Periodic Reporting for period 4 - MIMAT (From Micro to Macro: Aggregate Implications of Firm-Level Heterogeneity in International Trade)
Okres sprawozdawczy: 2023-04-01 do 2024-03-31
What determines the patterns of international trade and the associated welfare effects? Can individual incentives to trade diverge from societal objectives? Should governments intervene to promote or restrict international transactions? Questions like these have recently gained new salience, in Europe and elsewhere, due to renewed protectionist pressures and resurgent nationalistic tendencies arising from diffuse disenchantment with globalization.
The aim of the research project is to highlight key dimensions along which the answers to these questions obtained from conventional trade models with homogenous firms should be revisited in the light of pervasive firm heterogeneity. In particular, the project pursues four specific objectives through four integrated work packages (WPs) providing new insights on how firm heterogeneity affects: the ability of markets to deliver allocative efficiency (WP1); the design of optimal multilateral trade policies (WP2); The comparative advantages of countries (WP3); the capabilities of a country as an exporter (WP4).
In particular, WP1 investigates whether the allocative inefficiency (“misallocation”) determined by firm heterogeneity in the presence of pricing distortions is quantitatively relevant for a country’s aggregate economic performance, and whether economic integration reduces or exacerbates such misallocation. WP2 develops the theoretical implications of firm heterogeneity for trade policy, with special emphasis on the cooperative design of optimal multilateral trade agreements aimed at maximizing the joint welfare of all trade partners. WP3 studies how country, sector and firm characteristics interact to determine countries’ responses to trade liberalization. WP4 investigates the distinct role of firm heterogeneity in determining a country’s ability to export through the shape of the productivity distribution of its producers.
The aim of the research project is to highlight key dimensions along which the answers to these questions obtained from conventional trade models with homogenous firms should be revisited in the light of pervasive firm heterogeneity. In particular, the project pursues four specific objectives through four integrated work packages (WPs) providing new insights on how firm heterogeneity affects: the ability of markets to deliver allocative efficiency (WP1); the design of optimal multilateral trade policies (WP2); The comparative advantages of countries (WP3); the capabilities of a country as an exporter (WP4).
In particular, WP1 investigates whether the allocative inefficiency (“misallocation”) determined by firm heterogeneity in the presence of pricing distortions is quantitatively relevant for a country’s aggregate economic performance, and whether economic integration reduces or exacerbates such misallocation. WP2 develops the theoretical implications of firm heterogeneity for trade policy, with special emphasis on the cooperative design of optimal multilateral trade agreements aimed at maximizing the joint welfare of all trade partners. WP3 studies how country, sector and firm characteristics interact to determine countries’ responses to trade liberalization. WP4 investigates the distinct role of firm heterogeneity in determining a country’s ability to export through the shape of the productivity distribution of its producers.
All four objectives of the project have been achieved. Its results are contained in 11 papers at different stages of publication, 2 mimeos and 2 works in progress, and have been presented at 44 scientific events despite the pandemic. The research team transferred resulting knowledge to the Competitiveness Research Network (CompNet), whose funding members include the European Central Bank (ECB), the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB), the European Commission (DG EcFin and DG GROW), France Stratégie, the Halle Institute for Economic Research (IWH), Tinbergen Institute, the German Council of Economic Experts (Sachverständigenrat), the European Stability Mechanism (ESM) and the German Federal Ministry for Economic Affairs and Climate Action (BMBK). Knowledge has also been transmitted to the World Bank.
The main achievements of the four WPs with respect to the existing literature the following. WP1 has developed a novel general equilibrium trade model of monopolistic competition with heterogeneous agents that allows for variable markups and income effects in a multi-country multi-sector setup without sacrificing closed-form insights for most equilibrium outcomes. The model sheds new light on the welfare changes induced by resource shocks that are invisible in quantitative trade models with monopolistic competition and heterogeneous firms if one relies on the pervasive assumption of constant markups due to demand exhibiting constant elasticity of substitution. In an extended version of the model with worker heterogeneity and firm monopsony power in the labor market, it has also contributed to a deeper understanding of the economic origins of the growing backlash against globalization pointing out crucial interactions between globalization and technological change. The work package has explored these implications through the investigation of the origin and propagation of productivity shocks and technological change in networks of heterogeneous workers and firms. Finally, the work package has developed a fundamental result on the conditions under which in a closed economy misallocation due to variable markups with monopolistically competitive heterogeneous firms can be corrected by policy tools that do not discriminate across firms, which may be of crucial practical importance.
WP2 has shown how with monopolistically competitive heterogeneous firms multilateral trade policy can be optimally designed in a world in which countries differ in terms of market access and technology, and firms with different productivity differ in terms of market power. In general, optimal policy has to be discriminatory. However, the work package has found that, under analogous conditions to those discussed in WP1, there exists a set of combinations of coordinated policy tools that can remove the misallocation due to variable markups in all countries without discriminating across firms, no matter whether domestic or foreign.
WP3 has developed an original model of multi-product firms, derived the specific demand conditions needed to generate productivity changes at the macro level from within-sector and within-firm factor reallocations at the micro level, and shown that the induced macro productivity changes can be empirically sizeable. It has also shown, theoretically and empirically, that those reallocations can affect the international patterns of comparative advantage and thereby the resulting welfare effects of trade policies in substantial ways.
WP4 has developed a novel theory-based approach to the gravity estimation of trade flows that takes full account of the implications of the selection of heterogeneous producers into exporting. It has emphasized the interplay between aggregate exports and the distribution of producers’ productivity as a crucial determinant of a country’s capabilities as an exporter. Moreover, the work package has shown that gravity regressions derived from the theoretical framework adopted in WP 1 and WP3 has richer, empirically relevant implications for the estimation of trade flows than standard models with constant elasticity of substitution in demand.
The main achievements of the four WPs with respect to the existing literature the following. WP1 has developed a novel general equilibrium trade model of monopolistic competition with heterogeneous agents that allows for variable markups and income effects in a multi-country multi-sector setup without sacrificing closed-form insights for most equilibrium outcomes. The model sheds new light on the welfare changes induced by resource shocks that are invisible in quantitative trade models with monopolistic competition and heterogeneous firms if one relies on the pervasive assumption of constant markups due to demand exhibiting constant elasticity of substitution. In an extended version of the model with worker heterogeneity and firm monopsony power in the labor market, it has also contributed to a deeper understanding of the economic origins of the growing backlash against globalization pointing out crucial interactions between globalization and technological change. The work package has explored these implications through the investigation of the origin and propagation of productivity shocks and technological change in networks of heterogeneous workers and firms. Finally, the work package has developed a fundamental result on the conditions under which in a closed economy misallocation due to variable markups with monopolistically competitive heterogeneous firms can be corrected by policy tools that do not discriminate across firms, which may be of crucial practical importance.
WP2 has shown how with monopolistically competitive heterogeneous firms multilateral trade policy can be optimally designed in a world in which countries differ in terms of market access and technology, and firms with different productivity differ in terms of market power. In general, optimal policy has to be discriminatory. However, the work package has found that, under analogous conditions to those discussed in WP1, there exists a set of combinations of coordinated policy tools that can remove the misallocation due to variable markups in all countries without discriminating across firms, no matter whether domestic or foreign.
WP3 has developed an original model of multi-product firms, derived the specific demand conditions needed to generate productivity changes at the macro level from within-sector and within-firm factor reallocations at the micro level, and shown that the induced macro productivity changes can be empirically sizeable. It has also shown, theoretically and empirically, that those reallocations can affect the international patterns of comparative advantage and thereby the resulting welfare effects of trade policies in substantial ways.
WP4 has developed a novel theory-based approach to the gravity estimation of trade flows that takes full account of the implications of the selection of heterogeneous producers into exporting. It has emphasized the interplay between aggregate exports and the distribution of producers’ productivity as a crucial determinant of a country’s capabilities as an exporter. Moreover, the work package has shown that gravity regressions derived from the theoretical framework adopted in WP 1 and WP3 has richer, empirically relevant implications for the estimation of trade flows than standard models with constant elasticity of substitution in demand.
The research project has made substantial progress beyond the state-of-the-art by highlighting key dimensions along which the acquired wisdom of trade models with homogenous firms on how trade affects countries’ aggregate economic performance should be revisited in the light of firm heterogeneity. In particular, it has provided new insights on how firm heterogeneity affects: the ability of markets to deliver allocative efficiency (WP1); the design of optimal multilateral trade policies (WP2); the comparative advantages of countries (WP3); the capabilities of a country as an exporter (WP4).
The ultimate ambition of the project is to contribute to a paradigmatic shift and a new synthesis in the field of international trade by showing how the integration of firm heterogeneity into trade models should change the way economists and policy makers understand the patterns, the sources and the welfare effects of international trade as well as the impact and the optimal design of trade policies. All work packages have made important contributions in that direction. The extent to which the project will eventually fulfill its ambition will depend on finalizing the publication of their findings in highly regarded scientific outlets in the next few years.
The ultimate ambition of the project is to contribute to a paradigmatic shift and a new synthesis in the field of international trade by showing how the integration of firm heterogeneity into trade models should change the way economists and policy makers understand the patterns, the sources and the welfare effects of international trade as well as the impact and the optimal design of trade policies. All work packages have made important contributions in that direction. The extent to which the project will eventually fulfill its ambition will depend on finalizing the publication of their findings in highly regarded scientific outlets in the next few years.