Two Essays in International Trade and Development
Open Access
- Author:
- Belavadi, Tanmay
- Graduate Program:
- Economics
- Degree:
- Doctor of Philosophy
- Document Type:
- Dissertation
- Date of Defense:
- May 27, 2021
- Committee Members:
- Chloe Tergiman, Outside Unit & Field Member
Jonathan Eaton, Chair & Dissertation Advisor
James Tybout, Major Field Member
Michael Gechter, Major Field Member
Marc Henry, Program Head/Chair - Keywords:
- Informality
International Trade
Inequality
Financial Constraints
Endogenous Bankruptcy - Abstract:
- This dissertation consists of two chapters on two topics in development and international trade. In Chapter 1, I study the phenomenon of some large developing countries deviating from the expected pattern of non-agricultural informality declining with income growth. I focus on the striking case of India where informality in manufacturing fell only by 1\% from 1999-00 to 2009-10 while per-capita income more than doubled. On the demand side, I find that the informal expenditure share Engel for manufactured goods is downward sloping but not log-linear, implying that the distribution of income gains matters. In particular, the Engel effect is the weakest among households at the top of the income distribution, who experienced the greatest gains in this period. On the supply side, income growth is correlated with more schooling, which is expected to aid formalization because formal firms are skill intensive. In India, while educational attainment improved, increased capital use further displaced lower skill workers from formal manufacturing firms. Consistent with these findings, I add product dualism with varying income elasticity of informal expenditure, worker heterogeneity, and capital to the conventional informality framework of heterogeneous firms asymmetrically impacted by regulations and taxes. Cheaper capital imports following trade liberalisation, a positive shock to domestic capital supply, and technological change all contribute to increased skill selectivity among formal manufacturing firms. Without these shocks, I estimate that the observed improvement in the educational composition of the manufacturing workforce would have lowered manufacturing informality by 2.7%. In addition, if income growth among the wider non-manufacturing workforce had been equally distributed instead of top-decile concentrated, I estimate that manufacturing informality would have been reduced by a total of 8.6%. In Chapter 2, I study how introducing endogenous bankruptcy into a model of exporting with financial constraints affects the entry of firms into foreign markets. The financial constraints and exporting literature has long modelled a fixed cost of exporting as a crucial financial obstacle to overcome, creating a theoretical link between financial constraints and export participation. Previous work (Eaton et al. (2007)), has also shown that a large fraction of new exporting firms fail to continue exporting beyond the first year. Static models of exporting with financial constraints cannot fully internalise the effect of borrowing which finances an unsuccessful export venture on a firm. In this chapter, I present a dynamic model of firms in a two country environment with external borrowing and endogenous bankruptcy. I use a panel data-set of Colombian manufacturing firms combining financial performance and export information to calibrate the model, and find that the introduction of endogenous bankruptcy significantly distorts firm entry and exit both directly and by means of precautionary effects. While the effect of endogenous bankruptcy on the fraction of firms that attempt exporting in their lifetime is modest, it delays exporting by reducing the use of credit by 65% and forcing firms to rely on their internal savings to pay the fixed cost instead. It also makes an exit from exporting in the first year more likely by making it harder for the firm to ride out shocks while remaining in the export market. By reducing the tenure of firms in the export market, endogenous bankruptcy has a substantial 6.3% effect in reducing the extensive margin of exporting in a given year.