North-south trade and directed technical change

In a world where poor countries provide weak protection for intellectual property rights, market integration shifts technical change in favor of rich nations. Through this channel, free trade may amplify international income differences. At the same time, integration with countries where intellectual property rights are weakly protected can slow down the world growth rate. A crucial implication of these results is that protection of intellectual property is most beneficial in open countries. This prediction, which is novel in the literature, finds support in the data on a panel of 53 countries observed in the years 1965-1990.Economic Growth, North-South Trade, Intellectual Property Rights, Cross-Country Income Differences

Globalization, Divergence and Stagnation

In a world where poor countries provide weak protection for intellectual property rights, market integration will systematically shift technical change in favor of rich nations. For this reason, free trade can increase international income differences. At the same time, integration with countries where intellectual property rights are weakly protected can have a large adverse effect on the world growth rate. These results provide a strong rationale for global regulations, critical in a system of interdependent economies for sustaining innovation and reducing income inequality. Supportive empirical evidence is presented.Economic Growth; North-South Trade; Intellectual Property Rights; Cross-Country Income Differences; Innovation Diversion

Openness, government size and the terms of trade

This paper investigates the relationship between trade openness and the size of government, both theoretically and empirically. We show that openness can increase the size of governments through two channels: (1) a terms of trade externality, whereby trade lowers the domestic cost of taxation and (2) the demand for insurance, whereby trade raises risk and public transfers. We provide a unified framework for studying and testing these two mechanisms. First, we show how their relative strength depends on a key parameter, the elasticity of substitution between domestic and foreign goods. Second, while the terms of trade externality leads to inefficiently large governments, the increase in public spending due to the demand for insurance is optimal. We show that large volumes of trade may result in welfare losses if the terms of trade externality is strong enough while small volumes of trade are always beneficial. Third, we provide new evidence on the positive association between openness and the size of government and test whether it is consistent with the terms of trade externality or the demand for insurance. Our findings suggest that the positive relationship is remarkably robust and that the terms of trade externality may be the driving force behind it, thus raising warnings that globalization may have led to inefficiently large governments.Openness, government size, terms of trade externality, elasticity of substitution between imports and exports

The Skill Bias of World Trade

We argue that, with an elasticity of substitution in consumption greater than one and higher scale economies in the skill-intensive sectors, the entire volume of world trade matters for wage inequality. This implies that trade integration, even among identical countries, is likely to increase the skill premium. This result can also explain the increase in skill premia in developing countries that have experienced drastic trade liberalizations. Further, we argue that evidence of a falling relative rpice of skill-intensive goods can be reconciled with the fast growth of world trade and that the intersectoral mobility of capital exacerbates the effect of trade on inequality. We provide new empirical evidence in support of our results and a quantitative assessment of the skill bias of world trade.Skill Premium; Scale Effect; Intra-Industry and Inter-Industry Trade

Increasing returns, imperfect competition and factor prices

We show how, in general equilibrium models featuring increasing returns, imperfect competition and endogenous markups, changes in the scale of economic activity affect income distribution across factors. Whenever final goods are gross-substitutes (gross- complements), a scale expansion raises (lowers) the relative reward of the scarce factor or the factor used intensively in the sector characterized by a higher degree of product differentiation and higher fixed costs. Under very reasonable hypothesis, our theory suggests that scale is skill-biased. This result provides a microfoundation for the secular increase in the relative demand for skilled labor. Moreover, it constitutes an important link among major explanations for the rise in wage inequality: skill-biased technical change, capital-skill complementarities and international trade. We provide new evidence on the mechanism underlying the skill bias of scale.Endogenous Markups, Pro-competitive E¤ect, Income Distribution, Trade Models with Imperfect Competition, Wage Inequality

Technological change and the wealth of nations

We discuss a unified theory of directed technological change and technology adoption that can shed light on the causes of persistent productivity differences across countries. In our model, new technologies are designed in advanced countries and diffuse endogenously to less developed countries. Our framework is rich enough to highlight three broad reasons for productivity differences: inappropriate technologies, policy-induced barriers to technology adoption, and within-country misallocations across sectors due to policy distortions. We also discuss the effects of two aspects of globalization, trade in goods and migration, on the wealth of nations through their impact on the direction of technical progress. By doing so, we illustrate some of the equalizing and unequalizing forces of globalization.Barriers to Technology Adoption, Directed Technology Adoption, Endogenous Growth, Globalization, Human Capital, Inappropriate Technologies, Market Power, Political Economy, Skill-biased Technical Chan

Trade, markup heterogeneity and misallocations

We argue that the procompetitive effect of international trade may bring about significant welfare costs that have not been recognized. We formulate a stylized general equilibrium model with a continuum of imperfectly competitive industries to show that, under plausible conditions, a trade-induced increase in competition can actually amplify monopoly distortions. This happens because trade, while lowering the average level of market power, may increase its cross-sectoral dispersion. Using data on US industries, we document a dramatic increase in the dispersion of market power overtime. We also show evidence that trade might be responsible for it and provide some quantifications of the induced welfare cost. Our results suggest that, to avoid some unpleasant effects of globalization, trade integration should be accompanied by procompetitive reforms (i.e., deregulation) in the nontraded sectors.Markups, Dispersion of Market Power, Procompetitive Effect, Trade and Welfare

The skill bias of world trade

Under plausible assumptions about preferences and technology, the model in this paper suggests that the entire volume of world trade matters for wage inequality. Therefore, trade integration, even among identical countries, is likely to increase the skill premium. Further, we argue that empirical evidence of a falling relative price of skill-intensive goods can be reconciled with the fast growth of world trade and that the intersectoral mobility of capital exacerbates the effect of trade on inequality. We provide new empirical evidence in support of our results and a quantitative assessment of the skill bias of world trade.Skill Premium, Scale E.ect, Intra-Industry and Inter-Industry Trade

The Political Cost of Reforms

This paper formalizes in a fully-rational model the popular idea that politicians perceive an electoral cost in adopting costly reforms with future benefits and reconciles it with the evidence that reformist governments are not punished by voters. To do so, it proposes a model of elections where political ability is ex-ante unknown and investment in reforms is unobservable. On the one hand, elections improve accountability and allow to keep well-performing incumbents. On the other, politicians make too little reforms in an attempt to signal high ability and increase their reappointment probability. Although in a rational expectation equilibrium voters cannot be fooled and hence reelection does not depend on reforms, the strategy of underinvesting in reforms is nonetheless sustained by out-of-equilibrium beliefs. Contrary to the conventional wisdom, uncertainty makes reforms more politically viable and may, under some conditions, increase social welfare. The model is then used to study how political rewards can be set so as to maximize social welfare and the desirability of imposing a one-term limit to governments. The predictions of this theory are consistent with a number of empirical regularities on the determinants of reforms and reelection. They are also consistent with a new stylized fact documented in this paper: economic uncertainty is associated to more reforms in a panel of 20 OECD countries.Elections, Reforms, Asymmetric Information, Uncertainty.

Structural development accounting

We construct and estimate a unifi…ed model combining three of the main sources of cross-country income disparities: differences in factor endowments, barriers to technology adoption and the inappropriateness of frontier technologies to local conditions. The key components are different types of workers, distortions to capital accumulation, directed technical change, costly adoption and spillovers from the world technology frontier. Despite its parsimonious parametrization, our empirical model provides a good fi…t of GDP data for up to 86 countries in 1970 and 122 countries in 2000. Removing barriers to technology adoption would increase the output per worker of the average non-OECD country relative to the US from 0.19 to 0.61, while increasing skill premia in all countries. Removing barriers to trade in goods amplifi…es income disparities, induces skill-biased technology adoption and increases skill premia in the majority of countries. These results are reverted if trade liberalization is coupled with international IPR protection.Directed technology adoption, development accounting, distance to frontier, inappropriate technologies, skill-biased technical change, productivity, TFP differences