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Australian School of Business Building
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Recent Papers

The Composition of Trade Flows and the Aggregate Effects of Trade Barriers

Latest version: August, 2014


A widely used class of quantitative trade models implicitly assumes that patterns of comparative advantage take a specific form such that they have no influence over the effect of trade barriers on aggregate trade flows and welfare. In this paper, I show that this assumption is inconsistent with patterns present in the product-level trade data and develop a framework in which to analyze the role of interactions among countries' patterns of comparative advantage in determining the aggregate effects of trade barriers. The model preserves much of the tractability of standard aggregate quantitative trade models while allowing for the effects of any pattern of comparative advantage, across many products and countries, to be taken into account. After fitting the model to product-level trade data, I find that the composition of trade flows is quantitatively important in determining the welfare gains from trade and the aggregate effects of changes in trade barriers. A key finding is that the welfare gains from trade tend to be larger and more skewed toward low-income countries than an aggregate model would suggest.

Innovation, Product-Cycle Trade, and the Cross-Country Distribution of Income

Latest version: April, 2014


This paper develops a quantitative, multi-country model of endogenous growth, international trade, and international knowledge flows in order to understand how access to both foreign products and technologies, together, influences innovation incentives and the world distribution of income. An endogenous product cycle arises in equilibrium, in which innovative countries engage in both horizontal and vertical research, while others far from the technological frontier specialize in learning about and applying research previously conducted abroad. The effect of trade barriers on the level and dispersion of income across countries is found to be larger than would be predicted by a static trade model, and the effect of access to international knowledge flows is also quantitatively important and dependent on trade flows. For instance, halving the cost of learning reduces income dispersion by 23%, while doing so after eliminating asymmetric international trade barriers reduces income dispersion by only 10%.

Revealed Comparative Advantage: What Is It Good For?

Latest version: November, 2014


This paper utilizes a many-country, many-product Ricardian trade model to evaluate the usefulness of measures of revealed comparative advantage (RCA) in academic and policy analyses. I find that, while commonly used indexes are generally not consistent with theoretical notions of comparative advantage, certain indexes can be usefully employed for certain tasks. I explore several common uses of RCA indexes and show that different indexes are appropriate when attempting to (a) evaluate the differential effect of changes in trade barriers across producers of different products, (b) identify countries who are relatively close competitors in a given market, or (c) recover patterns of relative productivity.

Experience and the Wage Elasticity of Labor Supply (with Tess Stafford)

Latest version: December, 2014


We examine the effect of the presence of learning-by-doing (LBD) on estimates of individuals’ intertemporal elasticity of substitution (IES). Using a simple model, we show that if wages increase with experience, as evidence suggests, then wages are a function of past labor supply decisions. This violates the exogeneity assumption required for standard estimations, which are based on the responsiveness of labor supply to transitory variation in wages, to be consistent. Using a large data set of the daily labor supply decisions of Florida lobster fishermen, we show that wage elasticity estimates are consistent with a model of labor supply in which work today leads to higher future wages through LBD. We estimate an average bias in the estimated IES of 1.6 and a maximal bias of 2.7 associated with ignoring LBD.

Biased Gravity Estimates: Heteroskedasticity or Misspecification?

Latest version: August, 2014 (new version coming soon!)


Gravity estimations based on sector-level data implicitly assume that the effect of trade barriers on aggregated trade flows is independent of the patterns of comparative advantage that exist in the data. However, using a model that nests widely used quantitative trade models but allows for non-trivial patterns of comparative advantage across products, I show that, in general, sector-level trade flows follow a modified gravity equation that contains an unobservable, bilateral term that is ignored by traditional structural gravity estimations, which implies that their estimates suffer from omitted variable bias. I find that using product-level data to account for these patterns leads to coefficient estimates that differ from traditional estimates in the ways predicted by the theory and that the product-level estimates are much more robust to distributional assumptions, implying that this bias is important and that, once it has been corrected, the remaining biases due to heteroskedasticity and sample selection are less severe.

Works in Progress

Technological Collateral, Capital Flows, and Sovereign Default Risk (with Alexandre Dmitriev)

Prices, Markups and Quality: The Effect of Chinese Competition on Mexican Exporters (with Mauro Caselli and Arpita Chatterjee)

Innovation, Technology Diffusion, and Trade