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Note that the asterisk denotes the presenters of the papers.


- Antonio Accetturo (Bank of Italy), Matteo Bugamelli (Bank of Italy), Andrea Lamorgese* (Bank of Italy) and Andrea Linarello (UPF and Bank of Italy)

“Innovation and Trade. Evidence from Italian manufacturing firms.”

Abstract: Firms exposed to higher foreign demand have larger incentives to innovate, if market size matters for innovation. We test this hypothesis using Italian data from a representative sample of manufacturing firms. Our measure of innovation is the firm-level number of patent applications to the European Patent Office. Using the dynamics of world imports as an exogenous shock to sector-province exports, we build an instrument for firm-level exports and find that passing from the 25th to the 75th percentile of the export distribution causes an increase of the probability of applying for a patent by half a standard deviation. This effect is driven by larger and more productive firms.

JEL Codes: F10; O33

Keywords: Exports, Innovation, Patents, Firm Size, Productivity                                       


- Johannes Boehm* (London School of Economics, CEP)

“Contract Enforcement Costs, Productivity, and Industry Structure Across Countries.”

Abstract: Legal institutions affect economic outcomes. But how much? This paper quantifies the importance of costly supplier contract enforcement for aggregate productivity and welfare. I embed a contracting game between a buyer and a supplier into a general-equilibrium macro-model. Contract enforcement costs lead suppliers to underperform. Thus firms will perform more of the production process in-house instead of outsourcing it. On a macroeconomic scale, countries with slow and costly courts should buy relatively less inputs from sectors whose products are more specific to the buyer-seller relationship. I test this hypothesis using cross-country regressions. Using microdata on case law from the United States I construct a new measure of relationship-specificity by sector-pairs. This allows me to control for productivity difference across countries and sectors and causally identify the effect of contracting frictions on industry structure. I proceed to structurally estimate the key parameters of my macro-model. A set of counterfactual experiments investigates the role of contracting frictions in shaping productivity and income per capita across countries. Setting all countries' enforcement costs to the level of the United States would increase real income by an average of 9.5 percent, and decrease consumer prices by an average of 3.5 percent.

JEL Codes: D23; E02; O11; O43; L16; L24; K12

Keywords: Contract enforcement costs; Contracting frictions; Outsourcing; Misallocation; Industry structure; Technology adoption


- Pamela Bombarda* (THEMA - Université de Cergy-Pontoise)

“Multinational Firms, Exports and Intra-Firm Trade”

Abstract: We propose a model that features heterogeneous firms, multinational firms, exporters and intra-firm trade in a general equilibrium framework. In our framework each foreign affiliate has to import an intermediate input from the home headquarter due to technological appropriability issues (transfer of capabilities from the home headquarter). The model delivers gravity equations highlighting the complementarity existing between trade and FDI strategies. The attempt of this paper is to shed new light on how trade liberalization reshapes firms' global sourcing strategies and affect welfare. We will argue that, for certain wage differentials, gains from trade can be higher due to the additional line of trade (intra-firm trade).

JEL Codes: F12; F23;

Keywords: intra-firm trade, multinational firms, export, wages.


- Matthieu Crozet (Paris School of Economics and CEPII) and Federico Trionfetti* (Aix-Marseille University, CNRS and EHESS)

“Firm-Level Comparative Advantage”

Abstract: We study the consequences of heterogeneity in factor intensity on firms performance. We show that Heckscher-Ohlin comparative advantage begets a comparative advantage at firm-level. The latter is measured by comparing relative marginal costs; i.e., comparing the marginal cost of a firm relative to the average in its country-industry with the same ratio measured for a firm in a different country-industry. For any two firms whose capital intensity is, for instance, one percent above (below) the respective country-industry average, the relative marginal cost of the firm in the capital-intensive industry of the capital abundant country is lower (higher) than that of the other firm. Our empirical analysis, conducted using data for a large panel of European firms, supports this prediction. These theoretical and empirical results provide a novel approach to the verification of the Heckscher- Ohlin theory and new evidence on its validity.

JEL Codes: F1

Keywords: Factor intensity, Firm heterogeneity, Test of trade theories.


- Francesco Di Comite* (Université Catholique de Louvain and European Commission), Antonella Nocco (University of Salento) and Gianluca Orefice (CEPII)

“The impact of tariffs and PTAs on trade flows and the wage gap”

Abstract: In this paper we develop a three-country model with variable elasticity of substitution and vertical linkages to study the impact of bilateral tariff reductions and preferential trade agreements (PTAs) on trade creation, trade diversion and labor market outcomes. Focusing on the short run, our model predicts that bilateral tariff reductions and PTAs increase trade flows between the involved countries diverting it away from third countries because of tougher competition on the integrating markets. It also predicts that unskilled employment may decrease due to layoffs on the lines of production serving the domestic segment and that the wage gap between skilled and unskilled workers increase. We test the model’s predictions using two complementary datasets: the first on bilateral trade flows, covering 186 countries from 1989 to 2007; the second on wage and employment levels by level education for OECD countries from 1970 to 2005. Our empirical analysis provides results in line with the predictions and suggest that vertical linkages may be an important element to understand the impact of PTAs on trade flows and labor markets.

JEL Codes: F12; F16; J31

Keywords: PTAs - Vertical linkages - Trade diversion - Trade creation - Wage gap.


- Bjarne S. Jensen* (University of Southern Denmark)

“Comparative Cost and Factor Endowments : The International General Equilibrium Solutions for two Large Trading Economies.”

Abstract: The Ricardian principle of ‘comparative advantage’ refers to relative costs (relative autarky prices) compared to another country. The relative cost (price) functions can be obtained directly from specified cost functions with global regularity properties. The Stolper-Samuelson Theorem is embedded in relative cost functions and their numerical inelasticity property. Factor price equalization represents extreme parametric versions of the relative cost functions. Moreover a relative cost function connects isoquant tangents of contract curves with the tangents (shape) of production possibility curves. The relative cost function and CD consumer preferences are combined with Ohlin‘s ‘mutual-interdependence theory of general equilibrium pricing in solving the international general equilibrium (2x2x2) system (endogenous terms of trade) with two large trading economies.

JEL Codes: F10, F11, D51

Keywords: Comparative cost, endowments, autarky, world market prices


- Mauro Lanati* (University of Pisa)

“Estimating the elasticity of trade: the trade share approach.”

Abstract: Recent theoretical work on international trade emphasizes the importance of trade elasticity as the fundamental statistic needed to conduct welfare analysis. Eaton and Kortum (2002) proposed a two-step method to estimate this parameter, where exporter fixed effects are regressed on proxies for technology and wages. Within the same Ricardian model of trade, the trade share provides an alternative source of identication for the elasticity of trade. Following Santos Silva and Tenreyro (2006) both trade share and EK models are estimated using OLS and Poisson PML to test for the presence of heteroskedasticity-type-of-bias. The evidence from both specifications suggests that the bias in the OLS estimates significantly impacts the magnitude of trade cost elasticity. The welfare analysis reveals that the resulting extreme variability of the trade cost elasticity and the imposition of a common manufacturing share parameter for all countries generate substantial distortions in the calculation of benefits from trade.

JEL Codes: F10, F11, F14

Keywords: trade cost elasticity; gravity model; competitiveness equation; trade share; gains from international trade


- Finn Martensen* (Center of European Economic Research (ZEW) Mannheim and University of Konstanz)

“Globalization, Unemployment, and Product Cycles: Short and Long Run Effects”

Abstract: In a North-South product cycle model, I study the short- and long-run effects on Northern unemployment of (i) trade liberalization, (ii) tighter international patent protection, and (iii) Southern market expansion. Bilateral trade liberalization leads to both short- and long-run decreases in unemployment. Unilateral Northern trade liberalization increases unemployment in the short and the long run, while Southern trade liberalization has stronger opposite effects. Surprisingly, tighter international patent protection yields a short-run unemployment increase, although it decreases unemployment in the long run. An expansion of the Southern market yields a short- and long-run decrease in unemployment.

JEL Codes: E24, F16, F43, F62, F66, O31, O34

Keywords: Product Cycles, Trade Liberalization, International Patent Protection, Unemployment


- Antonella Nocco* (University of Salento), Gianmarco I.P. Ottaviano (London School of Economics and CEPR) and Matteo Salto (European Commission)

“Monopolistic competition and optimum product selection: why and how heterogeneity matters”

Abstract: After some decades of relative oblivion, the interest in the optimality properties of monopolistic competition has recently re-emerged due to the availability ofan appropriate and parsimonious framework to deal with firm heterogeneity. Within this framework we show that non-separable utility, variable demand elasticity and endogenous firm heterogeneity cause the market equilibrium to err in many ways, concerning the number of products, the size and the choice of producers, the overall size of the monopolistically competitive sector. More crucially with respect to the existing literature, we also show that the extent of the errors depends on the degree of firm heterogeneity. In particular, the inefficiency of the market equilibrium seems to be largest when selection among heterogenous firms is needed most, that is, when there are relatively many firms with low productivity and relatively few firms with high productivity.

JEL Codes: D4, D6, F1, L0, L1

Keywords: heterogeneity, monopolistic competition, product diversity, selection, welfare.


- Thomas Sampson* (London School of Economics and CEP)

“Dynamic Selection and the New Gains from Trade with Heterogeneous Firms”

Abstract: This paper develops an open economy growth model in which firm heterogeneity increases the gains from trade. Technology spillovers from incumbent firms to entrants cause the productivity threshold for firm survival to grow over time as competition becomes tougher. By raising the profits of exporters, trade increases the entry rate and generates a dynamic selection effect that leads to higher growth. The gains from trade can be decomposed into: static gains that equal the total gains from trade in an economy without technology spillovers, and; dynamic gains that are strictly positive. Since trade raises growth through selection, not scale effects, the positive growth effect of trade vanishes when firms are homogeneous. Thus, firm heterogeneity creates a new source of dynamic gains from trade. Calibrating the model using U.S. data implies that dynamic selection approximately triples the gains from trade.


- Jacopo Zotti* (University of Trieste)

Outsourcing and economic decline in Italy. Is there any connexion?

Abstract: The decline of the Italian economy over the last two decades is widely documented. During this period, the global economy has become highly integrated and foreign outsourcing has turned into a standard practice for firms. While trade theory predicts benefits from the internationalization of production, Italy seems to have gained negligibly from it, or rather, to have lost. In a simple model, we show that this may be the case when competition policies are weak and productivity growth is poor. We study a small open economy with one oligopolistic and one competitive sector, which outsources part of its production process abroad. Deeper globalization entails lower trade costs of outsourcing. We show that welfare is an inverted U-shaped function of these costs. Hence, there is a level of trade costs, which maximizes utility. Below this threshold, the economy loses from globalization because the competitive sector overproduces, and the oligopolistic good has a higher marginal effect on welfare. Policies, which enhance competition and improve productivity in the competitive sector lower the threshold, and thus contribute to offset possible negative effects from deeper globalization.

JEL Codes: D43, D51, F12, F62, L13

Keywords: Cournot oligopoly, Italy’s economic decline, outsourcing, general equilibrium.