The gravity model has been widely used to infer substantial trade flow effects of institutions such as customs unions and exchange rate mechanisms. McCallum [1995] found that the US-Canada border led to trade between provinces that is a factor 22 (2,200%) times trade between states and provinces, a spectacular puzzle in light of the low formal barriers on this border. We show that the gravity model usually estimated does not correspond to the theory behind it. We solve the 'border puzzle' by applying the theory seriously. We find that national borders reduce trade between the US and Canada by about 44%, while reducing trade among other industrialized countries by about 30%. McCallum's spectacular headline number is the result of a combination of omitted variables bias and the small size of the Canadian economy. Within-Canada trade rises by a factor 6 due to the border. In contrast, within-US trade rises 25%.

https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=256086

Gravity with Gravitas: A Solution to the Border Puzzle

Gravity equations have been widely used to infer trade flow effects of various institutional arrangements. We show that estimated gravity equations do not have a theoretical foundation. This implies both that estimation suffers from omitted variables bias and that comparative statics analysis is unfounded. We develop a method that (i) consistently and efficiently estimates a theoretical gravity equation and (ii) correctly calculates the comparative statics of trade frictions. We apply the method to solve the famous McCallum border puzzle. Applying our method, we find that national borders reduce trade between industrialized countries by moderate amounts of 20-50 percent.

/pdf/gravity-with-gravitas-a-solution-to-the-border-puzzle-4dn7us6msp.pdf

This handbook looks to provide academics and students with a comprehensive and holistic understanding of the phenomenon of innovation. Innovation spans a number of fields within the social sciences and humanities: Management, Economics, Geography, Sociology, Politics, Psychology, and History. Consequently, the rapidly increasing body of literature on innovation is characterized by a multitude of perspectives based on, or cutting across, existing disciplines and specializations. Scholars of innovation can come from such diverse starting points that much of this literature can be missed, and so constructive dialogues missed. The editors of The Oxford Handbook of Innovation have carefully selected and designed twenty-one contributions from leading academic experts within their particular field, each focusing on a specific aspect of innovation. These have been organized into four main sections, the first of which looks at the creation of innovations, with particular focus on firms and networks. Section Two provides an account of the wider systematic setting influencing innovation and the role of institutions and organizations in this context. Section Three explores some of the diversity in the working of innovation over time and across different sectors of the economy, and Section Four focuses on the consequences of innovation with respect to economic growth, international competitiveness, and employment. An introductory overview, concluding remarks, and guide to further reading for each chapter, make this handbook a key introduction and vital reference work for researchers, academics, and advanced students of innovation. Contributors to this volume - Jan Fagerberg, University of Oslo William Lazonick, INSEAD Walter W. Powell, Stanford University Keith Pavitt, SPRU Alice Lam, Brunel University Keith Smith, INTECH Charles Edquist, Linkoping David Mowery, University of California, Berkeley Mary O'Sullivan, INSEAD Ove Granstrand, Chalmers Bjorn Asheim, University of Lund Rajneesh Narula, Copenhagen Business School Antonello Zanfei, Urbino Kristine Bruland, University of Oslo Franco Malerba, University of Bocconi Nick Von Tunzelmann, SPRU Ian Miles, University of Manchester Bronwyn Hall, University of California, Berkeley Bart Verspagen , ECIS Francisco Louca, ISEG Manuel M. Godinho, ISEG Richard R. Nelson, Mario Pianta, Urbino Bengt-Ake Lundvall, Aalborg

The Oxford Handbook of Innovation

Corruption has its adverse effects not just on static efficiency but also on investment and growth. This chapter discusses the reasons for the persistence of corruption that have to do with frequency-dependent equilibria or intertemporal externalities. There are many cases where corruption is mutually beneficial between the official and his client, so neither the briber nor the bribee has an incentive to report or protest, for example, when a customs officer lets contraband through, or a tax auditor purposely overlooks a case of tax evasion, and so on. The idea of multiple equilibria in the incidence of corruption is salient in some of the recent economic theorists' explanations. There is a strand in the corruption literature, contributed both by economists and non-economists, suggesting that, in the context of pervasive and cumbersome regulations in developing countries, corruption may actually improve efficiency and help growth.

Corruption and Development: A Review of Issues

This paper studies the impact of a regional free trade agreement, MERCOSUR, on technology upgrading by Argentinean firms. To guide empirical work, I introduce technology choice in Melitz’s (2003) model of trade with heterogeneous firms. The joint treatment of the technology adoption and exporting choices shows that the increase in revenues produced by trade integration can induce exporters to upgrade technology. An empirical test of the model reveals that firms in industries facing higher reductions in Brazil’s import tariffs increase their investment in technology faster and exporters upgrade technology faster than other firms in the same industry.

/pdf/trade-liberalization-exports-and-technology-upgrading-lgob5luyt0.pdf

Trade Liberalization, Exports, and Technology Upgrading: Evidence on the Impact of MERCOSUR on Argentinian Firms

The paper explores the evolution of export diversification patterns along the economic development path. Using a large database with 156 countries over 19 years at the HS6 level of disaggregation (4’991 product lines) we look for action at the “intensive” and “extensive” margins (diversification of export values among active product lines and by addition of new product lines respectively) using various export concentration indices and the number of active export lines. We also look at new product introduction as an indicator of “export-entrepreneurship”. We find a hump-shaped pattern of export diversification similar to what Imbs and Wacziarg (2003) found for production and employment. Diversification and subsequent re-concentration take place mostly along the extensive margin, although the intensive margin follows the same pattern. This hump-shaped pattern is consistent with the conjecture that countries travel across diversification cones, as discussed in Schott (2003, 2004) and Xiang (2007).

Export Diversification: What’s behind the Hump?

HY should export diversification be taken as a policy objective per se? There are two reasons that it should not. First, according to Ricardo, countries should specialize, not diversify. Second, the Heckscher-Ohlin model implies that export patterns are largely determined by endowments, so, if anything, we should worry about factor accumulation, not diversification. Yet export diversification is a constant preoccupation of policymakers in developing countries. As de Ferranti et al. (2002) note, ‘‘A recurrent preoccupation of [Latin American] policymakers is that their natural riches produce a highly concentrated structure of export revenues, which then leads to economic volatility and lower growth’’ (p. 38). The notion that export patterns are fully determined by endowments is of course naive. The relationship of endowments, trade, and growth is a complex and imperfectly understood one. Intra industry trade models showed long ago that many factors other than endowments, including market failures and policies, can affect trade patterns. More recently, Hausmann, Hwang, and Rodrik (2007) argued that export patterns can display path dependence in the presence of externalities.

/pdf/export-diversification-what-s-behind-the-hump-jjnuv149bb.pdf

Export Diversification: What's behind the Hump?

Corruption as a gamble

https://www.econstor.eu/bitstream/10419/50931/1/349052875.pdf

Contribution to Productivity or Pork Barrel? : The Two Faces of Infrastructure Investment

Overview
- Trade flows and trade policies need to be properly quantified to describe, compare or follow the evolution of policies between sectors or countries or over time. This is essential to ensure that policy choices are made with an appropriate knowledge of the real conditions.
- This practical guide introduces the main techniques of trade and trade policy data analysis. It shows how to develop the main indices used to analyse trade flows, tariff structures and non-tariff measures. It presents the databases needed to construct these indices as well as the challenges faced in collecting and processing these data, such as measurement errors or aggregation bias.
- Gravity models are a means to understanding the determinants and patterns of trade and assessing the trade effects of certain trade policies, such as WTO accession or the signing of preferential trade agreements. The appropriate specification of the model and estimation method is crucial for reliable results. This practical guide guides you in making the right choice.
- Trade policies generally have diverse effects across economic sectors and ultimately individuals. The welfare impact of trade policies is therefore an important concern for policy-makers.
- This practical guide provides an overview of how applied partial and general equilibrium models can be used to assess the impact of policy reforms such as tariff reductions. The aim is to provide the reader with an understanding of how these models work, what they can and cannot do, and what is required to make them operational.
- In particular, the practical guide offers a hands-on introduction on how to use the most common partial equilibrium models and how to estimate the distributional effects of trade policies on welfare, in particular on inequality and poverty.

Olivier Cadot

Papers

Export Diversification: What’s behind the Hump?

Export Diversification: What's behind the Hump?

Corruption as a gamble

Contribution to Productivity or Pork Barrel? : The Two Faces of Infrastructure Investment

A practical guide to trade policy analysis