Labor Market Power and the Pro-competitive Gains from Trade

We build into a model of trade with market power in product markets and strategic complementarities in price-setting labor market power, strategic complementarities in wage-setting, and a rich structure of product and labor markets to study the pro-competitive gains from trade. We combine our model with confidential firm-level data from Australia to quantify the welfare and efficiency gains of higher exposure to international trade. We find that closing the economy to trade has significant and negative effects on welfare and aggregate labor productivity. In a perfectly competitive economy, where there is no firm market power, welfare losses are only 40% of the total effect which indicates that imperfect competition is the main driver behind these losses. Contrary to common belief, these losses are amplified by the presence of labor market power, which accounts for almost half of the total effect. We find that, at the aggregate level, the pro-competitive effect is well approximated by models of firm market power that leave aside strategic complementarities both in price- and wage-setting. However, these models hide how the losses materialize. Our results highlight the importance of market structure, firm competition, and strategic complementarities for the quantification of the gains from trade liberalizations.

Multinational Production and Trade Policy

with Sebastian Heise, Nicolo Rizzotti, and Felix Tintelnot

Multinational enterprises (MNEs) can respond to tariffs in ways that standard optimal-tariff theory ignores. Using confidential Census data on U.S. imports, we find that in response to the 2018–2019 tariffs, MNEs reduced their import volumes from affected countries more sharply than other firms, and lowered their related-party prices by more than their arm’s-length prices, suggesting transfer pricing. We develop a quantitative model with MNEs that set transfer prices on intra-firm shipments, and derive sufficient-statistic formulas for optimal tariffs. MNEs attenuate standard terms-of-trade effects through the endogenous relocation of production, generate profit-repatriation motives arising from profits earned abroad by domestic firms, break Lerner symmetry so that tariffs imperfectly substitute for missing export taxes, and erode the tariff base through transfer pricing. Taking all these channels into account, the optimal unilateral tariff for the U.S. is 8.7 percent, far below the 17.4 percent implied by the terms-of-trade motives alone.

The Back-Cover Quotes of the Journal of Political Economy, 1973–2023

with Julio J. Elías

Outside Options, Monopsony, and Product Market Power

with Hamid Firooz and Attila Gyetvai

Trade, Productivity and Welfare with Endogenous Customers

with Marcos Sorá and Laszlo Tetenyi

The Quantitative New Trade Model

with Yuyang Jiang, Konstantin Kucheryavyy, and Andrés Rodríguez-Clare

Optimal Import Tariffs: Ramsey and Myopic Planners in Large and Small Open Economies

Trade Policy and Global Sourcing: An Efficiency Rationale for Tariff Escalation

with Pol Antràs, Teresa C. Fort, and Felix Tintelnot

Journal of Political Economy: Macroeconomics, Vol. 2, No. 1, 2024

Import tariffs tend to be higher on final goods than inputs, a phenomenon referred to as tariff escalation. Despite its salience, existing research does not predict that tariff escalation increases welfare. We show that tariff escalation is usually welfare-improving when final-good production occurs under increasing returns to scale. In our vertical model, countries export inputs directly or by embodying them in final goods. The latter raises welfare if final-good efficiency is increasing in sector size, and a disproportionately high final-good tariff exploits this benefit. When tariffs are the only available instruments, this effect dominates input-tariff motives for most parameter values.

Bond Risk Premia and the Return Forecasting Factor

with Constantino Hevia and Martín Solá

Studies in Nonlinear Dynamics & Econometrics, Vol. 24, No. 1, 2020

The return forecasting factor is a linear combination of forward rates that seems to predict 1-year excess bond returns of bond of all maturities better than traditional measures obtained from the yield curve. If this single factor actually captures all the relevant fluctuations in bond risk premia, then it should also summarize all the economically relevant variations in excess returns considering different holding periods. We find that it does not. We conclude that including the return forecasting factor as the main driver of risk premia in a term structure model, as has been suggested, is not supported by the data.