Review of the 3rd InsTED Workshop at Indiana University


We would like to thank all the participants of the 3rd InsTED workshop for making the meeting interesting and productive.  We also would like to thank the Department of Economics at Indiana University Bloomington for hosting the Workshop.  We are grateful to them, and to the Center for Applied Economics and Policy Research, The Ostrom Workshop, The University of Exeter Business School and Vanderbilt University for sponsoring this event.  The workshop took place from May 13th-15th 2016.  Special thanks go to Mostafa Beshkar as chair of the local organizing committee and Howard Swyers for his cheerful interactions with everyone and his meticulous attention to detail in the organization of this event. We are grateful to the PhD students for their great help with the logistics and their intellectual engagement with the meeting.

The program comprised of 23 papers that ranged over three broad topics at the intersection of institutions, trade and economic development.  One focused on the institutional determinants of economic development, especially through the formation of human and physical capital and property rights over land.  The second concerned the effectiveness of WTO institutions to promote international trade and economic performance.  The third was on institutions broadly defined, which constrain the choices of firms and policy makers, and how these interact with trade and immigration.  There now follows a summary of all the papers presented at the workshop, organised under these three topic headings.  A bibliography, together with links to papers where available, is provided at the end.  Please note that for brevity the summary mentions presenters’ names but not those of their co-authors and does not include affiliations.  This information is contained in the papers linked below.

Institutional Determinants of Economic Development

Institutions are now widely recognized as central in the determination of economic performance and development.  But active research is ongoing to discover the specific roles that institutions play.  Our two keynote addresses focused on understanding these roles, as did a number of the other papers presented at the workshop.

The first keynote address was given by Stephen Yeaple, who considered the role of educational institutions in human capital accumulation.  His paper focused on the fact that most occupations require a mix of cognitive and non-cognitive skills, which are two different forms of human capital.  The issue is that while cognitive skills such as mathematical reasoning can be measured directly, non-cognitive skills are more difficult to capture.  His paper provided a framework to measure and compare the roles of cognitive and non-cognitive skills in economic performance across countries using structural estimation techniques first developed to understand international trade.  Based on the framework, a non-cognitive skill is one that raises incomes but does not show up in test scores.  The framework made it possible to see that focusing an education system excessively on developing a test-based schooling environment may not be conducive to developing, for example, non-cognitive leadership type skills.  A striking result Steve presented was that in the US, substituting a Korean style test-based schooling environment for the current one would raise US test scores by 18% but reduce GDP by 3.2%.  The paper therefore cautions against blind attempts to develop human capital by directing educational institutions at raising performance on international test scores.

The second keynote address was given by Kishore Gawande and concerned the interaction between land rights reform, urban development and political stability in China.  (No significance should be attributed to the sequencing of these talks out of alphabetical order as this was done to suite the speakers’ schedules.)  The idea that institutions securing property rights over land play a crucial role in capital formation and economic growth goes all the way back to Adam Smith.  The Property Law of the People’s Republic of China, adopted in 2007, was hailed as a decisive step in the development of private property rights in China, aimed at promoting economic development.  But it coincided with a rise in protests by farmers who have apparently had their land expropriated by subnational government officials.  Kishore’s paper establishes a structural break giving rise to a sharp increase in land lease revenues at the time of the land rights reform in 2007, causing an increase in the report of protests by about 40%.  A methodological innovation in this study is that the main dependent variable is the number of reports of protest in the media, based on textual analysis of media reports, as opposed to the actual number of protests.  This distinction is relevant because the Chinese government is more concerned about reports of protests than the actual number of protests themselves.  Since the late 1970’s, a central part of the Chinese national government’s development strategy has involved managing the movement of resources out of agriculture and into cities.  This has always involved a political balancing act between rural and urban interests groups.  This study shows how the measurement of protests can be used as an indicator of whether the government is managing that balancing act successfully.

Relatedly, a branch of the literature on the natural resource curse has argued that poorly functioning economic and political institutions allow the discovery of natural resources to undermine growth.  This happens when politically powerful agents divert resources to try to expropriate or otherwise extract rents from the natural resource.  The paper presented by Manasa Patnam provided an intriguing example of this by studying the creation of three new Indian states in 2000, comprising areas with some of the largest endowments of natural resources in the country.  Employing a regression discontinuity design the paper finds that, while the economic effect of creating the new states is generally favorable, constituencies rich in resources see a relative worsening of outcomes in both economic activity and inequality.

On the subject of property rights enforcement, the paper presented by Jan Auerbach studied the endogenous enforcement of property rights in a setting where this is costly and the government must also expend resources to verify taxable incomes. He provides the conditions under which the government, in maximizing national welfare, will find it worthwhile to bear the costs of implementing perfectly secure property rights using redistributive taxation.  The paper presented by Federica Carugati was related in that it studied the introduction of legal institutions, in this case in ancient Athens to enforce contracts.  As with many such reforms this was driven by Athens’ loss of a war against the Peloponnesian League led by Sparta (431–404 BC).  The research argues that the court system, one of the first known cases where foreigners and even slaves were treated equally to domestic citizens, was instrumental in supporting the recovery of Athens because it lowered the costs of trade.

An exciting branch of the literature makes use of the fact that institutions can give rise to geographical discontinuities that make it possible to assess the effects of policy using a regression discontinuity design (RDD).  The paper presented by Tobias Seidel was a nice example of such a study that sought to identify permanent effects of regional development subsidies targeted at an underdeveloped region of West Germany called the Zonenrandgebiet (ZRG) in the early 1970s.  The institutional setting of the ZRG gives rise to discontinuities that the paper uses to identify causal effects of the subsidies.  The subsidies were applied in a geographical region with a well-defined border, which meant that the discontinuity in economic activity at this border could be interpreted as a causal effect of the subsidies.  As the treatment border does not separate areas with different institutions, many concerns of other discontinuities that are important at country borders can be ruled out.  The paper found that the subsidies had long lived effects on economic outcomes through the building of infrastructure and other capital formation and were not solely attributable to agglomeration externalities.

Turning to financial institutions and economic development, the papers presented by Sarah Danzman and Rahul Mukherjee explored different aspects of institutional reforms that lead countries to open up to foreign direct investment (FDI).  Sarah’s paper focused on the tension between resistance to FDI by domestic firms on the one hand, because they face competition from foreign firms, and the receptiveness of labor interests who anticipate a rise in labor demand.  Her empirical investigation focuses on banking reforms that effectively redirect credit away from domestic firms towards foreign firms engaging in FDI.  She finds that these reforms often take place during times of balance of payments crisis when the need for foreign financing is acute.  Contrastingly, Rahul’s paper focused on variations in the degree to which firms are foreign finance dependent.  Based on a dataset of cross-border and domestic acquisitions in the manufacturing sector of fifteen emerging-market economies from the 1990s onwards, his paper presents evidence that firms in external finance dependent sectors are more likely to be targets of foreign acquisitions.  A key finding from an institutional standpoint is that domestic financial development plays a mitigating role, effectively reducing the dependence of domestic firms on foreign finance and hence acquisition.  These effects are most quantitatively significant for the least liquid sectors.  Based on this evidence, the paper concludes that industry-level liquidity, as proxied by external finance dependence and asset tangibility, plays a key role in determining FDI.  This is especially true in countries where domestic financial markets are less developed.

WTO Institutions, International Trade and Economic Performance

With the stalling of the current WTO ‘Doha’ round of multilateral trade talks, attention has shifted to the effectiveness of other institutional features of the WTO to consolidate the gains from trade facilitated by past trade talks.  These institutional features include the availability of temporary trade barriers (TTBs) to provide escape from WTO commitments, the WTO’s dispute settlement mechanism (DSM), and the ‘trade related aspects of intellectual property’ (TRIPS) agreement.  A number of papers presented at the workshop focused on these features.  One way that multilateral trade negotiations could be revitalised might be through a shift from shallow to deep integration, as has happened already in a number of preferential trade agreements, and that was a focus of attention here as well.

We will review the presentations in each of these areas, looking at TTBs and the DSM first.  Since this was a workshop, some presentations were of promising project proposals and preliminary results as well as more polished work.  Kristy Buzard, for example, presented a proposal for a project that is at a preliminary stage.  While a current theme in the literature concerns the imposition of TTBs, Kristy’s new focus is on how long they will last once they have been imposed.  A number of factors are likely to play a role here, ranging from how profitable the industry is with and without protection from the TTB to the nature and persistence of the shock that first gave rise to the TTB.  The plan for the empirical investigation is to focus on anti-dumping (AD) duties since this has been the most actively used form of escape recently.  Shushanik Hakobyan’s presentation switched focus from why countries might seek to impose and sustain AD duties to why those targeted by AD duties might decide to file a trade dispute through the WTO.  The approach of the paper is to assume that a country weighs the costs and benefits of filing a dispute.  The findings are that the higher is export share and hence the more the country has to lose from AD duties the more likely they are to file a dispute.  Prior experience as both a complainant and a defendant are important as well, presumably in lowering the costs of bringing a new dispute.  Finally, Jee-Hyeong Park’s presentation focused on the dispute settlement process, and in particular the WTO’s aim to settle disputes before they reach the full panel process.  His paper analyzes a pre-trial settlement game where the defending government knows the likelihood of winning if the dispute goes to a panel but the complaining government only receives an imperfect signal.  The paper shows that the defending government always tells the truth about the level of political pressure for protection that it faces from domestic interests.  But surprisingly, there is a positive probability that the dispute goes to a panel anyway.  The reason is that the panel serves as a backstop to prevent individual governments from misrepresenting the pressure they face.

Rick Bond and Difei Geng explored the constraints imposed on policy by WTO institutions designed to protect intellectual property rights, particularly TRIPS.  The government, typically of a developing country, will negotiate with a multinational firm such as a pharmaceutical producer over the price at which its patented product is allowed to enter the market.  To prevent the firm from holding out for an unreasonably high price, after a ‘reasonable’ length of time the TRIPS agreement allows the government to issue a compulsory license for the product to be produced by a different firm.  Rick’s paper looked at a situation where the multinational firm has private information about its payoff to entering the market itself and the value of a compulsory license.  He showed that two types of inefficiency arise from the informational friction.  First, too many firms are forced to wait for a license rather than accepting terms of entry to the market themselves.  Second, some firms who do enter the market themselves nevertheless wait until the government offers them sufficiently favourable terms rather than entering immediately as efficiency would dictate.  Difei’s paper considered two policies other than compulsory licenses that governments are permitted to use under TRIPS to control the market power of patent holding pharmaceutical producers: external reference prices (ERPs) and price controls (PCs).  Under a typical ERP policy, the price that a country permits the seller of a patented product to charge in its market depends upon its prices in a well-defined set of foreign countries.  Under PCs, the government typically controls directly some aspect of the firm’s pricing such as the wholesale markup or the retail price.  Using a new theoretical model of an open economy, Difei’s paper considers the interaction between ERPs and PCs.  One key result he reported was that, in equilibrium, the home government maximizes national welfare by setting its ERP so that its own pharmaceutical producer is only just willing to export.  This tends to lead to inefficiently high prices for exports and gives the government of importing countries an incentive to set PCs on imports, giving rise to an interesting set of strategic interactions over these two different types of policy.

The General Agreement on Tariffs and Trade (GATT) endorsed a ‘shallow integration’ approach to trade agreements involving border policy measures, principally tariffs.  But since the conclusion of the Uruguay Round in 1995, momentum has shifted to preferential trade agreements that involve ‘deep integration’, which entails behind-the-border policies such as domestic taxation, as well as shallow integration.  One argument against trade agreements involving deep integration is that nations can undermine such agreements by strategically responding with changes in border measures. David DeRemer’s paper considers this argument in a differentiated product setting where exports have both an extensive margin in addition to the usual intensive margin on which the above argument is based.  He showed that if nations can directly influence extensive margins with policies behind the border, then there are gains from deep integration that would not be undermined by changes in trade taxes.  Such deep integration agreements, however, may lead to greater firm entry and smaller firm size, potentially undermining economic efficiency.

The Relationship between Institutions, Trade, and Immigration

Over the last twenty years or so, the pattern of international movement in goods and factors has shifted from being predominantly between developed countries to being between developed and developing countries.  This shift has been facilitated by the rise of information and communication technologies and the fall of transport costs, which have made it easier to organize production internationally through global supply chains.  This reorganization of production has also been influenced by changes in domestic institutions that have been exploited in some cases to help enhance production opportunities but in others to protect domestic interests.  Fariha Kamal’s paper looked at how the quality of domestic institutions affects the spatial concentration of firms that supply the US.  Her paper presents evidence that poorer quality contracting institutions give rise to greater spatial concentration as suppliers seek to use informal institutions in trade networks to substitute for poor formal institutions.  This tendency was found to be more pronounced in industries that make more intensive use of contracting institutions.  Ryan Lee’s paper considered the dynamics of how supply chain relationships are established.  Using a matching framework, his paper explores the idea that even though a firm may have found a match to an overseas supplier it may continue to search for a better match.  It shows that trade networks are particularly important in the short run as firms first look for international suppliers but become less important over time, possibly as firms learn more about the underlying structural and institutional features of the foreign market.  Network effects are also found to be more important for supply chains in heterogenous product inputs than homogeneous ones.  John Morrow’s paper looked at the role of supply chains in helping to determine the new products that multiproduct firms diversify into.  The basic idea is that the choice of which new products a firm diversifies into depends on the know-how that the firm already has about the production of bespoke inputs for existing products.  His paper shows that a firm’s idiosyncratic horizontal and vertical similarity to a product’s input-output structure predicts whether a firm will decide to produce it.  Using product-specific policy changes for a firm’s inputs and outputs, the paper goes on to show that input linkages are the most important, suggesting that firms’ product capabilities depend more on economies of scope than product market complementarities.  Rather than focus on a specific set of institutional or supply-chain features, Gary Lyn’s paper considered the interaction between factors that give rise to comparative advantage between countries on the one hand and increasing returns that are external to firms within a local geographical region (Marshallian externalities) on the other.  This type of framework makes it possible to understand why, for example, China tends to export labor intensive manufactures nationwide while at the same time producing particular products such as buttons in geographically concentrated clusters.  Possibly because this type of setting is plagued by multiple equilibria, it has received limited attention in past formal studies.  The major contribution of Gary’s paper is to provide a model with these features that has a unique equilibrium that can be embedded in a gravity model.  It should therefore be possible to extend this framework in future work to consider whether specific policies and institutions can support the establishment of new clusters.

Variation in the rates of economic recovery from the recent economic crisis, coupled with the Syrian refugee crisis, has brought issues concerning immigration to the fore especially in Europe.  There has been a lot of discussion in the press as to the role played by European Union (EU) institutions in shaping policy responses to the crisis.  Much of the discussion has centered around the ‘free movement of persons,’ which constrains EU member governments’ ability to control immigration within the EU.  The paper presented by Ben Zissimos asked on what economic grounds a member government would want to adopt an institution that tied its hands over the control of immigration in this way.  The answer proposed in his paper was that the institution resolves a commitment problem faced by a government who wants to promise to allow immigration in order to give entrepreneurs an incentive to invest.  But entrepreneurs anticipate the government’s incentive to renege on that promise if the median voter is a relatively low-skilled worker who loses out as a result of immigration.  So the free movement of people serves as a way to commit to the immigration that entrepreneurs desire, but creates popular discontent with the EU institution because it is seen as supporting an undemocratic outcome.  The paper presented by Chris Ellis focused on the related issue of economic and cultural integration of immigrants.  In the model he presented, the different educations and experiences of immigrants give rise to complementarities when they match with natives in the work place.  But difficulties with communication potentially dampen the gains from the complementarities.  Based on these underlying features, policy-makers may push either for policies that support assimilation or for multi-culturalism within a society.  The organization that is chosen may then give rise to less desirable outcomes, whereby assimilation may lead to greater competition for jobs which may be unpopular with some natives, while multi-culturalism may lead to ghettoization.

Geography is perhaps the main competing explanation for the variation in economic activity across a region.  The paper given by Alexandre (Sasha) Skiba presented a more nuanced perspective by assessing the extent to which geography interacts with international trade to explain the variation in the purchasing behavior of US households across the income distribution.  His paper exploits proxies for the internal trade costs that reflect internal geography to identify exogenous variation in imports within the U.S. For example, the states with major ports and airports receive substantially larger and vastly more diverse inflows of imports.  The results show that variation in access to imports explains the differences in the quality of purchased durable goods among the U.S. households across the income distribution.

An exciting new area of research concerns the interaction between economic and health outcomes, determined in part by institutions governing the economic environment in general and health care in particular.  The paper presented by Yarine Fawaz looked at the adverse effects on health of US workers in import-competing sectors as a result of increased trade with China.  Specifically, her paper looked at the effect of the increase in trade on mortality at the individual level.  Its analysis is based on a unique dataset linking individual deaths with industry level trade flows over a 26 year timeframe.  While the effect of increased imports is associated with an overall increase in deaths due to suicide, cirrhosis and respiratory diseases, the effects are heterogeneous across sectors.  They are found to be particularly pronounced in sectors that account for a large share of economic activity in a county, possibly reflecting limited alternative possibilities for workers adversely affected by import penetration.  Relatedly, Tommasso Tempesti considered how fringe benefits from employment are affected by import competition, a major component of which are benefits relating to health insurance.  He focuses on workers who worked in manufacturing from 1991 to 2006. He combines an individual level dataset with a measure of exposure to Chinese imports at the industry level and with an instrument for it. Surprisingly, he finds that the effects of Chinese import competition on fringe benefits is actually positive and economically and statistically significant.  Finally, the paper presented by Anna Kochanova asked whether Soviet political and economic institutions shape the non-cognitive skills of individuals.  Overall, her paper found that citizens in the former Soviet republics that were more insulated from market mechanisms during the time of the Soviet Union had greater psychological difficulty adapting to a market based economy after the Soviet Union’s collapse.

Bibliography of Papers Presented with Links Where Available (Presenters’ Names Shown in Bold)

Jerome Adda, Yarine Fawaz “Trade-induced Mortality.”

Ron Alquist, Rahul Mukherjee, Linda L. Tesar “Liquidity-Driven FDI.”

Jan U. AuerbachProperty Rights Enforcement with Unverifiable Income.”

Mostafa Beshkar, Jee-Hyeong Park Pre-trial Settlement with Imperfect Private Monitoring.”

Johannes Boehm, Swati Dhingra, John Morrow Swimming Upstream: Input-Output Linkages and the Direction of Product Adoption.”

Eric W. Bond, Larry Samuelson “Compulsory Licenses.”

Kristy Buzard “Temporary Trade Barriers: When Will They End?”

Federica Carugati “Extending Access to the Rule of Law: Maritime Trade, Fiscal Policy, and Legal Change in Ancient Athens.”

Sarah Danzman “Liberalizing for Liquidity: Local Firms, Financing Constraints and Investment Policy Reform.”

David R. DeRemer “Deep Trade Agreements and the Extensive Margin of Trade.”

Amrita Dhillon, Pramila Krishman, Manasa Patnam, Carlo Perroni “’The Natural Resource Curse Revisited: Theory and Evidence from India.”

Maximilian von Ehrlich, Tobias Seidel The Persistent Effects of Place-based Policy: Evidence from the West-German Zonenrandgebiet.”

Christopher Ellis, John Thompson, Jiabin Wu “Complementarities, Coordination and Culture.”

Kishore Gawande, Nicholas Reith “The Disappearing Ninth Square: Land and Protests in China.”

Difei Geng, Kamal Saggi “External Reference Pricing Policies, Price Controls, and International Patent Protection.”

Atisha Ghosh, Ben Zissimos “The Role of Institutions in Determining Immigration and Investment.”

Shushanik Hakobyan, Anthoula Vasiliou “Anti-Dumping Duties and WTO Trade Disputes.”

Peter R. Herman, Ryan LeeProduct Differentiation and the Effects of Trade Networks over Time.”
Fariha Kamal, Asha Sundaram “Spatial Concentration of Sourcing in International Trade: The Role of Insititutions.”

Anna Kochanova, Maryam Naghsh Nejad “Minds for the Market: Non-Cognitive Skills in Post-Soviet Countries.”

Konstantin Kucheryavyy, Gary Lyn, Andrés Rodríguez-Clare “External Economies and International Trade: A Quantitative Framework.”

Volodymyr Lugovskyy, Alexandre Skiba “Income Distribution, Internal Geography, and Gains from Trade.”

Tommaso Tempesti Fringe Benefits and Import Competition.”

Stephen Yeaple (Penn State) “Educational Quality Along Multiple Dimensions: A Cross Country Analysis.”