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Gravity
and Information: Heterogeneous Firms, Exporter Networks and the ‘Distance
Puzzle’
Most recent
version (Oct. 2009): [PDF]
Older
version: EUI Working Paper 2007/51
Prize for
the best paper at the 6th GEP Annual
Postgraduate Conference, Nottingham, 2007 and award for the best
article in International Economics at the 7th RIEF Doctoral
Meetings, Rennes 2007.
Abstract: Distance effects in gravity equations
are high and non-decreasing. Given that technical change in transport
technology is biased in favor of long distances, this constitutes a
challenge for existing theoretical models. This paper introduces a
spillover effect into a trade model with heterogeneous firms: the fixed
costs of exporting to a given market decrease in the number of home firms
serving that market. This makes the `net' equilibrium fixed costs increase
in distance even when the `gross' fixed costs are identical across
countries. The model implies higher distance effects than existing theories
and a strengthening of the spillover over time leads to non-decreasing or even
increasing distance effects. The model also helps to rationalize the strong
negative effect of borders in international trade. In addition, the impact
of variable trade costs on trade flows is dampened by the elasticity of
substitution even when productivities are distributed Pareto. The spillover
is micro founded based on the endogenous formation of informational
networks between exporting firms.
Export-Supporting FDI
Most recent
version (June 2009): [PDF]
Also
available as Deutsche Bundesbank Discussion Paper 20/2009: [PDF]
Older
version: EUI Working Paper 2007/24
Abstract: Exporting supported by a foreign
affiliate is a popular way for multinationals to serve foreign markets.
Although quantitatively important, this Export-Supporting FDI (ESFDI)
activity has received little attention in the literature. This paper
proposes a model of ESFDI with heterogeneous firms to analyze this
phenomenon. ESFDI is characterized by export-supporting distribution and
service activities in the foreign market while production remains in the
home country. This introduces a new channel of complementarity between
trade and FDI. The analysis shows that falling trade costs lead to an increase
in both overall trade and overall FDI activity, which is in line with
findings in the empirical FDI literature. An empirical analysis using
German firm level FDI data illustrates the quantitative importance of
ESFDI. The data also support crucial implications of the theoretical model.
Parents choosing ESFDI are smaller than firms that have production
affiliates in the foreign market. Moreover, market by market the importance
of ESFDI relative to horizontal FDI is strongest when variable trade costs
are low.
Heterogeneous Firms, ‘Profit Shifting’ FDI and
International Tax Competition
Joint work
with Tim
Schmidt-Eisenlohr (EUI)
Most recent version
(October 2009): CES (Centre d’Economie de la Sorbonne) Working Paper
2009/73 [PDF]
Older
version (Feb. 2009) available as EUI Working Paper 2009/15: [PDF]
Abstract: Larger firms are more likely to use tax
haven operations to exploit international tax differences. We study a tax
game between a large country and a tax haven modeling heterogeneous
monopolistic firms, which can shift profits abroad. We show that a higher degree
of firm heterogeneity (a mean-preserving spread of the cost distribution)
increases the degree of tax competition, i.e. it decreases the equilibrium
tax rate of the large country, leads to higher outflows of its tax base and
thus decreases its equilibrium tax revenue. Similar effects hold for a
higher substitutability across varieties. We find that models with
homogeneous firms understate the strength of tax competition.
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