Job Market Paper

Risk Diversification and International Trade”   New version coming soon!

Abstract: Firms face substantial uncertainty about consumers’ demand, arising, for example, from the existence of random shocks. In the presence of incomplete financial markets, entrepreneurs cannot insure perfectly against unexpected demand fluctuations. The key insight of my paper is that firms can reduce demand risk through geographical diversification. I first develop a general equilibrium trade model à la Chaney (2008) characterized by stochastic demand, where risk-averse entrepreneurs exploit the imperfect correlation of demand across countries to lower the variance of their total sales, in the spirit of modern portfolio analysis. I study the implications of this novel source of demand complementarities and show that: i) the firm’s exporting decision does not obey a hierarchical structure, as in standard models with fixed costs, because it depends on the global diversification strategy of the firm, and ii) the intensity of trade flows to a market are affected by its risk-return profile. To study the aggregate implications of firms’ risk-hedging behavior, I calibrate the parameters of the model with the Method of Moments using Portuguese firm-level data. One of the counterfactual exercises shows that the welfare gains from trade can be significantly higher than the gains predicted by models that neglect firm level risk. After a trade liberalization, risk-averse firms export more to countries that offer better diversification benefits. Hence in these markets the increase in foreign competition is more intense, lowering the price level more. Therefore, “safer” countries gain more from trade.

Working papers

Endogenous Labor Supply and the Gains from International Trade” with Costas Arkolakis

Abstract: This paper incorporates elastic labor supply into a standard gravity model of trade and characterizes the implications for welfare. We show that gains from trade can be computed using only a few sufficient statistics: the share of expenditure on domestic goods, the trade elasticity, and the elasticity of labor supply. Introducing the consumption-leisure choice delivers gains that may be substantially different from what models with inelastic labor supply predict. In particular, in a setting with a fixed number of varieties, gains from trade are always higher than in trade models with inelastic labor supply and are increasing in the Frisch elasticity of labor. In addition, when the number of varieties is endogenous and income effects are small, the increase in labor supply can raise the number of varieties and thus can lead to sizeable gains. Quantitatively, we find that, for the median country in our sample, gains from trade are up to 23% higher than in models featuring constant labor supply.

Correlated demand shocks” with Andrew Bernard

Abstract: Motivated by recent evidence showing the importance of demand shocks for sales variation across products and countries, in this paper we study how these demand shocks are volatile and correlated across markets. We use data on international trade flows at the country-product level from 1995 to 2007 to estimate, for 100 countries and 66 manufacturing products, destination-product demand shocks. We are able to isolate the destination-product component of the variation in trade flows using fixed-effects regressions. Then we compute, for each product at the HS6 level, the volatility and the cross-country correlations of the demand shocks for all countries. Our findings show that both the volatilities and the correlations are remarkably heterogeneous across countries within products. We aim to study the implications of this heterogeneity for trade patterns.

Measuring the Gains from Trade: Evidence from the US Embargo

Abstract: This study uses the United States Embargo of 1807-09, a rare case of autarky in history, as a natural experiment to estimate the effects of trade on welfare. Following Arkolakis et al. (2012), I compute the gains from trade (or losses from autarky) by means of two sufficient statistics: the share of expenditure on domestic goods and the elasticity of substitution between domestic and imported goods. This work is the first to estimate this elasticity by using price and quantity data from the early 19th century. To mitigate the bias due to the co-determination of prices and quantities, I adopt an identification strategy that uses tariffs and shipping costs as instrument for prices. The empirical findings suggest an elasticity of substitution of 3.64 and gains from trade of about 4.2% of total income.


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