Publications by Author: Helpman, Elhanan

2018
Globalization and Inequality

Globalization is not the primary cause of rising inequality. This may come as a surprise. Inequality within nations has risen steadily in recent decades, at a time when countries around the world have eased restrictions on the movement of goods, capital, and labor. Many assume a causal relationship, which has motivated opposition to policies that promote freer trade. Elhanan Helpman shows, however, in this timely study that this assumption about the effects of globalization is more myth than fact.

Globalization and Inequality guides us through two decades of research about the connections among international trade, offshoring, and changes in income, and shows that the overwhelming conclusion of contemporary research is that globalization is responsible for only a small rise in inequality. The chief causes remain difficult to pin down, though technological developments favoring highly skilled workers and changes in corporate and public policies are leading suspects. As Helpman makes clear, this does not mean that globalization creates no problems. Critics may be right to raise concerns about such matters as cultural autonomy, child labor, and domestic sovereignty. But if we wish to curb inequality while protecting what is best about an interconnected world, we must start with a clear view of what globalization does and does not do and look elsewhere to understand our troubling and growing divide.Globalization is not the primary cause of rising inequality. This may come as a surprise. Inequality within nations has risen steadily in recent decades, at a time when countries around the world have eased restrictions on the movement of goods, capital, and labor. Many assume a causal relationship, which has motivated opposition to policies that promote freer trade. Elhanan Helpman shows, however, in this timely study that this assumption about the effects of globalization is more myth than fact.

2011
Helpman, Elhanan. 2011. “A Linder Hypothesis for Foreign Direct Investment.” National Bureau of Economic Research. Publisher's Version Abstract
We study patterns of FDI in a multi-country world economy. First, we present evidence for a broad sample of countries that firms direct FDI disproportionately to markets with income levels similar to their home market. Then we develop a model featuring non-homothetic preferences for quality and monopolistic competition in which specialization is purely demand-driven and the decision to serve foreign countries via exports or FDI depends on a proximity-concentration trade-off. We characterize the joint patterns of trade and FDI when countries differ in income distribution and size and show that FDI is more likely to occur between countries with similar per capita income levels. The model predicts a Linder Hypothesis for FDI, consistent with the patterns found in the data.

Co-author Gene Grossman is a professor of economics at Princeton University. Co-author Pablo Fajgelbaum is an assistant professor of economics at the University of California, LA.

Working Paper 17550, National Bureau of Economic Research, October 2011.


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Understanding Global Trade
Helpman, Elhanan. 2011. Understanding Global Trade. Harvard University Press. Publisher's Version Abstract

Global trade is of vital interest to citizens as well as policymakers, yet it is widely misunderstood. This compact exposition of the market forces underlying international commerce addresses both of these concerned groups, as well as the needs of students and scholars. Although it contains no equations, it is almost mathematical in its elegance, precision, and power of expression.

Understanding Global Trade provides a thorough explanation of what shapes the international organization of production and distribution and the resulting trade flows. It reviews the evolution of knowledge in this field from Adam Smith to today as a process of theoretical modeling, accumulation of new empirical data, and then revision of analytical frameworks in response to evidence and changing circumstances. It explains the sources of comparative advantage and how they lead countries to specialize in making products which they then sell to other countries. While foreign trade contributes to the overall welfare of a nation, it also creates winners and losers, and Helpman describes mechanisms through which trade affects a country's income distribution.

The book provides a clear and original account of the revolutions in trade theory of the 1980s and the most recent decade. It shows how scholars shifted the analysis of trade flows from the sectoral level to the business-firm level, to elucidate the growing roles of multinational corporations, offshoring, and outsourcing in the international division of labor. Helpman’s explanation of the latest research findings is essential for an understanding of world affairs.

2010
The Mystery of Economic Growth
Helpman, Elhanan. 2010. The Mystery of Economic Growth. Harvard University Press. Publisher's Version Abstract

Far more than an intellectual puzzle for pundits, economists, and policymakers, economic growth—its makings and workings—is a subject that affects the well-being of billions of people around the globe. In The Mystery of Economic Growth, Elhanan Helpman discusses the vast research that has revolutionized understanding of this subject in recent years, and summarizes and explains its critical messages in clear, concise, and accessible terms.

The tale of growth economics, as Helpman tells it, is organized around a number of themes: the importance of the accumulation of physical and human capital; the effect of technological factors on the rate of this accumulation; the process of knowledge creation and its influence on productivity; the interdependence of the growth rates of different countries; and, finally, the role of economic and political institutions in encouraging accumulation, innovation, and change.

One of the leading researchers of economic growth, Helpman succinctly reviews, critiques, and integrates current research—on capital accumulation, education, productivity, trade, inequality, geography, and institutions—and clarifies its relevance for global economic inequities. In particular, he points to institutions—including property rights protection, legal systems, customs, and political systems—as the key to the mystery of economic growth. Solving this mystery could lead to policies capable of setting the poorest countries on the path toward sustained growth of per capita income and all that that implies—and Helpman's work is a welcome and necessary step in this direction.

2007
Helpman, Elhanan, Marc Melitz, and Yona Rubinstein. 2007. “Estimating Trade Flows: Trading Partners and Trading Volumes”. Abstract

We develop a simple model of international trade with heterogeneous …firms that is consistent with a number of stylized features of the data. In particular, the model predicts positive as well as zero trade ‡flows across pairs of countries, and it allows the number of exporting fi…rms to vary across destination countries. As a result, the impact of trade frictions on trade ‡flows can be decomposed into the intensive and extensive margins, where the former refers to the trade volume per exporter and the latter refers to the number of exporters. This model yields a generalized gravity equation that accounts for the self-selection of …firms into export markets and their impact on trade volumes. We then develop a two-stage estimation procedure that uses a selection equation into trade partners in the fi…rst stage and a trade ‡ow equation in the second. We implement this procedure parametrically, semi-parametrically, and non-parametrically, showing that in all three cases the estimated effects of trade frictions are similar. Importantly, our method provides estimates of the intensive and extensive margins of trade. We show that traditional estimates are biased, and that most of the bias is not due to selection but rather due to the omission of the extensive margin. Moreover, the effect of the number of exporting fi…rms varies across country pairs according to their characteristics. This variation is large, and particularly so for trade between developed and less developed countries and between pairs of less developed countries.

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Helpman, Elhanan. 2007. “Fair Wages and Foreign Sourcing”. Abstract

We develop a simple general equilibrium model for studying the impact of workers’relative-wage concerns on resource allocation and the organization of production. We characterize equilibria for the closed economy and for an open economy in which an intermediate input can be produced o¤shore. In the closed economy, …firms that are otherwise identical may have different hiring practices and pay different wages to low-skill workers. In the open economy, some …firms perform all production at home while others produce all of the intermediate input offshore. We show that relative-wage concerns add to incentives for offshoring. Offshore production may take place in the presence of relative-wage concerns in situations where it would not be pro…table in their absence. And if offshoring takes place with or without such concerns, the extent of offshore production is greater in the former setting than in the latter. We further show that when workers are concerned about relative pay, the equilibrium does not maximize the economy’s net output. Nonetheless, the competitive equilibrium with o¤shoring is constrained Pareto efficient.

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Helpman, Elhanan, and Oleg Itskhoki. 2007. “Labor Market Rigidities, Trade and Unemployment”. Abstract

We study a two-country two-sector model of international trade in which one sector produces homogeneous products while the other produces differentiated products. The differentiated- product industry has …rm heterogeneity, monopolistic competition, search and matching in its labor market, and wage bargaining. Some of the workers searching for jobs end up being unemployed. Countries are similar except for frictions in their labor markets. We study the interaction of labor market rigidities and trade impediments in shaping welfare, trade ‡flows, productivity, price levels and unemployment rates. We show that both countries gain from trade but that the ‡flexible country— which has lower labor market frictions— gains proportionately more. A ‡flexible labor market confers comparative advantage; the fl‡exible country exports differentiated products on net. A country bene…fits by lowering frictions in its labor market, but this harms the country’s trade partner. And the simultaneous proportional lowering of labor market frictions in both countries benefi…ts both of them. The model generates rich patterns of unemployment. Specifi…cally, trade integration— which bene…fits both countries— may raise their rates of unemployment. Moreover, differences in rates of unemployment do not necessarily re‡flect differences in labor market rigidities; the rate of unemployment can be higher or lower in the ‡flexible country. Finally, we show that the ‡flexible country has both higher total factor productivity and a lower price level, which operates against the standard Balassa-Samuelson e¤ect.

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Aghion, Philippe, Pol Antràs, and Elhanan Helpman. 2007. “Negotiating free trade”. Abstract

We develop a dynamic bargaining model in which a leading country endogenously decides whether to sequentially negotiate free trade agreements with subsets of countries or engage in simultaneous multilateral bargaining with all countries at once. We show how the structure of coalition externalities shapes the choice between sequential and multilateral bargaining, and we identify circumstances in which the grand coalition is the equilibrium outcome, leading to worldwide free trade. A model of international trade is then used to illustrate equilibrium outcomes and how they depend on the structure of trade and protection. Global free trade is not achieved when the political-economy motive for protection is sufficiently large. Furthermore, the model generates both "building bloc" and "stumbling bloc" effects of preferential trade agreements. In particular, we describe an equilibrium in which global free trade is attained only when preferential trade agreements are permitted to form (a building bloc effect), and an equilibrium in which global free trade is attained only when preferential trade agreements are forbidden (a stumbling bloc effect). The analysis identifies conditions under which each of these outcomes emerges.

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2006
Helpman, Elhanan, and Pol Antràs. 2006. “Contractual Frictions and Global Sourcing”. Abstract

We generalize the Antràs and Helpman (2004) model of the international organization of production in order to accommodate varying degrees of contractual frictions. In particular, we allow the degree of contractibility to vary across inputs and countries. A continuum of firms with heterogeneous productivities decide whether to integrate or outsource the production of intermediate inputs, and from which country to source them. Final-good producers and their suppliers make relationship-specific investments which are only partially contractible, both in an integrated firm and in an arm’s-length relationship. We describe equilibria in which firms with different productivity levels choose different ownership structures and supplier locations, and then study the effects of changes in the quality of contractual institutions on the relative prevalence of these organizational forms. Better contracting institutions in the South raise the prevalence of offshoring, but may reduce the relative prevalence of FDI or foreign outsourcing. The impact on the composition of offshoring depends on whether the institutional improvement affects disproportionately the contractibility of a particular input. A key message of the paper is that improvements in the contractibility of inputs controlled by final-good producers have different effects than improvements in the contractibility of inputs controlled by suppliers.

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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 fi…scal 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.

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Helpman, Elhanan, and Gene Grossman. 2006. “Separation of Powers and the Budget Process”. Abstract

We study budget formation in a model featuring separation of powers. In our model, the legislature designs a budget bill that can include a cap on total spending and ear-marked allocations to designated public projects. Each project provides random bene…fits to one of many interest groups. The legislature can delegate spending decisions to the executive, who can observe the productivity of all projects before choosing which to fund. However, the ruling coalition in the legislature and the executive serve different constituencies, so their interests are not perfectly aligned. We consider settings that differ in terms of the breadth and overlap in the constituencies of the two branches, and associate these with the political systems and circumstances under which they most naturally arise. Earmarks are more likely to occur when the executive serves broad interests, while a binding budget cap arises when the executive’s constituency is more narrow than that of the powerful legislators.

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2002

We develop an equilibrium model of industrial structure in which the organization of firms is endogenous. Differentiated consumer products can be produced either by vertically integrated firms or by pairs of specialized companies. Production of each variety of consumer good requires a unique, specialized component. Vertically integrated firms can manufacture the components the need in the quantity and type that maximizes profits, but they face a relatively high cost of governance. Specialized firms can produce at lower cost, but input suppliers face a potential hold–up problem. We study the equilibrium mode of organization when inputs are fully or partially specialized. We consider how the degree of competition in the market and other parameters affect the equilibrium choices, and how the equilibrium compares with the efficient allocation.

2001
Helpman, Elhanan. 2001. “Special Interest Politics”. Abstract

This book reports the results of our research on the role of special interest groups in the process of trade policy formation. However, there is little that is unique about this particular type of policy. The methods that interest groups use to affect trade outcomes are the same as the ones they use to influence a myriad of other policy decisions, including both economic issues and issues outside of the economic realm.

1999

We develop an equilibrium model of industrial structure in which the organization of firms is endogenous. Differentiated consumer products can be produced either by vertically integrated firms or by pairs of specialized companies. Production of each variety of consumer good requires a unique, specialized component. Vertically integrated firms can manufacture the components they need in the quantity and type that maximizes profits, but they face a relatively high cost of governance. Specialized firms can produce at lower cost, but input suppliers face a potential hold–up problem. We study the equilibrium mode of organization when inputs are fully or partially specialized. We consider how the degree of competition in the market and other parameters affect the equilibrium choices, and how the equilibrium compares with the efficient allocation.

1998

In this paper we study how aggregate output responds to the arrival of a new General Purpose Technology (GPT) by looking at adjustment mechanisms that operate through labor markets. We show that under a wide set of circumstances the arrival of a new GPT that raises long–run output can trigger a recession in the short–run. Furthermore, we characterize features of the GPT that produce a cyclical adjustment path. An initial recession occurs whenever a higher education level is required to operate the new GPT. But a recession can also occur when the new GPT has lower educational requirements. A cyclical adjustment path is more likely when inexperienced workers are less productive with the new technology and the faster productivity rises with experience in the new sector.

Helpman, Elhanan. 1998. “Lobbying and Legislative Bargaining”. Abstract

We examine the effects of the interaction between lobbying and legislative bargaining on policy formation. Two systems are considered: a US–style congressional system and a European–style parliamentary system. First, we show that the policies generated are not intermediate between policies that would result from pure lobbying or from pure legislative bargaining. Second, we show that in congressional systems the resulting policies are strongly skewed in favor of the agenda–setter. In parliamentary systems they are skewed in favor of the coalition, but within the coalition there are many possible outcomes (there are multiple equilibria) with the agenda–setter having no particular advantage. Third, we show that equilibrium contributions are very small, despite the fact that lobbying has a marked effect on policies.

1997

Countries differ greatly in R&D spending, and these differences are particularly striking when comparing developed with developing countries. The paper examines the extent to which the benefits of R&D are concentrated in the investing countries. It is argued that significant benefits spill over to other countries in the world. The argument is supported by quantitative estimates of such cross–country effects.