Mario Larch

The impact of endogenous tax treaties on foreign direct investment: theory and evidence

This paper investigates the effect of tax treaties on bilateral stocks of outward FDI. For this purpose we employ a numerically solvable general equilibrium model of trade and multinational firms to study the impact of tax treaties on both welfare and outward FDI. The model indicates under which factor endowment configurations countries gain in welfare when implementing a tax treaty. This motivates an empirical specification of the endogenous selection into implementing new tax treaties. Using data of bilateral OECD outward FDI between 1985 and 2000, we find a significant negative impact of newly implemented tax treaties on outward FDI stocks.

Migration, Trade and Unemployment

A source of anxiety of policy makers and the public in general is the detrimental impact of trade and immigration on unemployment. The transitory restrictions for worker migration after the EU enlargements of 2004 and 2007 exemplify the supposed negative effect of immigration on labor markets. This paper aims to identify the effects of immigration alongside trade on unemployment controlling for the high correlation between immigration and goods flows in order to prevent an omitted variable bias. The authors use data from 24 OECD countries over the period from 1997 to 2007 and employ instrumental variables fixed effects and dynamic panel estimators in order to account for unobserved heterogeneity as well as the potential endogeneity of migration flows and the high persistence of unemployment. We find no significant effect of immigration on unemployment on average.

Comparative Advantage and Skill-Specific Unemployment

Abstract We introduce unemployment and endogenous selection of workers into different skill-classes in a trade model with two sectors and heterogeneous firms. This allows us to identify three different channels through which trade liberalization can affect unemployment: specialization, changes in productivity, and mobility. These three channels may work in opposite directions and their relative importance depends on the type of trade (intra-industry trade vs. inter-industry trade) and the skill-class of a worker. We show that the gains from trade are distributed very unequally. When a skilled worker abundant country opens up to trade with a country that is unskilled worker abundant, the biggest losers are the skilled workers in the import sector in the skill abundant country. However, average unemployment among skilled workers goes down, while average unemployment among unskilled workers goes up.

Why 'Buy American' is a Bad Idea but Politicians Still Like It

When the world economy was recently hit by a severe recession, governments all over the world reacted by initiating stimulus packages. Some countries (among them, most notably, China and the US) tried to put special emphasis on their home industries by including ‘Buy National’ clauses into the stimulus package. By analyzing the dynamics of transitory changes of trade barriers as a short‐run response to an economic downturn, we show that beggar‐thy‐neighbour policies do not work. We then come up with two rationales that help us understand why countries nevertheless consider protectionism to be a good response to a recession: (i) the lobbying of domestic, non‐exporting firms, and (ii) the relationship between vulnerability, the degree of openness and loss aversion of consumers. Quand l’economie mondiale a ete recemment frappee par une grave recession, les gouvernements partout dans le monde ont reagi en mettant en place des ensembles de politiques de stimulation. Certains pays (parmi eux, plus particulierement, la Chine et les Etats‐Unis) ont tente de mettre l’emphase sur les industries domestiques en incluant des clauses ≪Achat national≫ dans leurs politiques de stimulation. En analysant la dynamique des changements transitoires dans les barrieres commerciales en tant que reponse a court terme a un declin du niveau d’activiteeconomique, on montre que ces politiques protectionnistes ne donnent pas de resultats. On suggere deux rationalisations qui aident a comprendre pourquoi, malgre tout, les pays considerent le protectionnisme comme une bonne reponse a la recession: (i) le lobbying des entreprises domestiques qui n’exportent pas, et (ii) la relation entre la vulnerabilite, le degre d’ouverture de l’economie, et l’aversion aux pertes des consommateurs.

The structure of the German economy

Exploiting the information contained in an economy’s input-output matrix and using the novel approach developed by Fisher and Marshall (2011), we calculate Rybczynski effects and Stolper–Samuelson effects for Germany in 2007. We show how sectoral output and factor remuneration react to exogenous changes of factor endowments and product prices, respectively. These calculations are implemented using two different models comprising one with labour and capital as the classical production factors and one where we introduce patent stock as an additional factor of production. In the former, we further differentiate between a scenario where all production factors are mobile and one with sector-specific capital. In the latter analysis, we measure the impact of innovation-targeting policy action for sectoral output. Positive Rybczynski effects of patents and high-skilled workers are strongest in knowledge-intensive sectors, while other sectors contract. The introduction of patents as a further production factor has only minor influence on the Rybczynski effects of other factors.

Performance contest between MLE and GMM for huge spatial autoregressive models

Abstract When using maximum likelihood estimation for spatial models, a well known problem is the computation of the logarithm of the determinant of the Jacobian, especially for problems with a huge number of observation units. In the recent literature there are various promising approaches to account for these numerical difficulties, relying on alternative decompositions or approximations. Recently, a general method of moments approach for estimating these models was developed. We compare all these different approaches with respect to their root mean-squared errors of the estimates and investigate the size and power of hypotheses tests with respect to the spatial correlation and the regression parameters.

Heterogeneous Firms, Globalisation and the Distance Puzzle

Despite the strong pace of globalization, the distance effect on trade is persistent or even growing over time (Disdier and Head, 2008). To solve this distance puzzle, we use the recently developed gravity equation estimator from Helpman, Melitz and Rubinstein (2008), HMR henceforth. Using three different data sets, we find that the distance coefficient increases over time when OLS is used, while the non-linear estimation of HMR leads to a decline in the distance coefficient over time. The distance puzzle thus arises from a growing bias of OLS estimates. The latter is explained by globalization more significantly reducing the downward bias from omitting zero trade flows than it reduces the upward bias from omitting the number of heterogeneous exporting firms. Furthermore, we show that including zero-trade flows cannot solve the distance puzzle when using HMR. The HMR estimates are strongly correlated with the time pattern in freight costs reported by Hummels (2007).

The Rise of the Maquiladoras: A Mixed Blessing

Mexico experienced a tremendous expansion of its export‐processing maquila sector during the 1990s. Since one of the main objectives of the maquiladora program was to promote formal employment, we study how the rapid increase in maquiladora activity has affected labor market outcomes and welfare in Mexico. We develop a heterogeneous‐firm model with imperfect labor markets that captures salient features of the Mexican economy such as the differences between maquila and non‐maquila manufacturing plants and the existence of an informal sector. We calibrate the models parameters to match key cross‐sectional moments characterizing the Mexican economy. We find that the expansion of the maquila sector during the 1990s was a mixed blessing for Mexico. Our quantitative model indicates that the skill premium decreased by 2.7%, informality increased by 0.9%, and overall welfare decreased by 3.7%.

Impacts of Trade and the Environment on Clustered Multilateral Environmental Agreements

Many countries align their environmental policy and environmental regulation by way of multilateral environmental agreements (MEAs). Previous work in economics provided insights in the economic and political determinants of MEAs at large. This paper distinguishes MEAs by the main issues covered and classifies them in five clusters: biodiversity; atmosphere; land; chemicals and hazardous wastes; and seas. Then the role of environmental, economic, and political factors and of dynamic and cross‐cluster effects is studied at the level of MEA clusters. Two findings stand out from this empirical analysis. First, economic size and multilateral trade liberalisation of countries are found to be the most important drivers of MEA participation across all clusters. Second, adjustment costs turn out to deter and, in particular, cross‐cluster spillovers turn out to stimulate MEA participation across countries and clusters.

Lag or Error? — Detecting the Nature of Spatial Correlation

Theory often suggests spatial correlations without being explicit about the exact form. Hence, econometric tests are used for model choice. So far, mainly Lagrange Multiplier tests based on ordinary least squares residuals are employed to decide whether and in which form spatial correlation is present in Cliff-Ord type spatial models. In this paper, the model selection is based both on likelihood ratio and Wald tests using estimates for the general model and information criteria. The results of the conducted large Monte Carlo study suggest that Wald tests on the spatial parameters after estimation of the general model are the most reliable approach to reveal the nature of spatial correlation.