This chapter reviews a recent body of theoretical and empirical work that studies the normative and positive aspects of trade policy. We start by presenting reduced-form evidence of the effects of trade policy in the presence of supply-chain linkages, on the short-run and persistent effects of trade policy across local labor markets, and on the effects of trade policy uncertainty on employment and firms. We describe the shift-share method for trade policy analysis, discuss the interpretation of the estimated effects, and provide a theoretical foundation. We then describe new quantitative frameworks, methods, and data used to study the aggregate and distributional effects of trade policy in general equilibrium. We discuss how to take into account supply-chain linkages, local labor markets, and different sources of dynamics. As an illustration, we quantify the aggregate and distributional effects of the 2018 trade war between the United States and its trading partners. Finally, we present recent theoretical insights on optimal unilateral trade policy with firm and product heterogeneity in the context of large and small open economies with perfectly and imperfectly competitive product markets. We also discuss how optimal trade policy is shaped by the presence of multiple sectors, intermediate goods, and supply-chain linkages. We close the chapter by discussing the scope of future research.
We show that labor market transaction costs explain why the smallest farms are more efficient than slightly larger farms in most low-income countries and that increases in machine capacity with operational scale result in the globally observed rising upper tail of productivity. We find evidence consistent with these mechanisms using Indian data, and we show that if all Indian farms were at the minimum scale required to maximize the return on land, the number of farms would be reduced by 82% and income per farm worker would rise by 68%.
We show that labor market transaction costs explain why the smallest farms are more efficient than slightly larger farms in most low-income countries and that increases in machine capacity with operational scale result in the globally observed rising upper tail of productivity. We find evidence consistent with these mechanisms using Indian data, and we show that if all Indian farms were at the minimum scale required to maximize the return on land, the number of farms would be reduced by 82% and income per farm worker would rise by 68%.
We use data from marriage records in Murcia, Spain, in the eighteenth century to study the role of women in social mobility in the pre-modern era. Our measure of social standing is identification as a don or doña, an honorific denoting high, though not necessarily noble, status. We show that this measure, which is acquired over the lifecycle, shows gendered transmission patterns. In particular, same-sex transmission is stronger than opposite-sex, for both sons and daughters. The relative transmission from fathers versus mothers varies over the lifecycle, and grandparents may affect the status of their grandchildren.
We show using a theoretical framework that embeds a voting model in a general-equilibrium model of a rural economy with two interest groups defined by land ownership that the effects of democratization – a shift from control of public resources by the landed elite to a democratic regime with universal suffrage – on the portfolio of public goods is heterogeneous, depending the population landless. In accord with the model and empirical findings from micro data on the differing material interests of the two land classes, we find, based on 30-year panel data describing the democratization of Indian villages, that democratization in villages with a larger landless population share shifted resources away from public irrigation, secondary schools, and electrification and towards programs that increase employment. When the landed farmers have a large population share, public resources were shifted towards irrigation, secondary schools and electrification and away from employment programs.
We develop a model of political competition with endogenous turn-out and endogenous platforms. Parties trade off incentivizing their supporters to vote and discouraging the supporters of the competing party from voting. We show that the latter objective is particularly pronounced for a party with an edge in the political race. Thus, an increase in political support for a party may lead to the adoption of policies favoring its opponents so as to asymmetrically demobilize them. We study the implications for the political economy of redistributive taxation. Equilibrium tax policy is typically aligned with the interest of voters who are demobilized.
What are the effects of school closures during the Covid-19 pandemic on children’s education? Online education is an imperfect substitute for in-person learning, particularly for children from low-income families. Peer effects also change: schools allow children from different socio-economic backgrounds to mix together, and this effect is lost when schools are closed. Another factor is the response of parents, some of whom compensate for the changed environment through their own efforts, while others are unable to do so. We examine the interaction of these factors with the aid of a structural model of skill formation. We find that school closures have a large, persistent, and unequal effect on human capital accumulation. High school students from low-income neighborhoods suffer a learning loss of 0.4 standard deviations after a one-year school closure, whereas children from high-income neighborhoods initially remain unscathed. The channels operating through schools, peers, and parents all contribute to growing educational inequality during the pandemic.
The implications of red-tape barriers (RTBs) under lobbying pressures differ markedly from those of traditional trade barriers. RTBs affect the extensive margin of trade and may respond in opposite ways to reductions in tariffs versus reductions in natural trade costs: The former induce a protectionist backlash that may reduce trade both at the intensive and extensive margin, whereas the latter may induce a reduction in RTBs magnifying the direct trade-increasing effects. Furthermore, if tariff commitments are optimized, the availability of RTBs limits the extent of tariff liberalization, and political uncertainty tends to increase the prevalence of RTBs.
Common resources may be managed with inefficient policies for the sake of equity. We study how rationing the commons shapes the efficiency and equity of resource use in the context of agricultural groundwater use in Rajasthan, India. We find that rationing binds on input use, such that farmers, despite trivial prices for water extraction, use roughly the socially optimal amount of water on average. The rationing regime is still grossly inefficient, because it misallocates water across farmers, lowering productivity. Pigouvian reform would increase agricultural surplus by 12% of household income yet fall well short of a Pareto improvement over rationing.
We document that an experimental intervention offering transport subsidies for poor rural households to migrate seasonally in Bangladesh improved risk sharing. A theoretical model of endogenous migration and risk sharing shows that the effect of subsidizing migration depends on the underlying economic environment. If migration is risky, a temporary subsidy can induce an improvement in risk sharing and enable profitable migration. We estimate the model and find that the migration experiment increased welfare by 12.9%. Counterfactual analysis suggests that a permanent, rather than temporary, decline in migration costs in the same environment would result in a reduction in risk sharing.
Mask usage remains low across many parts of the world during the COVID-19 pandemic, and strategies to increase mask-wearing remain untested. Our objectives were to identify strategies that can persistently increase mask-wearing and assess the impact of increasing mask-wearing on symptomatic severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2) infections.
We study optimal dynamic lockdowns against COVID-19 within a commuting network. Our framework integrates canonical spatial epidemiology and trade models and is applied to cities with varying initial viral spread: Seoul, Daegu, and the New York City metropolitan area (NYM). Spatial lockdowns achieve substantially smaller income losses than uniform lockdowns. In the NYM and Daegu—with large initial shocks—the optimal lockdown restricts inflows to central districts before gradual relaxation, while in Seoul it imposes low temporal but large spatial variation. Actual commuting reductions were too weak in central locations in Daegu and the NYM and too strong across Seoul.
We build a multicountry dynamic general equilibrium model to study the economic effects of the 2004 enlargement of the European Union. In our model, trade is costly and households of different skills and nationalities face costly forward-looking migration decisions. We exploit the timing of migration policy changes to identify the changes in migration costs. We find that the changes in migration and trade policy resulted in aggregate welfare gains but with heterogeneous effects across skill groups. We study the interaction between trade and migration policies and highlight the importance of trade for quantifying the welfare and migration effects of labor market integration.
Alfred Marshall and Mary Paley Marshall are often described as the first academic economist couple. Both studied at the University of Cambridge, where Paley became one of the first women to take the Tripos exam and the first female lecturer in economics, with Marshall’s encouragement. But in later life, Marshall opposed granting Cambridge degrees to women and their participation in academic economics. This paper recounts Alfred Marshall’s use of gender norms, born out of a separate spheres ideology, to promote and ingrain women’s exclusion in academic economics and beyond. We demonstrate the persistence of this ideology and resultant norms, drawing parallels between gendered inequities in labor market outcomes for Cambridge graduates in the UK post-Industrial Revolution and those apparent in cross-country data today. We argue that the persistence of the norms produced by separate spheres ideologies is likely to reflect, at least in part, the rents associated with preferential access to better paid, high-skilled labor market opportunities. In doing so, we ask who benefits from gender norms, who enforces them, and suggest relevant policy work and areas for future research.
We evaluate the effect of an educational program that aims to build social cohesion in ethnically mixed schools by developing perspective-taking ability in children. The program is implemented in Turkish elementary schools affected by a large influx of Syrian refugee children. We measure a comprehensive set of outcomes that characterize a cohesive school environment, including peer violence incidents, the prevalence of interethnic social ties, and prosocial behavior. Using randomized variation in program implementation, we find that the program significantly lowers peer violence and victimization on school grounds. The program also reduces the likelihood of social exclusion and increases interethnic social ties in the classroom. We find that the program significantly improves prosocial behavior, measured by incentivized tasks: treated students exhibit significantly higher trust, reciprocity, and altruism toward each other as well as toward anonymous out-school peers. We show that this enhanced prosociality is welfare improving from the ex post payoff perspective. We investigate multiple channels that could explain the results, including ethnic bias, impulsivity, empathetic concern, emotional intelligence, behavioral norms, and perspective taking. Children’s increased effort to take others’ perspectives emerges as the most robust mechanism to explain our results.
We use a two-stage experiment to study how a short-term subsidy for a new product affects uptake, usage, and future demand for the same product (a new solar lamp). We use an auction design to gauge willingness-to-pay, and randomly vary the strike price across villages to create random variation in purchase prices and uptake across villages. Our main results are that subsidies do not adversely affect subsequent product use, but stimulate uptake. If subsidies depress future willingness-to-pay, then this effect is outweighed by additional learning about the benefits of the new product. The net effect is that short-term subsidies increase future willingness-to-pay. However; prices play an important allocative role, and lowering prices via subsidies encourages uptake by households with low use intensity. We do not find any evidence supporting social learning and anchoring beyond the initial sample of beneficiaries.