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

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

Early inhaled budesonide for the prevention of bronchopulmonary dysplasia

BACKGROUND Systemic glucocorticoids reduce the incidence of bronchopulmonary dysplasia among extremely preterm infants, but they may compromise brain development. The effects of inhaled glucocorticoids on outcomes in these infants are unclear. METHODS We randomly assigned 863 infants (gestational age, 23 weeks 0 days to 27 weeks 6 days) to early (within 24 hours after birth) inhaled budesonide or placebo until they no longer required oxygen and positive-pressure support or until they reached a postmenstrual age of 32 weeks 0 days. The primary outcome was death or bronchopulmonary dysplasia, confirmed by means of standardized oxygen-saturation monitoring, at a postmenstrual age of 36 weeks. RESULTS A total of 175 of 437 infants assigned to budesonide for whom adequate data were available (40.0%), as compared with 194 of 419 infants assigned to placebo for whom adequate data were available (46.3%), died or had bronchopulmonary dysplasia (relative risk, stratified according to gestational age, 0.86; 95% confidence interval [CI], 0.75 to 1.00; P = 0.05). The incidence of bronchopulmonary dysplasia was 27.8% in the budesonide group versus 38.0% in the placebo group (relative risk, stratified according to gestational age, 0.74; 95% CI, 0.60 to 0.91; P = 0.004); death occurred in 16.9% and 13.6% of the patients, respectively (relative risk, stratified according to gestational age, 1.24; 95% CI, 0.91 to 1.69; P = 0.17). The proportion of infants who required surgical closure of a patent ductus arteriosus was lower in the budesonide group than in the placebo group (relative risk, stratified according to gestational age, 0.55; 95% CI, 0.36 to 0.83; P = 0.004), as was the proportion of infants who required reintubation (relative risk, stratified according to gestational age, 0.58; 95% CI, 0.35 to 0.96; P = 0.03). Rates of other neonatal illnesses and adverse events were similar in the two groups. CONCLUSIONS Among extremely preterm infants, the incidence of bronchopulmonary dysplasia was lower among those who received early inhaled budesonide than among those who received placebo, but the advantage may have been gained at the expense of increased mortality

Trade, Markup Heterogeneity and Misallocations

Markups vary widely across industries and countries, their heterogeneity has increased overtime and asymmetric exposure to international trade seems partly responsible for this phenomenon. In this paper, we study how the entire distribution of markups affects resource misallocation and welfare in a general equilibrium framework encompassing a large class of models with imperfect competition. We then identify conditions under which trade opening, by changing the distribution of markups, may reduce welfare. Our approach is novel both in its generality and in the emphasis on the second moment of the markup distribution. Two broad policy recommendations stand out from the analysis. First, whenever there is heterogeneity in markups, be it due to trade or other distortions, there is also an intersectoral misallocation, so that the equilibrium can be improved upon with an appropriate intervention. This suggests that trade liberalization and domestic industrial policy are complementary. Second, ensuring free entry is a crucial precondition to prevent adverse effects from asymmetric trade opening

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

Procompetitive Losses from Trade

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

The Skill Bias of World Trade

This article suggests that international trade, even between identical countries, can raise the relative demand for skilled labour. It shows that a simple generalisation of Krugman’s (1979) model of trade in differentiated products has implications for the skill premium, through economies of scale rather than Hecksher-Ohlin effects, that are consistent with a number of stylised facts. It provides new evidence in support of these results by showing that increases in market size lead to higher returns to education, skill premia and income inequality