Pushan Dutt

Corruption and Bilateral Trade Flows: Extortion or Evasion?

We analyze the impact of corruption on bilateral trade, highlighting its dual role in terms of extortion and evasion. Corruption taxes trade, when corrupt customs officials in the importing country extort bribes from exporters (extortion effect); however, with high tariffs, corruption may be trade enhancing when corrupt officials allow exporters to evade tariff barriers (evasion effect). We derive and estimate a corruption-augmented gravity model, where the effect of corruption on trade flows is ambiguous and contingent on tariffs. Empirically, corruption taxes trade in the majority of cases, but in high-tariff environments (covering 5% to 14% of the observations) their marginal effect is trade enhancing. (c) 2010 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Inequality and the Instability of Polity and Policy

We create alternative measures of political instability, which capture only movements from dictatorship to democracy and vice versa and, unlike older, well-known measures, does not capture government changes that preserve the democratic or dictatorial structure of the country. We show that inequality is positively correlated with our measures of political instability as well as with a well-known measure (used by Alesina and Perotti) but the impact of inequality on the latter is only through components of political instability captured by our measures. We show that our measures have significant policy implications - political instability increases both fiscal and trade polity volatility. Copyright (C) The Author(s). Journal compilation (C) Royal Economic Society 2008.

Does WTO Matter for the Extensive and the Intensive Margins of Trade

We use 6-digit bilateral trade data to document the effect of WTO/GATT membership on the extensive and intensive product margins of trade. We construct gravity equations for the two product margins where the specifications of these gravity equations are motivated by the model of Eaton and Kortum (2002). The data show that the puzzle of no significant impact of WTO membership on trade documented by Rose (2004) manifests itself differently at the product margins of trade. We show that the impact of the WTO is almost exclusively on the extensive product margin of trade, i.e. trade in goods that were not previously traded. In our preferred specification, WTO membership increases the extensive margin of exports by 31%. At the same time, WTO membership has a negligible or even a negative impact on the intensive margin (the volume of already-traded goods). Incidentally, we also document that standard gravity variables provide good explanatory power for bilateral trade on both margins.

The effect of WTO on the extensive and the intensive margins of trade

We use 6-digit bilateral trade data to document the effect of WTO/GATT membership on the extensive and intensive product margins of trade.We construct gravity equations for the two product margins motivated by Chaney (2008). The empirical results show that standard gravity variables provide good explanatory power for bilateral trade on both margins. Importantly, we show that the impact of the WTO is concentrated almost exclusively on the extensive product margin of trade, i.e. trade in goods that were not previously traded. In our preferred specification, WTO membership increases the extensive margin of exports by 25%. At the same time, WTO membership has a negative impact on the intensive margin. Based on novel comparative statics results about how fixed and variable trade costs impact the product margins of trade, our results suggest that WTO membership works by reducing primarily the fixed rather than the variable costs of trade.

Trade protection and bureaucratic corruption: an empirical investigation

We examine whether protectionist trade policies lead to increased bureaucratic corruption. Using multiple measures of corruption and trade policies, we find strong evidence that corruption is significantly higher in countries with protectionist trade policies. These results are robust to endogeneity concerns. Next, a panel-data-based GMM methodology is used to estimate a dynamic model of corruption. This estimator controls for country-specific effects, potential endogeneity of trade policy, and existence of measurement errors afflicting the corruption data. The paper strengthens the case for trade liberalization and argues that trade reforms may lead to improvements in governance.

Crisis and Consumption Smoothing

The dramatic impact of the current crisis on performance of businesses across sectors and economies has been headlining the business press for the past several months. Extant reconciliations of these patterns in the popular press rely on ad hoc reasoning. Using historical data on currency crisis episodes across the world, we show that the impact of the crisis on a firms business is best understood by focusing on the impact of the crisis on the behavior of consumers. Our analyses show that consumer behavior in a crisis is characterized by consumption smoothing at various levels---intertemporal, intercategory, and intracategory. These behavioral adjustments result in significant reallocation of consumption expenditures. More importantly, the smoothing decisions because of a crisis are distinct and independent of the impact of changes in income and prices that accompany a crisis. Interestingly, there is marked variation in the patterns of consumption smoothing across different types of economies. Taken together, these results have important and interesting implications for managers, policy makers, and academics.

Democracy and Policy Stability

Available online xxxx We explain stable growth performance in democracies by characterizing political systems in terms of the distribution of political power across groups, and show when the qualities of policy alternatives are uncertain, greater democracy (decentralization of authority) leads to more stable policy choices. We empirically test this mechanism by creating measures of the intertemporal variability in fiscal and trade policies. In an array of specifications (cross-sectional, panel with fixed-effects, matching models, instrumental variables, difference-in-difference), we show that policy choices are significantly more stable over time in democracies. This mechanism explains a large part of the negative link between democracy and output volatility.

Stock Market Comovements and Industrial Structure

We use monthly stock market indices for 58 countries to construct pairwise correlations of returns and explain these correlations with differences in the industrial structure across these countries. We find that countries with similar industries have stock markets that exhibit high correlation of returns. The results are robust to the inclusion of other regressors like differences in income per capita, stock market capitalizations, measures of institutions, as well as various fixed time, country and country-pair effects. We also find that differences in the structure of exports explain stock market correlations quite well. Our results are consistent with models in which the impact of each industry-specific shock is proportional to the share of this industry in the overall industrial output of the country. We also show that differences in production structures have higher explanatory power for segmented markets rather than for markets that are integrated.

Impacts of Ideology, Inequality, Lobbying, and Public Finance

Barring very few exceptions, international trade has never and nowhere been free, even though only under extraordinary circumstances are deviations from free trade optimal. To explain this puzzle, an entire literature on the political economy of trade policy has emerged over the last three decades. In this literature, one common feature is that trade policies are chosen not with the aim of maximizing national economic efficiency and aggregate welfare, but set by politicians and policy makers whose objective functions diverge from aggregate welfare. Trade policies, in this view, are often used as indirect tools to redistribute income to certain targeted groups. The identity of these groups depends on (a) the type of political economy framework (lobbying or majority voting) assumed, (b) the actual economic, political, and geographic characteristics of the various sectors in the economy that determine which of them are politically organized, and (c) the political and economic ideology of the government…

Trade and the Skill-Bias - it's Not How Much, But with Whom, You Trade

This paper explores the hypothesis that changes in trading patterns and partners of US industries have contributed to skill deepening through defensive, skill-biased innovation. It draws on Thoenig and Verdiers (2003) assertion that, since skill-intensive technologies are less likely to be imitated, increased exposure to international competition promotes skill-biased innovation, due to the rise in the intensity of imitation by foreign firms. Our main proposition is that the rate of growth of a trading partner is related to the intensity of imitation from firms operating in that country, implying that an increase in the rate of growth of an industrys representative trading partner should contribute to the rise in its skill-intensity. We find empirical evidence in support of this notion, showing that the rise in the average growth rate of the trading partners has contributed to about 20% of the skilldeepening within US industries. By contrast, we find evidence that measures of the volume of trade do not matter significantly for the rise in skill-intensity, in line with existing literature.