James E. Rauch

Networks Versus Markets in International Trade

I propose a network/search view of international trade in differentiated products. I present evidence that supports the view that proximity and common language/colonial ties are more important for differentiated products than for products traded on organized exchanges in matching international buyers and sellers, and that search barriers to trade are higher for differentiated than for homogeneous products. I also discuss alternative explanations for the findings.

Bureaucratic structure and bureaucratic performance in less developed countries

Recent cross-country empirical analysis has found that privately produced ratings of the performance of the central government bureaucracy in areas such as corruption and red tape are significant predictors of economic performance. We argue that several relatively simple, easily identifiable structural features constitute the key ingredients of effective state bureaucracies and should help to predict these ratings: competitive salaries, internal promotion and career stability, and meritocratic recruitment. We collect a new data set on these features for bureaucracies of 35 less developed countries. Controlling for country income, level of education, and ethnolinguistic diversity, we find that our measures of bureaucratic structure are statistically significant determinants of ratings supplied by two of three country risk agencies. Meritocratic recruitment is the most important structural feature for improving bureaucratic performance, followed by internal promotion and career stability. The importance of competitive salaries could not be clearly established

Modelling the informal sector formally

Abstract The theoretical characterization of formal-informal sector dualism by labor-market dualism is integrated with its empirical characterization by size dualism by supposing that the minimum formal sector wage is only enforced for firms greater than a certain size. A firms size varies directly with the talent of its enterpreneur-manager, and the choice between formal and informal sector entrepreneurship is determined endogenously. It is then shown that the size gap between the smallest formal sector firm and largest informal sector firm varies directly with the formal-informal sector wage differential, which in turn is shown as expected to increase the further is the minimum wage above the market-clearing wage. The comparative statics of changes in the size of the firm above which the minimum wage is enforced are also examined.

Overcoming Informational Barriers to International Resource Allocation: Prices and Ties

Incomplete information in the international market creates difficulty in matching agents with productive opportunities and interferes with the ability of prices to allocate scarce resources across countries. Ties through international information-sharing networks or parent-subsidiary relationships overcome this matching friciton. When the difference between country factor-endowment ratios is small relative to the share of agents that is tied, efficient arbitrage and the standard properties of neoclassical trade models prevail. When the difference between factor-endowment ratios is sufficiently large, this equilibrium breaks down and countries become partially insulated from each other in the sense that the price (wage) of each countrys immobile resource is more sensitive to changes in domestic than foreign supply and trade liberalization causes less convergence in relative resource prices. The model is applied to the debate over the impact of international trade on domestic wages, and extended to address whether ties can reduce world welfare through trade diversion and to compare the effect of ties on trade in differentiated versus homogenous products.

Does History Matter Only When It Matters Little? The Case of City-Industry Location

When will an industry subject to agglomeration economies move from an old, high-cost site to a new, low-cost site? It is argued that history, in the form of sunk costs resulting from the operation of many firms at a site, creates a first-mover disadvantage that can prevent relocation. It is demonstrated that developers of industrial parks can partly overcome this inertia through discriminatory pricing of land over time, and empirical evidence is provided that they actually engage in such behavior. It is also shown that other aspects of developer land-sale strategy can be a source of information on the nature of interfirm externalities.

Adaptation and the Boundary of Multinational Firms

This paper offers the first empirical analysis of the impact of adaptation on the boundary of multinational firms. To do so, we develop a ranking of sectors in terms of routineness by merging two sets of data: ratings of occupations by their intensities in solving problems from the U.S. Department of Labors Occupational Information Network and U.S. employment shares of occupations by sectors from the Bureau of Labor Statistics Occupational Employment Statistics. Using U.S. Census trade data, we demonstrate that the share of intrafirm trade tends to be higher in less routine sectors.

Leadership selection, internal promotion, and bureaucratic corruption in less developed polities

The establishment of a professional government bureaucracy in place of political appointees is an important component of an enabling environment for private enterprise. I show that internal promotion can help to bring to power individuals who highly value (relative to income) imposition of their preferences over collective goods on the public. Such individuals restrain the corruption of their subordinates as a byproduct of their efforts to implement their preferences using tax revenue. As a result, large-scale and petty corruption tend to move together and both tend to be lower the longer the practice of internal promotion has been in place.

Increasing returns to scale and the pattern of trade

Abstract When realization of increasing returns to scale (IRS) requires geographic concentration, formation of cities whose optimal size is limited by commutation costs results. If this size is small relative to the population of a country, then efficiency of city formation rather than country size dictates comparative advantage with respect to IRS goods. Under restrictive assumptions, it can even be shown in a ‘Ricardian’ model with cities that ratios of labor requirement coefficients alone rank goods in comparative advantage order, so that country size and the degree of increasing returns displayed by any good are irrelevant to the pattern of trade.

Quantitative cross-national studies of economic development: A comparison of the economics and sociology literatures

For more than two decades, economists and sociologists have pursued parallel cross-national quantitative investigations of the determinants of economic development. These investigations have proceeded in mutual ignorance despite the often large overlap in statistical methods and data employed. Apparently contradictory findings have resulted, especially regarding the impacts of international trade and foreign direct investment. We find that there are two factors that account for these inconsistent results. One key factor is the use of different variables to measure international trade and investment, the choice of which is in turn driven by underlying differences in theoretical motivations. A second important difference involves sociologists’ greater preoccupation with more complex multivariate models versus economists’ greater willingness to focus on individual variables in multivariate regressions while viewing others as “controls.” A major finding of our survey is that when thesame variables are used, the results of economists and sociologists tend to be consistent, rather than contradictory (as might have occurred, for example, because of the use of different samples of countries or time periods, or the use of other variables included in the regression equations). We also consider some studies whose purviews go beyond economic growth to consider factors such as income inequality, physical quality of life, demographic change, and basic needs provisioning.

A note on the optimum subsidy to a learning industry

Abstract The existing results on the optimum subsidy to an infant industry engaged in learning by doing are of little use to policy makers because they provide no practical means of computing the level of that subsidy, in part because one typically has no data with which to estimate the learning function until after the learning process is over. Using both the now-standard analysis of Bardhan (1971) and a generalization that allows for a non-constant marginal utility of consumption, this note demonstrates that the optimum subsidy must always be less than the rate that would completely make up for the productivity disadvantage of the infant industry relative to the efficient foreign producer. To compute this ceiling rate it would be sufficient to know, for example, current factor prices and the foreign producers cost function. Simulations show that for reasonable parameter values a ‘naive’ second-best policy that sets the subsidy rate equal to its ceiling value at all times not only improves on a policy of laissez-faire but also consistently captures more than three quarters of the benefits of the optimum subsidy policy.