RESEARCH

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Working Papers

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Responsible Sourcing? Theory and Evidence from Costa Rica (link). NBER WP 30683

with Alonso Alfaro-Ureña, Benjamin Faber, Cecile Gaubert, and José P. Vasquez

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Status: Revise and Resubmit at the American Economic Review 

Trade Talks podcast episode (39 mins), VoxDev summary, VoxEU summary

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Abstract: Multinational enterprises (MNEs) increasingly impose ``Responsible Sourcing'' (RS) standards on their suppliers worldwide, including requirements on worker compensation, benefits and working conditions. Are these policies just ``hot air'' or do they impact exposed suppliers and their workers? What is the welfare incidence of RS in sourcing countries? To answer these questions, we develop a quantitative general equilibrium (GE) model of RS and combine it with a unique new database. In the theory, we show that the welfare implications of RS are ambiguous, depending on an interplay between what is akin to an export tax (+) and a labor market distortion (-). Empirically, we  combine the near-universe of RS rollouts by MNE subsidiaries in Costa Rica since 2009 with firm-to-firm transactions and matched employer-employee microdata. We find that RS rollouts lead to significant reductions in firm sales and employment at exposed suppliers, an increase in their salaries to initially low-wage workers and a reduction in their low-wage employment share. We then use the estimated effects and the microdata to calibrate the model and quantify GE counterfactuals. We find that while MNE RS policies have led to significant gains among the roughly one third of low-wage workers employed at exposed suppliers ex ante, the majority of low-wage workers lose due to adverse indirect effects on their wages and the domestic price index.

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The Effects of Multinationals on Workers: Evidence from Costa Rican Microdata (link)

with Alonso Alfaro-Ureña and José P. Vasquez

Status: New draft in progress

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Abstract: This paper estimates the effects of multinational corporations (MNCs) on workers. To that end, we combine microdata on all formal worker-firm and firm-firm relationships in Costa Rica with an instrumental variable approach that exploits shocks to the size of MNCs in the country. First, using an event-study design, we find an MNC wage premium of nine percent. This premium reflects above-market wages rather than compensation for disamenities. Next, we study the effects of MNCs on workers in domestic firms. As MNCs bring jobs that pay a premium, they improve outside options by altering both the level and composition of labor demand. MNCs can also enhance the performance of domestic employers through input-output linkages. Shocks to firm performance may then pass through to wages. We show that the growth rate of annual earnings of a worker experiencing a one standard deviation increase in either her labor market or firm-level exposure to MNCs is one percentage point higher than that of an identical worker with no change in either MNC exposure. Finally, we develop a model to rationalize the reduced-form evidence and estimate structural parameters that govern wage setting in domestic firms. We model MNCs as paying a wage premium and buying inputs from domestic firms. When hiring workers, firms incur recruitment and training costs. We find that workers are sensitive to improvements in outside options. Moreover, we estimate that the marginal recruitment and training cost of the average domestic firm is 90% of the annual earnings of a worker earning the competitive market wage. This high cost allows incumbent workers to extract part of the increase in firm rents coming from intensified linkages with MNCs.

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Selected Work in Progress

The Gains from Foreign Multinationals in an Economy with Distortions

with José P. Vasquez and Román David Zárate

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Peer-Reviewed Publications

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The Effects of Joining Multinational Supply Chains: New Evidence from Firm-to-Firm Linkages (link)

with Alonso Alfaro-Ureña and José P. Vasquez

Quarterly Journal of Economics. Volume 137, Issue 3, Aug. 2022, 1495–1552. Working Paper w/ Online Appendix (link)

VoxDev summary, IGC summary, "The Visible Hand" podcast (46 mins), Faculti interview (21 mins), LSE Business Review

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Abstract: We study the effects of becoming a supplier to multinational corporations (MNCs) using tax data tracking firm-to-firm transactions in Costa Rica. Event-study estimates reveal that domestic firms experience strong and persistent gains in performance after supplying to a first MNC buyer. Four years after, domestic firms employ 26% more workers and have a 4 to 9% higher total factor productivity (TFP). These effects are unlikely to be explained by demand effects or changes in tax compliance. Moreover, suppliers experience a large drop in their sales to all other buyers except the first MNC buyer in the year of the event, followed by a gradual recovery. The dynamics of adjustment in sales to others suggests that firms face short-run capacity constraints that relax over time. Four years later, the sales to others grow by 20%. Most of this growth comes from the acquisition of new buyers, which tend to be ``better buyers" (e.g., larger and with more stable supplier relationships). Finally, we collected survey data from domestic firms and MNCs to provide further insights into the wide-ranging benefits of supplying to MNCs. According to our surveys, these benefits range from better managerial practices to a better reputation.

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Industrial Policy at Work: Evidence from Romania's Income Tax Break for Workers in IT (link)

with Smaranda Pantea

European Economic Review. Volume 133, Apr. 2021. Working Paper (link) w/ Online Appendix (link)

Trade Talks podcast episode (51 mins), VoxEU summary, Presentation recording (minute 58) 

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Abstract: We study the firm and sector-level effects of an industrial policy designed to support the development of the IT sector in Romania. In 2001, Romania introduced an unexpected personal income tax break to programmers with eligible bachelor's degrees and who work on software development for firms in eligible IT sector codes. In 2013, policy-makers suddenly expanded the scope of the original tax break to cover more bachelor's degrees and sector codes in IT. We first use firm-level data and difference-in-difference designs around each policy episode to show that treated firms experience strong and long-lasting growth. We then employ sector-level data and a synthetic control design to show that after the introduction of this policy in 2001, the IT sector grew faster in Romania than in otherwise similar countries. Finally, downstream sectors relying more on IT services also grew faster in Romania after 2001. Our results suggest that this policy has been effective in promoting the development of the IT sector, a sector typically seen as key to the transition to a knowledge economy.

 

Terrorism and the Value of Proximity to Public Transportation: Evidence from the London Bombings (link)

Journal of Urban Economics. Volume 102, Nov. 2017, 52-75. Working Paper (link)

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Abstract: Terrorism has become a primary concern for city dwellers around the world. This paper uses the 2005 attacks on the London Tube to provide causal evidence of the negative impact of terrorism on the value of proximity to public transportation. These attacks brought major transit stations into the spotlight as high-risk locations. As a result, surrounding communities became less attractive places in which to live and conduct business. I find that house prices closer to the major transit hubs of London fell by 6% for one year. This shock spread to Manchester as well: house prices closer to major transit hubs dropped by 9–14% for 3 to 4 years. I also show that new firms are less likely to locate near major stations after the attacks, particularly those relying on foot traffic. Among incumbent firms, those serving customers in person are most hurt by the attacks.

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Other Publications

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VoxDevLit International Trade (w/ David Atkin, Laura Boudreau, Rafael Dix-Carneiro, Amit Khandelwal, Brian McCaig, Pamela Medina, Ameet Morjaria, Luigi Pascali, Bob Rijkers, Meredith Startz). VoxDevLit Vol. 4, Issue 1, Oct. 2022

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