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2020: Forthcoming papers and abstracts

December 2020

Yoshinori Kurokawa (University of Tsukuba)
"A Simple Model of Competition Policies, Trade, and the Skill Premium"

The International Economy

We develop a simple model of competition policies and trade, where fixed costs are shared within a cartel. The closed economy model shows that entry deregulation can increase the skill premium by increasing firm numbers and decreasing firm size, while an antitrust policy has the opposite effects. The numerical example with two asymmetric countries shows that entry deregulation and antitrust policy in one country, respectively, can increase and decrease the skill premia in both countries; however, the domestic skill premium is changed by a greater percentage than the foreign one. Available U.S. data show that our model seems empirically relevant.

Kazunobu Hayakawa (Institute of Developing Economies), Hiroshi Mukunoki(Gakushuin University)
“Impacts of Lockdown Policies on International Trade”

Asian Economic Papers

The aim of this study is to quantify how lockdown policies implemented in response to the COVID-19 pandemic affected international trade in the first half of 2020. We examine monthly world trade data between January and June in both 2019 and 2020. Our findings can be summarized as follows. Stay-at-home orders did not have significant and robust effects on trade. Negative effects were found in only some industries, including those producing durable products and essential products. However, workplace closures had significantly negative effects on trade, except for intra-Asian trade. These effects of workplace closures can be found in most industries.

Hiroshi Mukunoki (Gakushuin University)
“Trade Liberalization and Incentives to Implement Antidumping Protection”

International Review of Economics and Finance

Reducing trade costs by reducing tariffs can be overturned if the tariff reductions induce governments to implement antidumping (AD) measures. Some empirical studies show that a commitment to reduce tariffs leads to more frequent use of AD protection. Other studies show that we rarely observe this substitution effect between tariffs and AD actions. This study theoretically explores the conditions under which a lower import tariff promotes AD actions. Results suggest that a lower tariff encourages AD actions in countries with a small market size. However, it can either encourage or discourage AD actions of countries with a large market size.

November 2020

Tsuyoshi Toshimitsu (School of Economics, Kwansei Gakuin University)
“Does an incumbent monopolist have an incentive to invite new entry through granting a free patent license?”

Research in Economics

We examine whether an incumbent monopolist has an incentive to invite a new entry. In particular, we demonstrate the condition of a profit-raising entry effect in the presence of network externalities. Here the incumbent monopolist grants a free patent license for a perfectly compatible product for a new firm when it can choose the level of compatibility.

Kozo Kiyota (Keio University and RIETI)
“The Leontief Paradox Redux”

Review of International Economics

Shortly after Edward E. Leamer found that the Leontief Paradox was based on a simple conceptual misunderstanding in 1980, Richard A. Brecher and Ehsan U. Choudhri in their 1982 article argued that the fact that the United States exported labor services was, in itself, paradoxical because it is true if and only if its per capita consumption is less than the world average. Surprisingly, however, no formal answer to this paradox has been provided for nearly four decades. This paper revisits this paradox and formally shows that the paradox can be resolved if the Heckscher–Ohlin–Vanek model takes into account technology differences across countries and trade imbalance. In contrast, the paradox cannot be resolved even if the analysis takes into account quasi‐homothetic preferences, the Armington home bias, or offshoring.

September 2020

Takumi Naito (Waseda University) and Laixun Zhao (Kobe University)
“Study Abroad, Return Migration and Capital Accumulation”

Economic Modelling

This paper examines the interplays among studying abroad, return migration and capital accumulation, in a dynamic general equilibrium model featuring heterogeneous ability. Households invest in education and make two migration decisions: whether to study abroad and subsequently whether to return home. The model predicts that the highest, middle and lowest-ability people choose respectively permanent migration, return migration and no migration. More interestingly, we find a novel migration cycle: returnees bring back learned-knowledge and over time, capital accumulates, attracting more return migration. Further, the usual "brain drain" in the literature can be turned into "brain gain", by providing a subsidy to studying abroad and returning home.

Kazumichi Iwasa (Kobe University) and Laixun Zhao (Kobe University)
“Inequality and catching-up under decreasing marginal impatience”

Journal of Mathematical Economics

This paper examines how endogenous time preference interacts with inequalities in economic development. We consider two distinct groups of households with intrinsic inequality (e.g., capitalists and workers), and show that (i) under decreasing marginal impatience (DMI), an unequal society may be preferable for poor households than an egalitarian one in which every household owns an equal share of asset; (ii) poor households tend to benefit more under DMI than CMI (constant marginal impatience) from positive shocks; (iii) inequality exhibits a sharp inverted-U shape as more people become rich, which should be good news for developing countries in catching up; and (iv) a tax on capital income reduces poor households’ income when the fraction of the rich is sufficiently small. We also examine immigration and discuss capital mobility.

August 2020

Manoj Atolia (Florida State University) and Yoshinori Kurokawa(University of Tsukuba)
"Entry Costs, Task Variety, and Skill Flexibility: A Simple Theory of (Top) Income Skewness"

The B.E. Journal of Macroeconomics

This paper develops a simple model that provides a unified explanation for both an increase in below-top skewness and a much larger increase in within-top skewness of wage income distribution. It relies on a single mechanism based on the fixed costs of firm entry. A decrease in entry costs increases the variety of goods/tasks and thus the demand for higher-skilled workers who are more flexible in handling a variety of tasks, which increases both types of skewness. Differences in flexibility are modeled as differences in the fixed labor setup costs required to handle a given number of tasks. Our numerical experiments in a calibrated model show that a decrease in entry costs – entry deregulation – can be a quantitatively important source of both the increase in below-top skewness and the much larger increase in within-top skewness observed in the U.S. Moreover, the experiments imply that the observed differences in entry deregulation can cause significant differences in the top skewness across countries that have similar technological change. This can provide an answer to Piketty and Saez’s (2006) question: Why have top wages surged in English speaking countries in recent decades but not in continental Europe or Japan, which have gone through similar technological change?

Jay PilChoi(Michigan State University), Taiji Furusawa(University of Tokyo), and Jota Ishikawa(Hitotsubashi University)
“Transfer pricing regulation and tax competition”

Journal of International Economics

The paper analyzes multinational enterprises' incentives to manipulate internal transfer prices to take advantage of tax differences across countries, and implications of transfer-pricing regulations as a countermeasure against such profit shifting. We find that tax-motivated foreign direct investment (FDI) may entail inefficient internal production but may benefit consumers. Thus, encouraging transfer-pricing behavior to some extent can enhance social welfare. Furthermore, we consider tax competition between two countries to explore its interplay with transfer-pricing regulations. We show that the FDI source country will be willing to set a higher tax rate and tolerate some profit shifting to a tax haven country if the regulation is tight enough. We also indicate a novel mechanism through which it is the larger country that undertakes tax-motivated FDI, the pattern we often observe in reality.

Been-Lon Chen (Academia Sinica), Yunfang Hu (Kobe University), and Kazuo Mino (Kyoto University)
“Income Taxation Rules and Stability of a Small Open Economy”

Journal of Macroeconomics

This paper examines the stability of a small open economy under alternative income taxation rules. Using a one-sector real business cycle model with external increasing returns, we show that if the income tax schedule is linear, the small open economy will not generate equilibrium indeterminacy, but it exhibits a diverging behavior under certain conditions. In this case, an appropriate choice of nonlinear tax on the factor income may recover the saddle-point stability. We also reveal that if the taxation on the interest income on financial assets is regressive, then the small open economy may exhibit equilibrium indeterminacy. In this situation, a progressive tax rule on the interest income can contribute to eliminating sunspot-driven fluctuations.

Hiroshi Kurata (Tohoku Gakuin University), Takao Ohkawa (Ritsumeikan University), and Makoto Okamura (Hiroshima University)
“A higher-cost region excessively attracts firms”

Journal of International Trade & Economic Development

This study examines the economic efficiency associated with firm location in a non-traded goods industry. This industry comprises of two segmented regions (markets) and a fixed number of potentially identical, oligopolistic firms. We consider the following two-stage game. In the first stage, firms determine the region in which they want to locate simultaneously and independently. In the second, given the pattern of firm location, every firm engages in Cournot competition in each market. If a potentially identical firm is located in a different region, the firm has a different cost function, and therefore, different fixed and marginal costs. Thus, the cost function of each firm is not firm-specific but region-specific. We define welfare as the sum of the region's social surplus, which includes consumer surplus and producer surplus. We obtain the following results. First, when only the marginal costs differ across regions, from a welfare perspective, an insufficient number of firms are located in the higher-cost region. Second, when only the fixed costs differ across regions, an excessive number of firms are located in the higher-cost region. Third, when a region has sufficiently higher fixed and marginal costs than another, an excessive number of firms are located in this region.

July 2020

Wei Hao (Beijing Normal University), Ran Yuan (Beijing Normal University) and Laixun Zhao (Kobe University)
“International Talent Inflow and R&D Investment: Firm-Level Evidence from China”

Economic Modelling

Using firm-level R&D data with regional international talent data, we find that international talent increases the R&D investment of Chinese manufacturing firms, a result that is further confirmed with patent data and under a number of robustness checks. These findings stem from two mechanisms: international talent boosts human capital accumulation and provides a diversified labor force. Further, the R&D promoting effect is stronger if firms are located in eastern China rather than in other regions, of small and medium-sized rather than large-sized, of domestic ownership rather than foreign ownership. The policy implication is, the introduction of international talent can be a new way to promoting R&D investment, especially for skilled-labor constrained countries.

Tsuyoshi TOSHIMITSU (School of Economics, Kwansei Gakuin University), Tetsuya NAKAJIMA (Faculty of Economics, Osaka City University)
“On the “Merger Paradox” in Price Competition with Asymmetric Product Differentiation”

Australian Economic Papers

By assuming asymmetric product differentiation, we consider the “merger paradox” in price competition (or the incentive to collude in prices). We investigate whether the emergence of the merger paradox depends on the degree of product differentiation between firms. In particular, unlike Deneckere and Davidson (1985), we demonstrate that if the degree of product differentiation between the insider and outsider is sufficiently small, then they are strategic substitutes, and thus, the merger paradox arises in price competition.

Kazunobu Hayakawa (Institute of Developing Economies), Jota Ishikawa (Hitotsubashi University), Nori Tarui (University of Hawaii)
"What goes around comes around: Export-enhancing effects of import-tariff reductions"

Journal of International Economics

In international trade, transportation requires a round trip for which a transport firm has to commit to shipping capacity that is sufficient to meet the maximum shipping volume. This may cause the “backhaul problem.” Trade theory suggests that, facing the problem, transport firms with market power adjust their freight rates strategically when import tariffs change. As a consequence, a country reducing its import tariffs may experience an increase in exports as well as imports. Using worldwide data covering 1995–2007, we find evidence that supports these predictions: a 1% reduction in an importer's tariffs increases the import freight rates by around 0.8%; decreases the export freight rates by around 1.1%; and increases the export quantity by 0.6% to 1%. These findings indicate a new mechanism through which import-tariff reductions lead to export expansions.

April 2020

Satoshi Honma (Tokai University), Yushi Yoshida (Shiga University)
"An Empirical Investigation of the Balance of Embodied Emission in Trade: Industry Structure and Emission Abatement"

Economic Modelling

By constructing the world panel dataset for the pollution emission embedded in international trade of 132 countries for the period between 1988 and 2008, we investigate whether the balance of embodied emission in trade (BEET) is consistent with the implication of pollution haven hypothesis (PHH). By using two differently constructed datasets, we are able to distinguish between the composition (i.e., changes in industry structure of international trade) effect and the technique (i.e., improvement in emission abatement) effect. We find that the composition effect is neither related with the income level nor the democracy level of countries. However, the empirical evidence, with consideration for the technique effect, provides a partial support that income level is negatively related with the BEET. Therefore, the BEET in fact has worsened for developing countries, but not by the composition effect assumed in the PHH.

March 2020

Theresa Greaney (University of Hawaii), Kozo Kiyota (Keio University, University of Hawaii, and RIETI)
"The Gravity Model and Trade in Intermediate Inputs"

The World Economy

Is the gravity model as applicable to trade in intermediate inputs as it is to trade in final goods? One of the contributions of this paper is that we explicitly account for the dual nature of products that can be used as either intermediate inputs or final goods. We find that the structural gravity model performs extremely well for describing bilateral trade in final goods and in intermediate inputs. Moreover, this continues to hold even when we focus on a subset of countries in which intermediate inputs trade accounts for a growing share of trade, namely `Factory Asia'. However, the gravity model may perform poorly due to model misspecification (i.e., exclusion of intranational trade) and/or sample selection, even after the model considers the dual nature of products. We demonstrate that the poor performance of the gravity model is not attributable to the large trade flow of intermediate inputs, which supports the continued use of the model as these trade flows continue to grow in importance worldwide.

Tsuyoshi Toshimitsu (Kwansei Gakuin University)
"Note on the excess entry theorem in the presence of network externalities"

Journal of Industrial and Business Economics

Focusing on the type of consumer expectations, i.e., passive and responsive expectations, we reconsider the excess entry theorem in the case of Cournot oligopoly with network externalities. We demonstrate that whether the number of firms under free entry is socially excessive or insufficient depends on the type of consumer expectations and the degree of network externalities. That is, in the case of passive expectations, if the degree of network externalities is sufficiently large (small), the number of firms under free entry is socially insufficient (excessive), based on the second-best criteria. However, in the case of responsive expectations, the number of firms under free entry is socially excessive, based on the second-best criteria.

February 2020

Hiroshi Kurata (Tohoku Gakuin University), Ryoichi Nomura (Ritsumeikan University), and Nobuhito Suga (Hokkaido University)
"Vertical specialization and North-South trade: industrial relocation, wage and welfare"

Review of International Economomicss

This paper presents a North–South trade model with vertically linked industries and examines how declining costs of trade across stages of production encourage vertical specialization and affect wages and welfare. As trade costs fall below a threshold, the production of all final goods relocates to the South and vertical specialization emerges. In some industries, production of intermediate goods also relocates against comparative costs because of benefits of co‐location, and further declines in trade costs lead to reshoring. A country may temporarily lose from falling trade costs, but both countries can be better off after trade costs fall sufficiently.

Yasuhiro Takarada (Nanzan University), Weijia Dong (Chinese Academy of Social Sciences), Takeshi Ogawa (Senshu University)
"Shared Renewable Resources and Gains from Trade under Technology Standards"

Review of Development Economics

Using a two-country, two-good model of international trade, we examine gains from trade and strategic interaction in resource management between countries that share renewable resources such as fishery stocks. Two goods are a resource good, which is the harvest of the shared stock, and some other good that may be thought of as manufactures. The productivity of the resource good depends on harvesting technology and the stock level. This paper focuses on technology standards (e.g., restrictions on fishing gears, vessels, areas and time) over other methods for resource management because they are most widely implemented in fisheries. Technology standards are modeled as restriction on the harvesting technology, i.e., under strict technology standards, firms exploit resources as if they are using inferior harvesting technology. We show that an opening up of trade may reduce the shared stock and cause steady state utility to fall in a resource-good importing country and rise in a resource-good exporting country. Strikingly, when the shared stock is in jeopardy (a high demand for the harvest), steady state harvest is maximized after an opening up of trade by what we call multilateral resource management in this paper and both countries gain from trade.

Naoto Jinji (Kyoto University) , Ayumu Tanaka (Chuo University)
"How Does UNESCO’s Convention on Cultural Diversity Affect Trade in Cultural Goods?"

Journal of Cultural Economics

After a long and heated argument on whether international trade in cultural goods should be an exception to free trade, UNESCO's Convention on Cultural Diversity (CCD) was adopted and entered into force in 2007 to protect and promote cultural diversity. This paper provides the first empirical assessment of the impact of CCD on trade in cultural goods. By using trade data for 2004--2010 and employing the first-differenced difference-in-differences method, we estimate the effects of ratifying CCD on the imports of cultural goods and on the extensive margin of cultural imports. Our estimation results provide little evidence that CCD is an instrument of disguised protectionism. Furthermore, we find that CCD contracting countries tend to increase the country margins of cultural imports for some subcategories of cultural goods more than CCD non-contracting countries. This change implies that CCD contributes to the promotion of cultural diversity.

January 2020

Jota Ishikawa (Hitotsubashi University and RIETI), Hodaka Morita (Hitotsubashi University and UNSW Sydney), Hiroshi Mukunoki (Gakushuin University)
"Parallel imports and repair services"

Journal of Economic Behavior & Organization

This study explores the welfare effects of parallel imports when the producer may refuse to provide repair services for parallel imported units, which reduces the degree of price convergence between countries. If the probability of the product’s breakdown is endogenously determined by the producer, permitting parallel imports could increase the probability, because a higher probability leads to a larger price gap. As a result, it is possible that prices increase and welfare deteriorates in both countries. This negative welfare effect is more likely to emerge as the liberalization of trade in goods proceeds. The prohibition of service discrimination recovers the positive welfare effect.

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