Research

Dissertation:

“Expropriation Risk and Technology”, April 2008

Abstract: My paper characterizes a dynamic relation between a firm and an impatient government that may expropriate the firm without legal punishment. The only sanction mechanism of the firm results from its productivity advantage in managing its assets. In this environment, I derive dynamics of investment and transfers and characterize the unique stationary allocation. The loading of the contract is determined by the initial surplus division. Backloading refers to the case, where investment is increasing over time and transfers from the firm to the government are deferred until the steady state is reached. Frontloading refers to the case where the firm initially makes larger payments than in the steady state. The steady state features non-monotonic comparative statics of the government's payoff with respect to its relative production efficiency. While the reduced incentive problem associated with technological incompetence increases investment efficiency, the lower threat point limits the share of the surplus obtained by the government. Markov-type discount rate shocks of the government generate expropriation on the equilibrium path with low technology-intensive sectors at the top of the pecking order. Firms are able to mitigate the government's incentive to expropriate via non-horizontal integration. The model predictions are consistent with observed contracts between sovereign countries and foreign direct investors. Special emphasis is given to production sharing agreements, the most common contract form in the oil industry. My paper has broader implications for principal-agent models with heterogeneous discounting.

Other Papers :

"Tariff Wars in a Ricardian Model with a Continuum of Goods”, June 2007, Status: Revise and Resubmit at Journal of International Economics

Abstract. This paper derives the optimum tariff rate policy within the Ricardian framework of Dornbusch-Fischer-Samuelson (1977) and analyzes the comparative statics of the associated Nash equilibrium. First, it is established that the optimum tariff schedule involves a uniform tariff rate (across goods) which is inversely related to the import demand elasticity of the other country. The impact of absolute productivity advantage and the size of the labor force on this tariff rate are shown to be equivalent such that a single measure of relative effective size summarizes their joint effect. Using this measure, I show that a sufficiently large economy will prefer the inefficient Nash equilibrium outcome over Free Trade due to its quasi-monopolistic power on world markets. The static Nash equilibrium analysis is shown to be directly relevant within the framework of a dynamic game which can be used to characterize self-enforcing trade agreements.

"Rybczynski's Theorem in the Heckscher-Ohlin World - Anything Goes", April 2008, joint with Hugo Sonnenschein and Christis Tombazos, Status: Revise and Resubmit at Journal of International Economics

Abstract. We demonstrate that Rybczynski’s classic comparative statics can be reversed in a Heckscher-Ohlin world when preferences in each country favor the exported commodity. This taste bias has empirical support. An increase in the endowment of a factor of production can lead to an absolute curtailment in the production of the commodity using that factor intensively, and an absolute expansion of the commodity using relatively little of the same factor. This outcome – which we call “Reverse Rybczynski” – implies immiserizing factor growth. We present a simple analytical example that delivers this result with unique pre- and post-growth equilibria. In this example, production occurs within the cone of diversification, such that factor price equalization holds. We also provide general conditions that determine the sign of Rybczynski’s comparative statics.

"Biases and Self-Selection: A Theoretical Investigation of the Rothschild-Stiglitz Insurance Model", September 2005

Abstract. This paper analyzes the impact of biased beliefs on the structure of informational equilibria in classical self-selection models. Using the intuitive insurance market example of Rothschild-Stiglitz (1976) I show that biases of high-risk individuals have fundamentally different effects on equilibrium contracts than biases of low-risk individuals. Whereas equilibrium contracts of both groups are affected by biases of the high-risk group, equilibrium contracts are robust to moderate biases among the low-risk group. Specifically, optimism of the high-risk group results in underinsurance of their own group and causes negative externalities on the low-risk group by restricting the set of feasible contracts. If optimism is sufficiently strong, it is possible, that a breakdown of the insurance market occurs. This extreme result is more likely to have empirical relevance in insurance markets where losses are relatively small. The model provides a more general notion of the revelation principle in which agents truthfully report their biased beliefs about their own type.

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