intra-industry trade

Outsourcing in a Global Economy?

We study the determinants of the location of sub-contracted activity in a general equilibrium model of outsourcing and trade. We model outsourcing as an activity that requires search for a partner and relationship-specific investments that are governed by incomplete contracts. The extent of international outsourcing depends inter alia on the thickness of the domestic and foreign market for input suppliers, the relative cost of searching in each market, the relative cost of customizing inputs, and the nature of the contracting environment in each country.

Optimal Dynamic R&D Programs

We study the optimal pattern of outlays for a single firm pursuing an R&D program over time. In the deterministic case, (a) the amount of progress required to complete the project is known, and (b) the relationship between outlays and progress is known. In this case, it is optimal to increase effort over time as the project nears completion. Relaxing (a), we find in general a simple, positive relationship between the optimal expenditure rate at any point in time and the (expected) value at that time of the research program. We also show that, for a given level ofexpected difficulty, a riskier project is always preferred to a safe project. Relaxing (b), we find again that research outlays increase as further progressis made.