Danny McGowan

Trade Costs and Trade Composition

Do trade costs have consequences other than on the volume of international trade? In this paper we investigate whether countries’ trade costs act like other national endowments by affecting the composition of countries’ exports. Using an econometric approach that controls for endogeneity by accounting for potentially relevant omitted variables we find strong evidence for a sample of 37 industrialized and transition countries that national trade costs systematically affect the composition of trade and can be viewed therefore as a source of comparative advantage. Industries located in countries with low trade costs capture significantly higher shares of world exports where this effect is stronger in trade cost intensive industries.

Tax Policy and Firm Entry and Exit Dynamics: Evidence from OECD Countries

In this paper we study the effects of reforms to corporate and personal income taxation on the rate of firm entry and exit using industry data for 19 OECD countries from 1998 to 2005. Using a difference-in-differences approach to correct for endogeneity bias we find that increases in corporate taxation affect entry but not exit. The effects of personal taxation depend upon the marginal tax rate that is altered. Increases in marginal tax rates applied at low income levels negatively affect entry and positively affect exit, whereas marginal tax reforms at higher income levels have the opposite effect.

Corporate Taxation and Productivity Catch-Up: Evidence from European Firms

Firms that lie far behind the technological frontier have the most to gain from imitating the technology or management practices of others. That some firms converge relatively slowly to the productivity frontier suggests the existence of factors that cause them to underinvest in their productivity. In this paper we explore how far higher rates of corporate taxation affect firm productivity convergence by reducing the after tax returns to productivity enhancing investments for small firms. Using data for 11 European countries we find evidence for such an effect; productivity growth in small firms is slower the higher are corporate tax rates. Our results are robust to the use of instrumental variable and panel data techniques with quantitatively similar effects found from a natural experiment following the German tax reforms in 2001.

The real effects of regulatory enforcement actions : evidence from U.S. counties

We present a novel way to examine macro-financial linkages by focusing on the real effects of bank supervisors’ enforcement actions. Exploiting plausibly exogenous variation in supervisory monitoring intensity, we show that enforcement actions in single-market banks trigger temporarily large adverse effects for the macroeconomy by reducing personal income growth, the number of establishments, and increasing unemployment. These effects are related to contractions in bank lending and liquidity creation, and are more pronounced when we consider enforcement actions on both single-market and multi-market banks, and in counties with fewer banks and greater external financial dependence.

Digging Deep to Compete: Vertical Integration, Product Market Competition and Prices

This paper tests whether product market competition affects vertical integration through the price channel. The identification strategy exploits data on ownership structure and deregulation of the US railroad sector as a source of exogenous variation in competition within the coal mining industry. We document a 28% reduction in the incidence of vertical integration among the treatment group following exposure to more product market competition. Consistent with recent organizational economics theories, this effect stems from product market competition increasing industry supply and reducing market prices. This decreased the returns to integration and triggered a significant reduction in the frequency of mergers.

Monitoring Matters: Debt Seniority, Market Discipline and Bank Conduct

We examine if debtholders monitor banks and if such monitoring constrains risk-taking. Leveraging an unexplored experiment in the U.S. that changes the priority structure of claims on banks’ assets, we provide novel insights into the debate on market discipline. We document asymmetric effects for monitoring effort depending on whether a creditor class moves up or down the priority ladder. Conferring priority to depositors reduces deposit rates but increases interest rates for non-deposit liabilities, suggesting greater incentives for junior debtholders to exert monitoring effort. Consistent with the idea that senior claims require lower risk premiums, banks increasingly rely on deposit funding following changes in the priority structure. More intensive monitoring also influences conduct: subordinating non-depositor claims reduces risk taking. Our results highlight that changes in the priority structure are a complementary tool to regulation which has received little attention in prior work.

Productivity-Enhancing Demand Shocks: Evidence from the U.S. Ethanol Boom

This paper examines the effect of demand on productivity. We exploit the Energy Policy Act of 2005 as a natural experiment which generated plausibly exogenous variation in the capacity of ethanol plants to establish the causal effect of demand on productivity within the corn sector. Using physical output productivity measures we show that the demand shock caused firms to increase productivity by 35% and provide evidence that this was driven by demand altering final goods’ prices which spurred technology adoption. This finding cannot be explained by reallocation effects and is robust to a barrage of robustness, falsification, and placebo tests.

Firms’ Internationalisation Strategies: The Evidence

It is widely recognised that the pioneering papers of Krugman (1979) and Lancaster (1979) triggered a revolution in the way in which we think about and model international trade. These theoretical insights were in fact motivated by empirical observation, namely intra-industry trade, which appeared to sit oddly with what we would expect in a world where trade patterns are fashioned by differences in factor endowments. The huge literature which these papers triggered yielded new insights into the role of imperfect competition, scale economies and preference diversity in driving trade.