Market Integration and Convergence to the Law of One Price: Evidence from the European Car Market

This paper exploits the unique experiment of European market integration to investigate the relationship between integration and price convergence in international markets. Using a panel data set of car prices we examine how the process of integration has affected cross-country price dispersion in Europe. We find surprisingly strong evidence of convergence towards both the absolute and the relative versions of Purchasing Power Parity. Our analysis illuminates the main sources of segmentation in international markets and suggests the type of institutional changes that can successfully reduce it.

A Structural Approach to Identifying the Sources of Local-Currency Price Stability

The inertia of the local-currency prices of traded goods in the face of exchange-rate changes is a well-documented phenomenon in International Economics. This paper develops a structural model to identify the sources of this local-currency price stability and applies it to micro data from the beer market. The empirical procedure exploits manufacturers’ and retailers’ first-order conditions in conjunction with detailed information on the frequency of price adjustments following exchange-rate changes to quantify the relative importance of local non-traded cost components, markup adjustment by manufacturers and retailers, and nominal price rigidities in the incomplete transmission of such changes to prices. We find that, on average, approximately 60% of the incomplete exchange rate pass-through is due to local non-traded costs; 8% to markup adjustment; 30% to the existence of own-brand price adjustment costs, and 1% to the indirect/strategic effect of such costs, though these results vary considerably across individual brands according to their market shares.

Trade, Inequality, and Poverty: What Do We Know? Evidence from Recent Trade Liberalization Episodes in Developing Countries

We review the empirical evidence on the relationship between Trade Liberalization, Inequality, and Poverty based on the analysis of micro data from several developing countries that underwent significant trade reforms in recent years. Despite many measurement and identification difficulties, and despite conflicting evidence on some issues, empirical work based on country case studies' has established certain patterns that seem common across countries and trade liberalization episodes, and may hence be informative as to how developing countries adjust to trade reform.

The Response of the Informal Sector to Trade Liberalization

This paper studies the relationship between trade liberalization and informality. It is often claimed that increased foreign competition in developing countries leads to an expansion of the informal sector, defined as the sector that does not comply with labor market legislation. Using data from two countries that experienced large trade barrier reductions in the 1980's and 1990's, Brazil and Colombia, we examine the response of the informal sector to liberalization. In Brazil, we find no evidence of a relationship between trade policy and informality. In Colombia, we do find evidence of such a relationship, but only for the period preceding a major labor market reform that increased the flexibility of the Colombian labor market. These results point to the significance of labor market institutions in assessing the effects of trade policy on the labor market.

Estimating the Effects of Global Patent Protection in Pharmaceuticals: A Case Study of Quinolones in India

Under the TRIPS agreement, WTO members are required to enforce product patents for pharmaceuticals. The debate about the merits of this requirement has been extremely contentious. Many low income economies claim that patent protection for pharmaceuticals will result in substantially higher prices for medicines, with adverse consequences for the health and well-being of their citizens. On the other hand, research-based global pharmaceutical companies, argue that prices are unlikely to rise significantly because most patented products have therapeutic substitutes. In this paper we empirically investigate the basis of these claims. Central to the ongoing debate is the structure of demand for pharmaceuticals in poor economies where, because health insurance coverage is so rare, almost all medical expenses are met out-of-pocket. Using a detailed product-level data set from India, we estimate key price and expenditure elasticities and supply-side parameters for the fluoroquinolones sub-segment of the systemic anti-bacterials (i.e., antibiotics) segment of the Indian pharmaceuticals market. We then use these estimates to carry out counterfactual simulations of what prices, profits, and consumer welfare would have been, had the fluoroquinolone molecules we study been under patent in India as they were in the U.S. at the time. Our results suggest that concerns about the potential adverse welfare effects of TRIPS may have some basis. We estimate that in the presence price regulation the total annual welfare losses to the Indian economy from the withdrawal of the four domestic product groups in the fluoroquinolone sub-segment would be on the order of U.S. $305 million, or about 50$50 million. The overwhelming portion of the total welfare loss therefore derives from the loss of consumer welfare. In contrast, the profit gains to foreign producers in the presence price regulation are estimated to be only around $19.6 million per year.

Credit Constraints in the Market for Consumer Durables: Evidence from Micro Data on Car Loans

We investigate the empirical significance of borrowing constraints in the market for consumer loans. We set up a theoretical model of consumer loan demand, which in the presence of credit rationing implies restrictions on the elasticities of loan demand with respect to the interest rate and the maturity of the loan. We estimate these elasticities and test the theoretical implications using micro data from the Consumer Expenditure Survey (1984-1995) on auto loan contracts. The econometric specification that we employ accounts for important features of the data: selection, censoring, and simultaneity. Our results suggest that credit constraints are binding for some groups in the population, in particular for young and low-income households.

Aggregate Implications of Barriers To Female Entrepreneurship

We develop a framework for quantifying barriers to labor force participation (LFP) and entrepreneurship faced by women in developing countries, and apply it to the Indian economy. We find that women face substantial barriers to LFP. The costs for expanding businesses through the hiring of workers are also substantially higher for women entrepreneurs. However, there is one area in which female entrepreneurs have an advantage: the hiring of female workers. We show that this is not driven by the sectoral composition of female employment. Consistent with this pattern, we find even without promoting female LFP, policies that boost female entrepreneurship can significantly increase female LFP. Counterfactual simulations indicate that removing all excess barriers faced by women entrepreneurs would substantially increase the fraction of female-owned firms, female LFP, earnings, and generate substantial gains in aggregate productivity and welfare. These gains are due to higher LFP, higher real wages and profits, and reallocation: low productivity male-owned firms previously sheltered from female competition are replaced by higher productivity female-owned firms previously excluded from the economy

The Employment Effects of Mobile Internet in Developing Countries

We examine the employment effects of 3G mobile internet expansion in developing countries. We find that 3G significantly increases the labor force participation rate of women and the employment rates of both men and women. Our results suggest that 3G affects the type of jobs and there is a distinct gender dimension to these effects. Men transition away from unpaid agricultural work into operating small agricultural enterprises, while women take more unpaid jobs, especially in agriculture, and operate more small businesses in all sectors. Both men and women are more likely to work in wage jobs in the service sector

The effects of extending intellectual property rights protection to developing countries: A case study of the Indian pharmaceutical market

Under the TRIPS agreement, WTO members are required to enforce product patents for pharmaceuticals. The debate about the merits of this requirement has been and continues to be extremely contentious. Many poor developing economies claim that patent protection for pharmaceuticals will result in substantially higher prices for medicines, with adverse consequences for the health and well-being of their citizens. On the other hand, research-based global pharmaceutical companies, which claim to have lost billions of dollars because of patent infringement, argue that prices are unlikely to rise significantly because most patented products have therapeutic substitutes. In this paper we empirically investigate the basis of these claims. Central to the ongoing debate is the structure of demand for pharmaceuticals in poor economies where, because health insurance coverage is so rare, almost all medical expense are met out-of-pocket. Using a product-level data set from India, which is unique in terms of its detail and coverage, we estimate key price and expenditure elasticities and supply-side parameters for the fluoroquinolones sub-segment of the systemic anti-bacterials (i.e., antibiotics) segment of the Indian pharmaceuticals market. We then use these estimates to carry out counterfactual simulations of what prices, profits (of both domestic firms and multinational subsidiaries) and consumer welfare would have been, had the fluoroquinolone molecules we study been under patent in India as they were in the U.S. at the time. Our results suggest that concerns about the potential adverse welfare effects of TRIPS may have some basis. We estimate that in the absence of any price regulation or compulsory licensing, the total annual welfare losses to the Indian economy from the withdrawal of the four domestic product groups in the fluoroquinolone sub-segment would be on the order of U.S. $713 million, or about 118$50 million (or 7%). The overwhelming portion of the total welfare loss therefore derives from the loss of consumer welfare. In contrast, the profit gains to foreign producers are estimated to be only around $57 million per year

Causes and Consequences of the Export Enhancement Program for Wheat

This paper uses regression analysis to study the causes and impacts of the Export Enhancement Program for wheat. We find that the overwhelming causes of the EEP, faltering export markets and swelling government stocks are primarily attributable to the overvaluation of the dollar in the 1980s, not the increase in EC subsidies to wheat farmers in 1985. We also find that what had been a fairly robust relationship between export shares, exchange rates, and loan rates broke down after 1985, probably due to a variety of changes in farm policy. In any case, export shares did not rebound in spite of the weaker dollar and the implementation of the EEP in the post-1985 period.