How does an industrial policy war affect worker inequality? How does this effect change over time? We develop a model to study how industrial policy affects the dynamics of the joint distribution of firms and workers, in the open economy. The model features two skill classes of workers, in addition to multiple sectors with varying skill intensities in production. Heterogeneous firms make decisions to offshore their production of inputs, in addition to export participation. Different industrial policy shocks generate alternative transmission channels in the model; after interacting with the dynamic decisions of firms and households, they can alter a country's comparative advantage over time. While most industrial policies can serve to benefit the locally protected skill class of workers, these effects may take time to eventuate. Similarly, the costs these policy actions impose on the non-protected worker class may diminish over time.
Policymakers use various industrial policies to achieve geopolitical and economic goals. What are the dynamic and welfare effects of these policies? How does the short-sightedness of policymakers influence their choice of instrument? What are the distributional consequences of these protectionist measures? We study these questions in a two-country open economy macro framework with firm heterogeneity, trade, and offshoring of tasks. We then calibrate the model to the context of the US and China and utilize it as a laboratory to explore the effects of four popular industrial policies: import tariff, offshoring friction, domestic production subsidy, and entry subsidy. We find that myopic policymakers are incentivized to subsidize production, yielding short-term gains and long-term losses. More forward-looking policymakers prefer to levy import tariffs; however joint losses are incurred at all time horizons when used by both countries simultaneously. Although all policy instruments reduce skill premiums of the imposing country in the short-run, some of them incur welfare losses in the long-run.
Using US firm-level data from 1985-2019, this paper investigates how the characteristics of matches between acquirers and targets of mergers and acquisitions (M&A) vary over the business cycle. We document several findings. (1) Acquirers are on average larger, more profitable, and in a stronger financial position than targets. (2) Targets are more innovative than acquirers, and (3) M&A targets during a recession have worse financial health but higher levels of innovation compared to M&A targets in booms. Our empirical evidence suggests that an economy may benefit from an economy may benefit from adjusting its antitrust stance over the business cycle.
Variable markups and multinational production have gathered considerable attention in the trade literature because of their empirical prevalence and welfare implications. This paper studies the welfare implication of tariffs and optimal tariffs in an environment that features firm heterogeneity, variable markups, and FDI. I find: (i) Tariffs endogenously affect firm entry level, producing different comparative statics in the short-run versus long-run. (ii) Variable markups generate multiple externalities in this economy, causing market outcome to differ from the socially optimum outcome systematically. Permitting tariff-jumping FDI can lower the domestic cutoff levels and reduces the misallocation in the economy. (iii) Free trade is not always socially optimal. If the domestic marginal cost cutoff is sufficiently high, a positive tariff can be welfare-improving since it encourages firm entry. The Nash equilibrium tariff level will also be higher than the socially optimal tariff. (iv) The interaction of variable markup and FDI generates novel welfare implications that are absent if consumers possess CES preference.
This paper examines the influence of export activity on a firm's energy intensity, with a particular focus on the role of the upgrading process. We introduce a firm-level complexity index incorporating two dimensions: the complexity of the goods traded, and the complexity of the destination markets served. By employing a quasi-experimental shift-share research design (Borusyak et al., 2022), we show that growth in external demand incentivizes firms to undertake upgrading activities, resulting in lower energy intensity. Furthermore, financial constraints diminish the energy efficiency gains from upgrading, especially for small firms. In addition, we explore whether upgraded firms can leverage higher markups, revealing that this strategy is effective only for large firms. These findings advocate for targeted support policies for small firms and highlight the critical importance of maintaining open trade in an increasingly fragmented world.