Michael E. Waugh

Selection, Agriculture and Cross-Country Productivity Differences

Cross-country labor productivity differences are larger in agriculture than in non-agriculture. We propose a new explanation for these patterns in which the self-selection of heterogeneous workers determines sector productivity. We formalize our theory in a general-equilibrium Roy model in which preferences feature a subsistence food requirement. In the model, subsistence requirements induce workers that are relatively unproductive at agricultural work to nonetheless select into the agriculture sector in poor countries. When parameterized, the model predicts that productivity differences are roughly twice as large in agriculture as non-agriculture even when countries differ by an economy-wide efficiency term that affects both sectors uniformly. (JEL J24, J31, J43, O11, O13, O40)

International Trade and Intertemporal Substitution

This paper quantitatively investigates the extent to which variation in the intertemporal marginal rate of substitution can help account for puzzling features of cyclical fluctuations of international trade volumes. Our insight is that, because international trade is time-intensive, variation in the rate at which agents are willing to substitute across time affects how trade volumes respond to changes in output and prices. We use a standard small open economy model with time-intensive international trade, calibrated to match key features of U.S. data and disciplining the variation in the intertemporal marginal rate of substitution using asset price data. We find that variation in the intertemporal marginal rate of substitution helps rationalize puzzling features of import fluctuations and that this mechanism is quantitatively important during both normal and crisis times.

Information Globalization, Risk Sharing, and International Trade

Information frictions are often invoked to explain low levels of international trade beyond those that measured trade frictions (taris, transportation costs, etc.) can explain. But to explain why international trade is lower then domestic trade, home rms have to know something that foreigners do not. Without information asymmetry, domestic trade and foreign trade would be inhibited equally. This paper incorporates a simple information asymmetry in a standard, two-country Armington trade model and studies its eect on international risk sharing and trade ows. We nd that ameliorating information asymmetry { information globalization { reduces trade and international risk sharing. In other words, asymmetric information frictions behave in the opposite manner as a standard trade cost. Many researchers have explored the possibility that information frictions account for the low volumes of cross-border trade. Portes and Rey (2005) show that the volume of phone calls between two countries predicts how much they trade. Gould (1994) and Rauch and Trindade (2002) argue that immigrants trade more with their home countries. The argument that information frictions create uncertainty about foreign economies, and that this uncertainty deters risk-averse potential exporters is compelling. In many settings, the eect of an increase in uncertainty is to reduce the certainty-equivalent expected return, which acts like

Measuring Openness to Trade

In this paper we derive a new measure of openness—trade potential index—that quantifies potential gains from trade as a simple function of data. Using a standard multicountry trade model, we measure openness by a country’s potential welfare gain from moving to a world with frictionless trade. In this model, a country’s trade potential depends on only the trade elasticity and two observable statistics: the country’s home trade share and its income level. Quantitatively, poor countries have greater potential gains from trade relative to rich countries, while their welfare costs of autarky are similar. This leads us to infer that rich countries are more open to trade. Our trade potential index correlates strongly with estimates of trade costs, while both the welfare cost of autarky and the volume of trade correlate weakly with trade costs. Thus, our measure of openness is informative about the underlying trade frictions.