The global welfare impact of China: Trade integration and technological change

This paper evaluates the global welfare impact of China's trade integration and technological change in a multi-country quantitative Ricardian-Heckscher-Ohlin model.We simulate two alternative growth scenarios: a "balanced" one in which China's productivity grows at the same rate in each sector, and an "unbalanced" one in whichChina's comparative disadvantage sectors catch up disproportionately faster to theworld productivity frontier. Contrary to a well-known conjecture (Samuelson 2004),the large majority of countries experience significantly larger welfare gains whenChina's productivity growth is biased towards its comparative disadvantage sectors.This finding is driven by the inherently multilateral nature of world trade.

Input diffusion and the evolution of production networks

What determines which inputs are initially considered and eventually adopted in the productionof new or improved goods? Why are some inputs much more prominent than others? We modelthe evolution of input linkages as a process where new producers first search for potentially usefulinputs and then decide which ones to adopt. A new product initially draws a set of 'essentialsuppliers'. The search stage is then confined to the network neighborhood of the latter, i.e., to theinputs used by the essential suppliers. The adoption decision is driven by a tradeoff between thebenefits accruing from input variety and the costs of input adoption. This has important implicationsfor the number of forward linkages that a product (input variety) develops over time. Inputdiffusion is fostered by network centrality ? an input that is initially represented in many networkneighborhoods is subsequently more likely to be adopted. This mechanism also delivers a powerlaw distribution of forward linkages. Our predictions continue to hold when varieties are aggregatedinto sectors. We can thus test them, using detailed sectoral US input-output tables. We showthat initial network proximity of a sector in 1967 significantly increases the likelihood of adoptionthroughout the subsequent four decades. The same is true for rapid productivity growth in aninput-producing sector. Our empirical results highlight two conditions for new products to becomecentral nodes: initial network proximity to prospective adopters, and technological progress thatreduces their relative price. Semiconductors met both conditions.

Political centralization and government accountability

This paper studies fiscal federalism when regions differ in voters' ability to monitor publicofficials. We develop a model of political agency in which rent-seeking politicians providepublic goods to win support from heterogeneously informed voters. In equilibrium, voterinformation increases government accountability but displays decreasing returns. Therefore,political centralization reduces aggregate rent extraction when voter information varies acrossregions. It increases welfare as long as the central government is required to provide publicgoods uniformly across regions. The need for uniformity implies an endogenous trade off between reducing rents through centralization and matching idiosyncratic preferences throughdecentralization. We find that a federal structure with overlapping levels of government canbe optimal only if regional differences in accountability are sufficiently large. The modelpredicts that less informed regions should reap greater benefits when the central governmentsets a uniform policy. Consistent with our theory, we present empirical evidence that lessinformed states enjoyed faster declines in pollution after the 1970 Clean Air Act centralizedenvironmental policy at the federal level.

Sovereign default, domestic banks and financial institutions

We present a model of sovereign debt in which, contrary to conventional wisdom, government defaultsare costly because they destroy the balance sheets of domestic banks. In our model, better financial institutionsallow banks to be more leveraged, thereby making them more vulnerable to sovereign defaults.Our predictions: government defaults should lead to declines in private credit, and these declines should belarger in countries where financial institutions are more developed and banks hold more government bonds.In these same countries, government defaults should be less likely. Using a large panel of countries, we findevidence consistent with these predictions.