Jiandong Ju

Domestic Institutions and the Bypass Effect of Financial Globalization

This paper proposes a simple model to study the relationship between domestic institutions - financial system, corporate governance, and property rights protection - and patterns of international capital flows. It studies conditions under which financial globalization can be a substitute for reforms of domestic financial system. Inefficient financial system and poor corporate governance in a country may be completely bypassed by two-way capital flows in which domestic savings leave the country in the form of financial capital outflows but domestic investment takes place via inward foreign direct investment. While financial globalization always improves the welfare of a developed country with a good financial system, its effect is ambiguous for a developing country with an inefficient financial sector/poor corporate governance. However, the net effect for a developing country is more likely to be positive, the stronger its property rights protection. This is consistent with the observation that developed countries are often more enthusiastic about capital account liberalization around the world than many developing countries. A noteworthy feature of this theory is that financial and property rights institutions can have different effects on capital flows.

Firm Behaviour and Market Access in a Free Trade Area with Rules of Origin

We develop a model to study the behavior of firms in a Free Trade Area with Rules of Origin and the consequences of this behavior on the market equilibrium and outcome. We show that firms will choose to specialize, and that an FTA with strict ROOs on the intermediate good raises imports and hence improves market access in the final good market reduces imports and hence harms market access in the intermediate good market. More restrictive ROOs on the final good first raise and then lower imports of the final good lower than raise imports of the intermediate good. Their turning point is common so that imports of the final good are maximized and imports of the intermediate good are minimized at a common level of restrictiveness of the rules of origin. We show that our model can be reinterpreted to show that more restrictive ROOs on the final good first improves and then harms the fortunes of labor, and to cast light on a particular policy to improve market access. Other problems with a similar structure could also be analyzed using our techniques; we expect similar results.

Endowment Versus Finance: A Wooden Barrel Theory of International Trade

This paper develops a theory of international trade in which financial development and factor endowment jointly determine comparative advantage. We apply the financial contract model of Holmstrom and Tirole to the Heckscher-Ohlin-Samuelson (HOS) framework. A key result is what we call the law of a wooden barrel: if the external finance constraint is binding, then augmenting capital stock would have no effect on output and returns. On the other hand, if the external finance constraint is not binding, the standard HOS predictions are resuscitated.

A Solution to Two Paradoxes of International Capital Flows

International capital flows from rich to poor countries can be regarded as either too small (the Lucas paradox in a one-sector model) or too large (when compared with the logic of factor price equalization in a two-sector model). To resolve the paradoxes, we introduce a non-neo-classical model which features financial contracts and firm heterogeneity. In our model, free trade in goods does not imply equal returns to capital across countries. In addition, rich patterns of gross capital flows emerge as a function of financial and property rights institutions. A poor country with an inefficient financial system may simultaneously experience an outflow of financial capital but an inflow of FDI, resulting in a small net flow. In comparison, a country with a low capital-to-labor ratio but a high risk of expropriation may experience outflow of financial capital without compensating inflow of FDI.

Regulations, regime switches and non-monotonicity when non-compliance is an option: an application to content protection and preference

Direct regulations have two regimes. In one, all firms behave in the same manner and in the other they behave differently. Past work assumed all firms were identical, thereby neglecting the non-monotonicity in comparative statics arising from the regime change.

Divisionalization and franchising incentives with integral competing units

Abstract Existing game-theoretic models of divisionalization and franchising treat each firms number of competing units as a continuous variable. We account for the integer constraint on divisions, and show that the continuous case reasonably approximates the equilibria of the discrete game.

Price Dispersion in a Model with Middlemen and Oligopolistic Market Makers: A Theory and an Application to the North American Natural Gas Market

We develop a microstructure model of a market for a homogeneous good in which trade amongst heterogeneous consumers and producers is intermediated by middlemen and oligopolistic market makers (gatekeepers). Market makers post bid and ask prices which are freely observable. Middlemen stand ready to trade at bid and ask prices they quote on a private basis to consumers or producers who identify these intermediaries via a costly search process. We model competition between market makers as a two-stage game: capacity setting in the first stage and bid and ask price setting in the second stage. We characterize the equilibrium market structure of intermediaries and the distribution of prices in equilibrium. Our main focus is the effect on prices that emerges following a change in the market structure of intermediation, specifically through the exit of a market maker. Exit of a market maker initially results in a shift of trade from market makers as a whole to middlemen resulting in an increase in price dispersion. Following transition to the new market structure with fewer market makers, price dispersion returns to its pre-exit level when total trade passing through the remaining market makers is roughly equal to the pre-exit level. We present an empirical study of price dispersion in the North American natural gas market for the period before and following the exit of Enron, a major market maker in late 2001. The empirical evidence supports the main propositions of our theory: price dispersion jumped 4-fold immediately following Enrons exit but returned to its pre-exit level within roughly 2 months following the exit date.

Evaluating Trade Reform with Many Consumers

In this paper we look at the welfare effects of trade reform in the many-consumers case. We show that Pareto-improving reforms with lump-sum taxation or with non-lump-sum taxation are possible in the small country case if sufficient conditions for welfare to rise in the single-consumer case are met.

Welfare and market access effects of piecemeal tariff reform

In a situation where tariff reforms are being negotiated between two parties, one of which aims to raise its exports and the other aims to raise its welfare, tariff cuts must be in the interest of at least one party. It is possible for the interests of the two sides to conflict. Conflict is certain if the excess demand for export goods does not respond to changes in the prices of imported goods. In this case, any policy which raises imports, must also reduce welfare.

Middlemen and Oligopolistic Market Makers

This paper studies the endogenous structure of intermediation when heterogeneous intermediaries choose between becoming a middleman or a market maker, and the relation between the equilibrium market structure and price dispersion. We obtain three main results: First, middlemen and oligopolistic market makers can coexist in the market equilibrium. All market makers publicly post unique ask and bid prices. These prices serve as the high and low bounds, respectively, for the ask and bid prices of middlemen, when capacity cost is sufficiently large. Second, more efficient intermediaries choose to become market makers, whereas less efficient intermediaries choose to become middlemen. Third, if the fixed cost of capacity installation for market makers increases, the number of market makers declines, whereas the number of middlemen increases. As a result, both ask prices and bid prices become more dispersed.