Three Essays on International Trade and Institutions.

Abstract

The first essay addresses the effects of trade liberalization on firms' productivity. Firms' responses to trade liberalization are heterogenous: exporters improve their level of technology adoption, whereas nonexporters downgrade their production technology. The degree to which exporters/nonexporters adjust their level of technology adoption depends on domestic market size, export destination market size, trade impediments, whether new exporter/nonexporter. I also show that even with some firms adopting lower levels of production technology, gains from trade are larger relative to the standard Melitz' model.

The evolution of domestic institutions in the global economy is the subject of the second essay. Why does trade liberalization improve domestic institutions in some countries but not others? I incorporate contractual frictions in a two-country two-sector model of international trade with heterogeneous firms. Countries are symmetric except for contracting institutional quality. Institutional quality is a source of comparative advantage. In the differentiated goods sector, exporters, on average, benefit from domestic institutional reforms, whereas nonexporters' profits fall as institutions advance. The effect of institutional change on firms' profits is magnified as trade costs decline. To endogenize domestic institutions, I use the lobbying framework of Grossman and Helpman (1994). Reduction in trade costs deteriorates domestic contracting institutions if nonexporters are the predominant political group, which is more likely in countries with low initial domestic institutions. In addition, equilibrium domestic institutional quality is positively affected by the trade partner's institutional quality.

In the third essay (joint with Vanessa Alviarez), we study intra-firm trade and multinational production in the global economy. Intra-firm trade is concentrated among a small set of large multinational firms. In addition, we document that not only firms in the upper-tail of the firm's size distribution are subject to gravity forces, but also sales of relatively small foreign affiliates are significantly affected by geographical barriers. Two puzzles emerge: (i) why intra-firm trade is concentrated among the largest multinational firms? and (ii) what are the mechanisms that drive affiliates' sales in the lower tail of the distribution to obey gravity forces, even in the absence of intra-firm trade? We deliver a framework to explain theses two phenomenas.