Research

WORKING PAPERS

  • Production Structures and Preferential Trade Agreements (Job market paper)

Abstract: This paper examines the effects of differences in production structure between countries on their ability to reduce global tariffs in the coalition-proof Nash equilibrium sense. Using a static tariff-setting game with endogenous trade agreements, I develop a competing exporters model with three countries that differ in their production structure and economic size. I consider three settings that are differentiated by the type of trade agreements that countries can sign: free trade agreements, customs unions, and multilateral trade agreements, i.e. no preferential trade agreements. Under a symmetric change in production structure across countries, I find that for the last two settings countries optimally reach global free trade regardless of the size of this change. In the setting with free trade agreements, a strong free-riding incentive affects the capacity of countries to reach global free trade. Under an asymmetric change in production structure, I find that countries in the setting with multilateral trade agreements optimally reach global free trade, regardless of the size of the change. The setting with free trade agreements exhibits a strong free-riding incentive and the setting with customs unions has a strong exclusion incentive, with the former setting being more restrictive than the latter. These findings suggest that permitting the signing of preferential trade agreements fails to properly incentivize countries to reduce global tariffs when they only differ in production structure.

QED working paper 1459. Latest version 2022/08.

Abstract: We propose an information-based theory of capital structure to address the diversity of firm financing behavior and the variety of optimal financial contracts. Our model features nested information problems of adverse selection and agency cost. We prove that there exists a unique perfect Bayesian equilibrium with novel features: First, three types of optimal contracts arise endogenously, i.e., equity, transparent debt, and opaque debt. Equity and transparent debt are both informationally transparent because these contracts require firms to take on a costly technology for verifying types. Opaque debt, however, merely reflects the general information of firms seeking external funds. Any signaling contract that does not involve costly verification does not survive the equilibrium. Second, the unique equilibrium is either pooling on opaque debt, or mixing with transparent and opaque financing. Third, partial capital structure irrelevance exists in a mixing equilibrium. Fourth, debt weakly dominates equity for all firms that seek external financing. Finally, the optimal debt-to-equity ratio is unique for all firms in a pooling equilibrium, but only for a strict subset of firms in a mixing equilibrium.

  • Trade Bargaining Power, Multilateralism, and Regional Trade Agreements (Work in progress)

Abstract: This paper examines the effects of differences in trade bargaining power between countries on their ability to reduce global tariffs. Using a static tariff-setting game with endogenous trade agreements, I develop a competing exporters model with three countries that differ in their trade bargaining powers. I consider three settings that are differentiated by the type of trade agreements that countries can sign: free trade agreements, customs unions, and multilateral trade agreements, i.e. no preferential trade agreements. I find that only the setting with free-trade agreements can guarantee global free trade as a unique coalition-proof Nash equilibrium, i.e. a world without tariffs. The setting with customs unions does not always have global free trade as the unique solution. Global free trade can never be realized in the setting without preferential trade agreements when countries differ in their trade bargaining powers. There is a strong free-riding incentive for countries to leave the three-country multilateral trade agreement. Permitting the signing of preferential trade agreements significantly mitigates the role of trade bargaining power of countries in trade relations and helps reduce global tariffs.

PUBLICATIONS

The associated computer codes can be downloaded here.

Abstract: This paper provides an exact algorithm for efficient computation of the time series of conditional variances, and hence the likelihood function, of models that have an ARCH(∞) representation. This class of models includes, e.g., the fractionally integrated generalized autoregressive conditional heteroskedasticity (FIGARCH) model. Our algorithm is a variation of the fast fractional difference algorithm of Jensen and Nielsen (2014). It takes advantage of the fast Fourier transform (FFT) to achieve an order of magnitude improvement in computational speed. The efficiency of the algorithm allows estimation (and simulation/bootstrapping) of ARCH(∞) models, even with very large data sets and without the truncation of the filter commonly applied in the literature. In Monte Carlo simulations, we show that the elimination of the truncation of the filter reduces the bias of the quasi-maximum-likelihood estimators and improves out-of-sample forecasting. Our results are illustrated in two empirical examples.