Book Description

This dissertation consists of three essays spanning the fields of international trade and economic development. In the first essay, we ask why developing countries fail to specialize in products in which they (at least potentially) have a comparative advantage? For example, farmers in land-poor developing countries overwhelmingly produce staples rather than exotic fruits that command high prices. We propose a simple model of trade and intermediation that shows how holdup resulting from poor contracting environment can produce such an outcome. We use the model to examine which polices can help ameliorate the problem, even when its cause cannot be eliminated.In the second and the third essays, we study how exporters introduce new products into the export market. In the second essay, using information on the universe of Chinese exporters to the US, we document a number of empirircal facts that discipline economists' undrstanding of dynamic aspects of multiproduct exporters. In the third essay, we estimate a structural dynamic model of multiproduct exporting.In Chapter 1, "Wheat or Strawberries? Intermediated Trade with Limited Contracting," we develop the model that provides a new explanation as to why developing countries have agricultural productivity orders of magnitude smaller than in the developing countries. We propose that due to contracting frictions agricultural producers often specialize in staples in which they have a comparative disadvantage, instead of specializing in fruits and vegetables which they can grow efficiently and which command higher prices in the export markets. While farmers can subsits on staples, farmers require services of the intermediaries to deliver cash crops to the export market. When markets are thin intermediaries hold the bulk of the bargaining power and offer a small price to the farmer for his produce. Foreseeing the hold up farmers choose to specialize in the staples.In the model, farmers can produce two types of goods: wheat and strawberries. Wheat is suitable for subsistence but farmers are inefficient in producing it. Farmers are efficient in making strawberries, but cannot subsist on it, and have to sell them to an intermediary who makes profits by selling it at the world price. In a frictionless world farmers would specialize in strawberries. Central to the model is the inability of farmers and traders to contract ex-ante on a price. The absence of enforceable contracts sets the stage for the classic hold up problem and precludes negotiating the terms of trade prior to entry into production. We use a two period model with a continuum of traders and farmers. In the first period, farmers decide whether to produce wheat or strawberries and intermediaries decide whether to enter the business of intermediation. In the second period, farmers and traders meet randomly and trade. Since meetings are random and traders do not know the number of local competitors but do know how thick the market is, they can infer the distribution of potential rivals and offer a price based on this information. In other words, traders compete for the output of farmers in the first price auction. As a result, some farmers fetch a high price for their strawberries; others fetch a low price, or even fail to meet an intermediary. Farmers make the production decision based on the expected price.We solve the model and characterize all the possible equilibria as a function of the primitive parameters. Of particular interest is the region in the parameter space that yields multiple equilibria. In the good equilibrium, specialization occurs according to comparative advantage and there is intermediation, while in the bad equilibrium, there is no intermediation and the staple is produced. Our work suggests that there may be some simple measures to ensure intermediation and specialization according to comparative advantage even if the government is not able to resolve the core issue, the underlying lack of enforceable contracts. A temporary production subsidy or a marketing board that ensures a sufficiently high minimum price to the farmer can help an economy remove the bad equilibrium without intermediation. This paper is closely related to the work of Antras and Costinot (2011). In their paper they focus on the implications of intermediation for globalization in a model that assumes that contracts between traders and producers are enforceable. In contrast we study the implications of contractual failure on production choices in a model of trade with intermediation. In Chapter 2, "Multiproduct Exporters: Empirical Regularities," we use information on Chinese exporters to the US to document a number of empirical regularities regarding dynamic multiproduct exporter behaviour. First, we confirm that scope and firm scale are positively associated. This suggests that more productive firms select to produce more products. Furthermore we find empirical regularities that are consistent with firms facing uncertainty in the export market. We explore the conjecture that firms learn about their potential in new export products trough exporting similar products. We find only tentative support for this conjecture.In chapter 3, "Multiproduct Exporters: Learning versus Knowing," we develop and estimate a structural model of multiproduct exporters based on three empirical regularities documented using data on Chinese exporters. These regularities are as follows: (1) multi-product exporters introduce their best-selling products early; (2) more than 40% of the new products introduced by incumbent exporters are dropped due to low sales within the first year; (3) for a firm, the probability of introducing a new product is positively related to the survival and success of the earlier products.The first regularity is consistent with unobserved firm-product specific heterogeneity. The second suggests that both incumbents and new exporters face uncertainty when they introduce new products. The third is consistent with firms learning about their potential in an export market, i.e., their brand effect, as they introduce new products. We develop a model which incorporates all of these features, and we estimate it structurally using data on Chinese exporters to the U.S. in the plastics industry.First, we find that known demand shocks play an important role in whether producers enter the exporting market or not. Second, we find that it is important to account for large attrition among new exporters including uncertainty about the brand effect. When we let firms know their brand effect precisely, only those with sufficiently high brand effects enter, and then the model cannot replicate disproportionately large attrition of new products among new exporters. Third, we find that while firms act consistently with learning about their brand effect, the uncertainty that firms face in conjunction with introducing new products looms large, and limits the extent to which learning affects incentives of firms to add new products. Our counterfactuals show that the distribution of products among the high brand effect firms only marginally first order stochastically dominates the distribution for low brand effect firms.Using our model we revisit the question of trade policy in the multiproduct firm setting. We simulate a decrease in the cost of introducing new products for firms. Our simulations suggest that in the presence of economies of scope and even moderate learning effects, decreasing costs of introducing subsequent products can make a significant contribution to increasing trade flows.