Publications by Type: Unpublished

2007
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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Cooper, Richard N. 2007. “Living with Global Imbalances”. Abstract

The U.S. economy and the economies of the rest of the world intersect through international transactions. These have received more attention in the Brookings Papers, although again largely with a U.S. focus. I will address this intersection with respect to the large global imbalances that exist today, although I will deviate from the usual practice here by adopting a rest-of-the-world rather than a U.S. perspective.

In this brief paper I want to cast doubt on two related propositions that are widely accepted as truths: that Americans save too little, and that the U.S. current account deficit is unsustainably large, risking a disorderly adjustment that would be damaging to the world economy in the relatively near (but usually unspecified) future. These remarks should not be treated as new truths, but as plausible alternative hypotheses about how the world works these days, how we reached our current circumstances, and what the future may bring.

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Also Brookings Papers on Economic Activity, 2:2007.

Desai, Mihir A., Pol Antràs, and C. Fritz Foley. 2007. “Multinational Firms, FDI Flows and Imperfect Capital Markets”. Abstract

This paper examines how costly financial contracting and weak investor protection influence the cross-border operational, financing and investment decisions of firms. We develop a model in which product developers have a comparative advantage in monitoring the deployment of their technology abroad. The paper demonstrates that when firms want to exploit technologies abroad, multinational firm (MNC) activity and foreign direct investment (FDI) flows arise endogenously when monitoring is nonverifiable and financial frictions exist. The mechanism generating MNC activity is not the risk of technological expropriation by local partners but the demands of external funders who require MNC participation to ensure value maximization by local entrepreneurs. The model demonstrates that weak investor protections limit the scale of multinational firm activity, increase the reliance on FDI flows and alter the decision to deploy technology through FDI as opposed to arm’s length licensing. Several distinctive predictions for the impact of weak investor protection on MNC activity and FDI flows are tested and confirmed using firm-level data.

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Also NBER Working Paper No. 12855.

Antràs, Pol, Mihir A. Desai, and C. Fritz Foley. 2007. “Multinational Firms, FDI Flows and Imperfect Capital Markets”. Abstract

This paper examines how costly …nancial contracting and weak investor protection in‡uence the cross-border operational, …nancing and investment decisions of …rms. We develop a model in which product developers can play a useful role in monitoring the deployment of their technology abroad. The analysis demonstrates that when …rms want to exploit technologies abroad, multinational …rm (MNC) activity and foreign direct investment (FDI) ‡ows arise endogenously when monitoring is nonveri…able and …nancial frictions exist. The mechanism generating MNC activity is not the risk of technological expropriation by local partners but the demands of external funders who require MNC participation to ensure value maximization by local entrepreneurs. The model demonstrates that weak investor protections limit the scale of multinational …rm activity, increase the reliance on FDI ‡ows and alter the decision to deploy technology through FDI as opposed to arm’s length licensing. Several distinctive predictions for the impact of weak investor protection on MNC activity and FDI ‡ows are tested and con…rmed using …rm-level data.

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Antràs, Pol, and Robert W. Staiger. 2007. “Offshoring and the Value of Trade Agreements”. Abstract

We study the trade policy choices of governments in an environment in which some of the trade ‡flows being taxed or subsidized involve the exchange of customized inputs, and the contracts governing these transactions are incomplete. We show that the second-best policies that emerge in this environment entail free trade in fi…nal goods but not in intermediate inputs, since import or export subsidies targeted to inputs can alleviate the international hold-up problem. We next show that the Nash equilibrium policy choices of governments do not coincide with internationally efficient choices, and that the Nash policies imply an inefficiently low level of intermediate input trade across countries. The reason is that in our environment trade policy choices serve a dual role: they can enhance investment by suppliers but, because of ex-post bargaining over prices, they can also be used to redistribute pro…ts across countries. The inefficiencies inherent in the Nash policy choices of governments not only result in suboptimal input subsidies, but also in positive distortions in fi…nal-good prices, even when countries cannot affect world (untaxed) prices in those goods. As a result, an international trade agreement that brings countries to the efficiency frontier will necessarily increase trade in inputs, but it may require a reduction in …final-goods trade. When governments are not motivated by the impact of their policies on ex-post negotiated international input prices, the resulting policy choices are efficient, and hence a modifi…ed terms-of-trade interpretation of the purpose of trade agreements can be offered, but only when governments maximize real national income. If governments preferences are sensitive to political economy (distributional) concerns, the purpose of a trade agreement becomes more complex, and cannot be reduced to solving a simple terms-of-trade problem.

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The paper investigates the effects of checks and balances on corruption. Within a presidential system, effective separation of powers is achieved under divided government, with the executive and legislative branches being controlled by different political parties. When government is unified, no effective separation exists even within a presidential system, but, we argue, can be partially restored by having an accountable judiciary. Our empirical findings show that divided government and elected, rather than appointed, state supreme court judges are associated with lower corruption and, furthermore, that the effect of an accountable judiciary is stronger under unified government, where government cannot control itself.

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Building on recent work in evolutionary psychology, we predict substantial gender-related differences in demand for scandalous political news. We argue that individuals’ self-images can alter their motivation to seek information about potential sexual competitors and mates, even when those figures are “virtual”—appearing in mass media. Individuals perceiving themselves as attractive will seek negative news about attractive same-gender individuals, whereas individuals perceiving themselves as unattractive will seek negative information about the opposite gender. We test our hypotheses in three ways. First, we investigate partially disaggregated national opinion data regarding news attention. Second, we conduct an experiment in which we asked participants to choose the two most interesting stories from a menu of headlines. We varied the gender and party affiliation of the individual featured in the story. Each participant saw a headline promoting a DUI arrest of an attractive male or female “rising star” from one of the two parties. Finally, we repeat the experiment with a national sample, this time also varying the valence of the tabloid story. We find strong correlations between respondents’ self-image and their likelihood of seeking and distributing positive or negative information about “virtual” competitors and mates.

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It is now nearly five years since President Bush promulgated what has become known as "the Bush Doctrine". The seminal document, published above the President’s signature twelve months after the terrorist attacks of September 11, 2001, and entitled National Security Strategy of the United States, argued that because "deliverable weapons of mass destruction in the hands of a terror network or murderous dictator … constitute as grave a threat as can be imagined", the President as commander-in-chief should, at his discretion, "act preemptively" to forestall or prevent any such threat. "As a matter of common sense and self-defense", the President stated, the United States would “act against such emerging threats before they are fully formed” and before they reached America’s borders. NSS-2002 asserted not only the principle of preemption but also the principle of unilateralism. "While the United States will constantly strive to enlist the support of the international community," the document declared, "we will not hesitate to act alone, if necessary..." At the time, and subsequently, the two principles of preemption and unilateralism were widely criticized as dangerous novelties in American foreign policy.

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Research has shown that messages of intra-party harmony tend to be ignored by the news media, while internal disputes, especially within the governing party, generally receive prominent coverage. We examine how messages of party conflict and cooperation affect public opinion regarding national security, as well as whether and how the reputations of media outlets matter. We develop a typology of partisan messages in the news, determining their likely effects based on the characteristics of the speaker, listener, news outlet, and message content. We hypothesize that criticism of the president by his fellow partisan elites should be exceptionally damaging (especially on a “conservative” media outlet), while opposition party praise of the president should be the most helpful (especially on a “liberal” outlet). We test our hypotheses through an experiment and a national survey on attitudes regarding the Iraq War. The results show that credible communication (i.e., “costly” rhetoric harmful to a party) is more influential than “cheap talk” in moving public opinion. Ironically, news media outlets perceived as ideologically “hostile” can actually enhance the credibility of certain messages relative to “friendly” news sources.

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Beckfield, Jason. 2007. “The Social Structure of the World Polity”. Abstract

The world polity is conceptualized as a network of international organizations and states. A rapidly growing sociological literature argues that many policies of modern states, such as educational expansion, environmental protection, human rights, and economic liberalization, are shaped by embeddedness in this network, and yet the structure of this network itself is rarely examined. This absence of empirical analysis of the social structure of the world polity is surprising, given that world polity theory, in contrast to traditional realist approaches, argues that the world polity should be an increasingly dense, even, flat field of association. This paper tests these structural claims using a formal network analysis of the complete population of intergovernmental organizations as it has evolved since 1820. The world polity is a bipartite network: States are interlinked through memberships in organizations, and organizations are interlinked through their member states. Analysis of this network structure reveals growing fragmentation—not integration—in the world polity driven by intergovernmental organizations that have become less densely connected by common member states, increasingly centralized around a few prominent organizations, and increasingly heterogeneous in structural position. This fragmentation reflects a recent rise in the regionalization of the world polity.

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This paper establishes a robust stylized fact: changes in the revealed comparative advantage of nations are governed by the pattern of relatedness of products at the global level. As countries change their export mix, there is a strong tendency to move towards related goods rather than to goods that are farther away. The pattern of relatedness of products is only very partially explained by similarity in broad factor or technological intensities, suggesting that the relevant determinants are much more product-specific. Moreover, the pattern of relatedness of products exhibits very strong heterogeneity: there are parts of this ‘product space’ that are dense while others are sparse. This implies that countries that are specialized in a dense part of the product space have an easier time at changing their revealed comparative advantage than countries that are specialized in more disconnected products.

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Also CID Working Paper No. 146.

Aghion, Philippe, Drew Fudenberg, and Richard Holden. 2007. “Subgame Perfect Implementation with Almost Perfect Information”. Abstract

The theory of incomplete contracts has been recently questioned using or extending the subgame perfect implementation approach of Moore and Repullo (1988). We consider the robustness of this mechanism to the introduction of small amounts of asymmetric information. Our main result is that the mechanism may not yield (even approximately) truthful revelation as the amount of asymmetric information goes to zero.

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Desai, Mihir A., and Dhammika Dharmapala. 2007. “Taxes, Institutions and Foreign Diversification Opportunities”. Abstract

Investors can access foreign diversification opportunities through either foreign portfolio investment (FPI) or foreign direct investment (FDI). By combining data on US outbound FPI and FDI, this paper analyzes whether the composition of US outbound capital flows reflect efforts to bypass home country tax regimes and weak host country investor protections. The cross-country analysis indicates that a 10% decrease in a foreign country’s corporate tax rate increases US investors’ equity FPI holdings by 21%, controlling for effects on FDI. This suggests that the residual tax on foreign multinational firm earnings biases capital flows to low corporate tax countries toward FPI. A one standard deviation increase in a foreign country’s investor protections is shown to be associated with a 24% increase in US investors’ equity FPI holdings. These results are robust to various controls, are not evident for debt capital flows, and are confirmed using an instrumental variables analysis. The use of FPI to bypass home country taxation of multinational firms is also apparent using only portfolio investment responses to within-country corporate tax rate changes in a panel from 1994 to 2005. Investors appear to alter their portfolio choices to circumvent home and host country institutional regimes.

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Also NBER Working Paper No. 13132.

Antràs, Pol, and Ricardo J. Caballero. 2007. “Trade and Capital Flows: A Financial Frictions Perspective”. Abstract

The classical Heckscher-Ohlin-Mundell paradigm states that trade and capital mobility are substitutes, in the sense that trade integration reduces the incentives for capital to ‡ow to capital-scarce countries. In this paper we show that in a world with heterogeneous …nancial development, the classic conclusion does not hold. In particular, in less …nancially developed economies (South), trade and capital mobility are complements. Within a dynamic framework, the complementarity carries over to (…nancial) capital ‡ows. This interaction implies that deepening trade integration in South raises net capital in‡ows (or reduces net capital out‡ows). It also implies that, at the global level, protectionism may back…re if the goal is to rebalance capital ‡ows, when these are already heading from South to North. Our perspective also has implications for the e¤ects of trade integration on factor prices. In contrast to the Heckscher- Ohlin model, trade liberalization always decreases the wage-rental in South: an anti-Stolper- Samuelson result.

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Satisfactory calculations of the welfare cost of aggregate consumption uncertainty require a framework that replicates major features of asset prices and returns, such as the high equity premium and low risk-free rate. A Lucas-tree model with rare but large disasters is such a framework. In the baseline simulation, the welfare cost of disaster risk is large—society would be willing to lower real GDP by about 20% each year to eliminate all disaster risk. In contrast, the welfare cost from usual economic fluctuations is much smaller, though still important—corresponding to lowering GDP by around 1.5% each year.

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2006

On March 23, 2006, we published an article titled “The Israel Lobby” in the London Review of Books. A slightly longer, fully documented version titled “The Israel Lobby and U.S. Foreign Policy” was posted simultaneously on the Faculty Working Paper website of Harvard’s John F. Kennedy School of Government. In these two pieces, we argued that unconditional U.S. support for Israel could not be justified on either strategic or moral grounds, and that it was primarily due to the political effectiveness of the loose coalition of groups and individuals that make up the “Israel lobby.” We also argued that the lobby had encouraged the United States to adopt policies that were neither in the America’s national interest nor in Israel’s long-term interest.

We knew that our article would be controversial, because it addressed a set of important issues that few mainstream scholars or journalists had examined. We also knew it would be criticized, because it challenged a number of powerful individuals and organizations and cast doubt on a set of historical claims and policy positions to which these individuals and organizations are strongly committed. We also thought it likely that we would be personally attacked, because we were critical of Israeli policy and of Washington’s unconditional support for Israel, and we had observed what had happened to others who had taken similar positions in the past.

We have followed the criticisms closely and have provided brief responses to some of them in two letters to the London Review of Books (May 11 and May 25, 2006), a symposium on the Israel lobby in Foreign Policy (July/August 2006) and a letter on that symposium in Foreign Policy (September/October 2006). We also published a slightly revised version of the original Harvard Working Paper in the Fall 2006 issue of the journal Middle East Policy. This clarified our position on several points, but our main position was unaltered.

We live in a world where trade policies are liberal and immigration policies are restrictive. Recent globalization discussions give the impression that this policy difference is a modern phenomenon (Wellisch and Walz 1998; Hillman and Weiss 1999), implying that trade policy was liberal and open a century ago. This conventional view is quite wrong. Instead, while most labor-scarce economies today have open trade and closed immigration policies, a century ago the labor-scarce economies had just the opposite, open immigration and closed trade policies. Thus, the inverse policy correlation has persisted over almost two centuries.

Why have policies towards the movement of labor and goods always been so different in labor-scarce economies? After all, importing labor-intensive products is pretty much like importing labor. So shouldn’t trade and migration policies reinforce each other? Consider for a moment the simple 2×2×2 model in which trade is driven by factor endowments. Furthermore, let us think about the country where labor is relatively scarce since that’s the country for which immigration policies matter. Suppose such a country puts up a tariff to protect the scarce factor, labor. In the absence of immigration, wages will increase. But if labor is allowed to move across borders, the tariff-induced wage increase will be undone by immigration (Mundell 1957). By the same logic, an immigration policy designed to protect domestic labor will be undone by free trade: the desired effect will only be achieved by restricting both trade and immigration. Simple theory predicts that immigration and import restriction should go together. In fact, they never have. Therein lies the policy paradox.

In the first global century before 1914, trade and especially migration had profound effects on both low-wage, labor abundant Europe and the high-wage, labor scarce New World. Those global forces contributed to a reduction in unskilled labor scarcity in the New World and to a rise in unskilled labor scarcity in Europe. Thus, it contributed to rising inequality in overseas countries, like the United States, and falling inequality in most of Europe. Falling unskilled labor scarcity and rising skill scarcity contributed to the high school revolution in the US. Rising unskilled scarcity also contributed to the primary schooling and literacy revolution in Europe. Under what conditions would we expect the same responses to globalization in today’s world? This paper argues that modern debates about inequality and schooling responses to globalization should pay more attention to history.
Paper presented at the Conference on Migration, Trade and Development, Dallas (October 6, 2006). This paper draws from a recent book with Timothy J. Hatton, Global Migration and the World Economy: Two Centuries of Policy and Performance (MIT Press 2005). It has also been influenced by participant’s comments at the Center for Global Development Workshop on Emigration’s Impact on the Third World (September 11, 2006).
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Rogoff, Kenneth S, Philippe Aghion, Philippe Bacchetta, and Romain Ranciere. 2006. “Exchange Rate Volatility and Productivity Growth: The Role of Financial Development”. Abstract
This paper offers empirical evidence that real exchange rate volatility can have a significant impact on long-term rate of productivity growth, but the effect depends critically on a country’s level of financial development. For countries with relatively low levels of financial development, exchange rate volatility generally reduces growth, whereas for financially advanced countries, there is no significant effect. Our empirical analysis is based on an 83 country data set spanning the years 1960-2000; our results appear robust to time window, alternative measures of financial development and exchange rate volatility, and outliers. We also offer a simple monetary growth model in which real exchange rate uncertainty exacerbates the negative investment effects of domestic credit market constraints. Our approach delivers results that are in striking contrast to the vast existing empirical exchange rate literature, which largely finds the effects of exchange rate volatility on real activity to be relatively small and insignificant.
Also NBER Working Paper 12117.
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Rogoff, Kenneth S, Ayhan M Kose, Eswar Prasad, and Shang-Jin Wei. 2006. “Financial Globalization, A Reappraisal”. Abstract
The literature on the benefits and costs of financial globalization for developing countries has exploded in recent years, but along many disparate channels with a variety of apparently conflicting results. There is still little robust evidence of the growth benefits of broad capital account liberalization, but a number of recent papers in the finance literature report that equity market liberalizations do significantly boost growth. Similarly, evidence based on microeconomic (firm- or industry-level) data shows some benefits of financial integration and the distortionary effects of capital controls, while the macroeconomic evidence remains inconclusive. At the same time, some studies argue that financial globalization enhances macroeconomic stability in developing countries, while others argue the opposite. We attempt to provide a unified conceptual framework for organizing this vast and growing literature, particularly emphasizing recent approaches to measuring the catalytic and indirect benefits to financial globalization. Indeed, we argue that the indirect effects of financial globalization on financial sector development, institutions, governance, and macroeconomic stability are likely to be far more important than any direct impact via capital accumulation or portfolio diversification. This perspective explains the failure of research based on crosscountry growth regressions to find the expected positive effects of financial globalization and points to newer approaches that are potentially more useful and convincing.
Revised version of International Monetary Fund, Working Paper WP/06/189, August 2006.
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