Conference program (PDF, 476 Kb)
Abstracts of Keynote lectures:
Jose Scheinkman (Columbia University).
Savings Gluts and Financial Fragility (with Patrick Bolton and Tano Santos)
We investigate the effects of an increase in liquidity (a “savings glut”) on the incentives to originate high quality assets and on the fragility of the financial sector. Originators incur private costs when originating high quality assets. Assets are subsequently distributed in two markets: A private market where informed intermediaries operate and an exchange where uninformed liquidity trades. Uninformed liquidity pays the same price irrespective of the quality of the assets, which discourages good origination. Informed liquidity instead creams skims the best assets paying a premium over the uninformed price, which encourages originators to supply good assets. We show that the positive origination effects of an increase in liquidity matter when the overall level of liquidity is low whereas the opposite is true when liquidity is abundant - an increase in liquidity has a non-monotone effect on origination incentives. Leverage increases monotonically with liquidity and is highest precisely when incentives for good asset origination are at their lowest. Thus plentiful liquidity leads to fragile balance sheets: On the asset side there are more low quality assets and on the liability side more of those assets are funded with debt. We relate our findings to some of the stylized facts observed in financial markets in the lead up to the Great Recession.
Gabriel Felbermayr (LMU)
Firm Dynamics and Residual Inequality in Open Economies (with Giammario Impullitti and Julien Prat)
Wage inequality between similar workers has been on the rise in many rich countries. Recent empirical research suggests that heterogeneity in firm characteristics is crucial to understand wage dispersion. Lower trade costs as well as labor and product market reforms are considered critical drivers of inequality dynamics. We ask how these factors affect wage dispersion and how much of their effect on inequality is attributable to changes in wage dispersion between and within firms. To tackle these questions, we incorporate directed job search into a dynamic model of international trade where wage inequality results from the interplay of convex adjustment costs with firms’ different hiring needs along their life cycles. Fitting the model to German linked employer-employee data for the years 1996-2009, we find that firm heterogeneity explains about half of the surge in inequality. The most important mechanism is tougher product market competition driven by domestic product market deregulation and, indirectly, by international trade.
Svetlana Demidova (MacMaster University)
Trade Policies, Firm Heterogeneity, and Variable Markups
We study unilateral trade liberalization in a model of monopolistic competition with hetero-geneous Örms, endogenous wages, and non-separable and non-homothetic quadratic preferences that generate variable markups. We show that the optimal rate of the revenue-generating import tariff is strictly positive so that protection is always desirable, whether the liberalizing economy is large or small. Yet, if per-unit trade costs are the only policy instrument available, free trade is optimal. Finally, we show that for both policy instruments, variable markups result in negative pro-competitive effects, reducing gains from trade.
Jens Sudekum (Heinrich Heine University)
Distorted Monopolistic Competition ( with Kristian Behrens, Yasusada Murata and Giordano Mion)
We develop a general equilibrium model of monopolistic competition with multiple asymmetric industries and heterogeneous firms. Comparing the market equilibrium and the socially optimal allocation, we characterize two types of inefficiencies: intrasectoral and intersectoral distortions. Specific examples of our model allow for closed-form solutions and a simple quantification approach. Using data for France and the United Kingdom, we provide a first estimate of the aggregate welfare distortion due to monopolistic competition. This welfare loss is substantial and equivalent to the contribution of almost 6% of the aggregate labor input. It stems partly from insufficient firm selection within industries, and partly from excessive and insufficient entry of firms between industries.
Kiminori Matsuyama (Northwestern University)
Globalization and Synchronization of Innovation Cycles (with Iryna Sushko and Laura Gardini)
We study a two-country model of endogenous innovation cycles. In autarky, innovation fluctuations in the two countries are decoupled . As the trade costs fall and intra-industry trade rises, they become more synchronized . This is because globalization leads to the alignment of innovation incentives across firms based in different countries, as they operate in the increasingly global (hence common) market environment. Furthermore, synchronization occurs faster (i.e., with a smaller reduction in trade costs) when the country sizes are more unequal, and it is the larger country that dictates the tempo of global innovation cycles with the smaller country adjusting its rhythm to that of the larger country. These results suggest that adding endogenous sources of productivity fluctuations might help improve our understanding of why countries that trade more with each other have more synchronized business cycles.