Firm heterogeneity and political economy of international trade

Ergul, Esra

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https://hdl.handle.net/2142/15533 Copy

Description

Title

Firm heterogeneity and political economy of international trade

Author(s)

Ergul, Esra

Issue Date

2010-05-14T20:44:29Z

Director of Research (if dissertation) or Advisor (if thesis)

Esfahani, Hadi S.

Doctoral Committee Chair(s)

Esfahani, Hadi S.

Committee Member(s)

• Gahvari, Firouz
• Baer, Werner W.
• Polborn, Mattias K.

Department of Study

Economics

Discipline

Economics

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

Ph.D.

Degree Level

Dissertation

Keyword(s)

• Bilateral Trade
• Gravity Model
• Firm Heterogeneity
• Oil

Abstract

In this dissertation I examine a set of crucial topics in the political economy of international trade, with an emphasis on firm-level heterogeneity. The first chapter is an empirical study of the new trade theories in which firm heterogeneity and trade costs play central roles in shaping the patterns of international trade. It examines the empirical basis for the theoretical insights offered by Helpman, Melitz, and Rubinstein (QJE 2008), HMR. A crucial element in this analysis is identifying a variable that affects the fixed costs of exporting from one country to another, but not the variable costs (“excluded variable”). We argue that the nature of the variable that HMR had selected for this purpose and some errors in the dataset weaken their empirical case for the theoretical observations. We propose an alternative “excluded variable” that addresses those concerns. It benefits from the existence of panel data contemporaneous with the trade data and it fulfills the empirical requirements for an excluded variable regardless of the model specification. The results confirm HMR’s finding that firm heterogeneity plays a significant role in the response of trade volumes to trade costs. However, the magnitude of selection and heterogeneity biases in trade elasticities caused by the absence of appropriate corrections are smaller than those presented in HMR. The option to use panel data opens up possibilities for further research on the role of country-level variables in shaping trade patterns. We examine two such variables—GDP and Rule of Law—and find that they have tangible effects on shaping trade, though not as strong as often found in traditional gravity regressions. Our study also casts doubt on the use of some bilateral indicators, such as common religion and language, proposed as alternative excluded variables. Instead, it points to other indicators that may be useful in the future studies of trade flows and related topics. The second chapter examines the determinants of formations of trade partnerships and bilateral flows in oil trade and how these factors ultimately affect the world prices and trade pattern. We use the approach developed by HMR to specify and estimate a model of bilateral oil trade controlling for the role of selection in partnership formation and source heterogeneity in the flow of oil among countries. The results show that ignoring these controls introduces significant biases in the estimation of the elasticities of oil trade with respect to its determinants. We employ the estimation results to analyze the role of various factors in the formation of partnerships and bilateral flows in oil trade and examine how these factors affect the cost of oil for each country and their ultimate impact on world prices and trade pattern. We use the model to carry out a series of global equilibrium simulation exercises to demonstrate the usefulness of the model. In particular, we show that for the rise in oil prices during 1997-2007 to have been caused by economic growth around the world, the demand and supply price elasticities must have been closer to their short run estimates found in the literature. Moreover, relatively high growth in OECD countries followed by rapid growth in transition countries and India and China account for the bulk of the rise in global oil prices. We also show that the model can be used to explore various scenarios of oil price responses to international security issues, especially the conflicts of Iran with the West. Finally, the third chapter analyzes the bilateral trade patterns of oil substitutes around the world and how it links with the crude oil trade. We construct price and quantity indices for three forms of energy—natural gas, coal and electricity (GCE)—that are substitutes for each other and oil. In order to estimate a model of bilateral trade in GCE forms of energy we use the approach developed by HMR. We use the model to carry out a series of global equilibrium simulation exercises. We show that the rise in GCE prices during 1997-2007 may be explained by economic growth around the world, with an estimated long-run price elasticity of world supply of GCE which is around 0.60. Moreover, high growth in China and India followed by rapid growth in transition countries and OECD countries account for the bulk of the rise in global GCE prices. We also show that the model can be used to explore various scenarios of GCE price responses to international conflict issues.

Graduation Semester

2010-05

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Copyright 2010 Esra Ergul

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