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B06: Trade policy and market structure

In this project, we shed new light on countries' incentives to use trade and industrial policy when firms are heterogeneous in productivity and we study the design of international institutions that coordinate trade policy in such a context. We also aim at improving our understanding of how market conditions - especially regulation, trade and industrial policy - affect firms' organizational structure.

 

Project members

 

Discussion papers (B06)

 

Motivation

There exist pervasive firm-level differences in size, productivity and trade status within sectors. The role of firm heterogeneity for (i) trade policy incentives and (ii) the design of the international trade policy environment is still not well understood. The liberalization of product markets is associated with changes in firms' organizational structures (e.g., outsourcing, delegation of decision rights). Some organizational changes are associated with efficiency gains. Others have led to reductions in production efficiency and product quality.

Policy relevance

Trade policy decisions are made at the level of individual countries and sectors. Owing to heterogeneity, firms within a sector are differentially affected.  Adherence to a given set of rules for the international trade environment (WTO) must be in line with countries' interests. This raises important strategic issues. Domestic (e.g., merger and competition policy) and international (e.g., free trade agreements, tariffs) regulations change market prices and the distribution of rents across different agents within firms (e.g., final producers vs. suppliers, central management vs. upstream plants' managers). Therefore, these regulations induce changes in firm-level organizational choices and, ultimately, in firm performance and welfare.

Project Plan

Work package 1 - Trade policy with firm-level heterogeneity

  • We study trade policy incentives in the presence of firm-level heterogeneity in productivity.
  • Which welfare incentives drive trade-policy-makers' decisions? We develop a welfare decomposition that is derived from first principles and exactly holds in general equilibrium. We use it to separate single-country policy-makers' incentives to improve (consumption and production) efficiency from pure beggar-thy-neighbor policies.
  • We investigate the robustness of trade policy incentives under different competition modes (monopolistic competition, oligopoly) and different information structures (complete/incomplete information).
  • How should institutions for trade policy be designed in a world with firm heterogeneity? We study the interactions between domestic (production subsidies/taxes) and trade policies.
  • We test theoretical results on trade policy incentives with firm heterogeneity to see if countries implement strategically optimal policies.

Work package 2 - Firm organization and product market regulation

  • We bring integration, delegation and management decisions together, both theoretically and empirically. We develop a theoretical framework to analyze the factors determining organizational design decisions. We then test its predictions using a new dataset containing firm-level information on vertical integration, delegation of decision rights and the quality of management practices.
  • We extend organizational IO models by a managerial component. A shortage of management plagues poorer countries and this appears to be connected to performance heterogeneity. Little is known, however, about heterogeneity in vertical integration and its relation to the stock of managers. Therefore, we plan to investigate the empirical relationship between the availability of management and vertical integration.
  • We investigate if trade policy leads to convergence in organizational design. We examine whether trade policy - by affecting price levels - leads to convergence in vertical firm boundaries across countries.
  • We investigate how specific types of regulation, such as merger policy and trade policy, affect organizational decisions and firm performance. We also look at optimal policy design in the presence of endogenous organizational choice.
  • We study the interaction between the organization and location choices of multinational firms and trade policy.
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