ELSNIT PARIS 2010, Comment MM backupx
9 pages
English
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ELSNIT PARIS 2010, Comment MM backupx

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9 pages
English

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“Institution-Driven Comparative Advantage, Complex Goods and Organizational Choice” by Shon Ferguson and Sara Formai Comment by Marcela Meléndez VIII Conference of the Euro-Latin Study Network on Integration and Trade (ELSNIT) CEPII, Paris, France, October 2010 Building blocks Nunn (2007) “Relationship-Specificity, Incomplete Contracts and the Pattern of Trade” •   Tests whether a country’s ability to enforce written contracts is an important source of comparative advantage. Insight: when investments are relationship- specific, underinvestment will occur if contracts cannot be enforced, so countries with good contracting environments have a comparative advantage in goods that require relationship-specific investments. •   Measures for each commodity, the proportion of inputs that are relationship- specific (US technology data). Inputs sold on organized exchange are not relationship-specific. Inputs reference-priced in trade publications are also not relationship-specific (alternative approach). •  Measures comparative advantage in industry i as ratio of total exports from country with better legal system to total exports from country with worse legal system (each country relative to the US). •   Finds that (1) countries with good contract enforcement specialize in industries where relationship-specific investments are important, and (2) contract enforcement explains more of the variation in trade-flows than factor endowments. •  ...

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Nombre de lectures 42
Langue English

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“Institution-Driven Comparative
Advantage, Complex Goods and
Organizational Choice”
by Shon Ferguson and Sara Formai
Comment by Marcela Meléndez
VIII Conference of the Euro-Latin Study Network
on Integration and Trade (ELSNIT)
CEPII, Paris, France, October 2010
Building blocks
Nunn (2007) “Relationship-Specificity, Incomplete Contracts and the Pattern of
Trade”
Tests whether a country’s ability to enforce written contracts is an important
source of comparative advantage. Insight: when investments are relationship-
specific, underinvestment will occur if contracts cannot be enforced, so countries
with good contracting environments have a comparative advantage in goods that
require relationship-specific investments.
Measures for each commodity, the proportion of inputs that are relationship-
specific (US technology data). Inputs sold on organized exchange are not
relationship-specific. Inputs reference-priced in trade publications are also not
relationship-specific (alternative approach).
Measures comparative advantage in industry i as ratio of total exports from
country with better legal system to total exports from country with worse legal
system (each country relative to the US).
Finds that (1) countries with good contract enforcement specialize in industries
where relationship-specific investments are important, and (2) contract
enforcement explains more of the variation in trade-flows than factor
endowments.
Tests whether vertical integration reduces underinvestment when contracts are
imperfectly enforced, by restricting sample to sectors where vertical integration is
less feasible. Finds larger effects of judicial quality.
Building blocks
Acemoglu, Johnson and Mitton (2009) “Determinants of Vertical Integration:
Financial Development and Contracting Costs”
Investigates relationship between quality of contracting institutions, financial
development, and vertical integration across countries
Tests model predictions that (1) higher contracting costs together with greater
financial development lead to greater vertical integration, and (2) effect of
contracting costs on vertical integration decision is stronger in industries more
susceptible to holdup problems (i.e with more relationship-specific investments)
Computes vertical integration index for each country based on US technology
data and data on industry participation by firm, by country.
Finds little explanatory power of institutional characteristics once differences in
industrial composition are controlled for.
Computes country level “propensity to vertically integrate” to explore lack of
correlation, using share of industry sales over total sales, and average vertical
integration of the industry (in the US). Finds institutional characteristics effect on
this variable is swept away by development level control (GDP per capita)
But confirms model’s predictions (1) and (2).
Uses industry’s capital intensity as proxy for extent of holdup. Nunn’s relationship-
specificity measure is used in alternative models and yields non-significant, non-
robust results
The paper
In a nutshell
Investigates effect of legal and financial institutional quality on
comparative advantage across industries that vary in their complexity
and their propensity to vertically integrate (complexity understood as
contract intensity / extent of required relationship-specific investments).
Insight: ignoring ability to vertically integrate overstates importance of
contracts.
Uses Nunn’s (2007) relationship-specificity measure as proxy of industry
complexity.
Uses Acemoglu et al (2009) US industries’ average vertical integration
levels as industries’ propensities to vertically integrate.
Uses export levels by industry, by country, as measure of comparative
advantage.
Finds that (1) vertical integration lessens impact of a country’s ability to
enforce contracts on comparative advantage of complex goods, and (2)
countries with good financial institutions export more in sectors that
produce complex goods and have a high propensity to vertically
integrate.
The paper
Empirical strategy
Cross-section analysis
T
ci
=
β
0
+ β
1
(z
i
Q
c
) + β
2
(z
i
Q
c
vi
i
) + β
3
(z
i
CR
c
vi
i
) + β
4
(z
i
CR
c
)
(1)
+ β
5
(Q
c
vi
i
) + β
6
(CR
c
vi
i
) + X
ci
+ α
c
+ α
i
+ ε
ci
.
where
T
ci
is the log value of country cʼs exports to the rest of the world in
industry i; Q
c
is legal institutional quality; CR
c
is financial institutional quality; z
i
is Nunnʼs (2007) measure of contract intensity; vi
i
is Acemoglu et al.ʼs (2009)
measure of vertical integration propensity; X
ci
is a vector of country-industry
interaction controls; α
c
and α
i
are country and industry fixed effects
respectively.
Panel regression
T
cit
=
β
0
+ β
1
(z
i
L&O
ct
) + β
2
(z
i
L&O
ct
vi
i
) + β
3
(z
i
Libdum
ct
vi
i
)
(2)
+ β
4
(z
i
Lib dum
ct
) + X
cit
+ α
ci
+ α
t
+ ε
cit
where
L&O
ct
is the proxy for legal institutional quality;
Libdum
ct
is the financial
liberalization dummy variable (= 1 since year of financial liberalization); X
cit
is
a vector of controls; and α
ci
and α
t
are country-industry and time fixed effects.
First-difference regression model (first-differencing of equation (2))
Comments and questions
General
Is question relevant?
We know:
Higher contracting costs together with greater financial
development lead to greater vertical integration, and effect of
contracting costs on vertical integration decision is stronger in
industries more susceptible to holdup problems, i.e with more
relationship-specific investments (from Acemoglu et al, 2009)
Countries with good contract enforcement specialize in
industries where relationship-specific investments are
important (from Nunn, 2007)
We presume ability to vertically integrate (partially) substitutes
contract enforcement, by allowing efficient production (and exports)
of goods that require relationship-specific investments. In fact, we
know vertical integration is positively correlated with contracting
costs in contexts of sufficient financial development.
But we don’t know by how much the importance of contracts as a
source of comparative advantage is overstated when ability to
vertically integrate is not taken into account. So question is
indeed interesting.
Comments and questions
Is empirical strategy appropriate?
Exports size as a measure of comparative advantage. Why not use
more direct measures of trade specialization patterns?
Revealed Comparative Advantage (Balassa, 1965)
Findings based on negative coefficients on triple interactions
If higher relationship-specificity in an industry comes together
with higher average vertical integration, this reduces the impact of
contract enforcement on exports of that particular industry in
countries with better contract enforcement.
Alternative reading (please correct me): In countries with better
contract enforcement, industries with higher potential holdup
problems and higher average vertical integration levels are
associated with lower exports than industries with higher
potential holdup problems that are not highly vertically
integrated. (?)
Comments and questions
Is empirical strategy appropriate?
Concerns:
If in fact vertical integration (partially) substitutes contract
enforcement as a solution to holdup problems, then the vertical
integration that matters is the actual vertical integration of
industry i in country c (not the industry average). But vertical
integration at that level is partly correlated with the country’s
institutional characteristics, so actual model wouldn’t work...
Also, we know that relationship-specificity is a reason for firms
to benefit from vertical integration (i.e. industries’ facing stronger
holdup problems should on average be more vertically
integrated), so even if the propensity to vertically integrate is
industry wide (and the correlation with country characteristics is
avoided ) we are still interacting the variable who’s effect we
want to explore with a variable that is (at least partially) an
outcome variable. Doesn’t this bias the coefficients?
Suggestion: define vertical integration index by industry, by
country as a weighted average of Acemoglu et al.’s firm-level
indices and try a version of Nunn (2007)’s model?
Questions and comments
Concern about endogenous controls (TFP, Inter-Industry trade,
Value-added).
Capital intensity: is it or is it not a good proxy for relationship-specificity?
If it is, it should not enter as control.
What is the question we intend to respond with the financial
development interactions? Whether more vertically integrated
relationship-specific industries have lower/higher exports in contexts of
higher financial development? (I think I am missing the point).
Panel regression adds little insight (and can be misleading in terms of
answering the main question the paper wants to explore).