PhD Supervisor: J. Peter Neary

Publications:

	NEW: "Parallel Imports and Innovation in an Emerging Economy: The Case of Indian Pharmaceuticals" (with A. Mantovani), Health Economics: forthcoming. link Abstract: This paper studies the impact of the re-importation of imitated pharmaceuticals as a by-product of an open policy towards parallel import (PI) on process innovation. Foreign investment by a firm to exploit a new unregulated market with weak intellectual property rights can give rise to imitation. These products can potentially re-enter the original country when PI is allowed influencing R&D incentives. In an emerging economy with technologically heterogeneous firms, trade costs shift PI-related market share losses from the more to the less R&D efficient firm, inducing the former to strategically increase R&D. PI accompanied by tariffs also induces higher R&D effort by the technologically inferior firm when it results in an expansion of its sales abroad. A tariff on PI is most likely to increase welfare when the technological gap between the two firms at home is sufficiently large.
	"Rent Seeking and Regime Stability in Rentier States" (with K. Bjorvatn), European Journal of Political Economy: 27(4), 740-748, 2011. link Abstract: Are natural resources a source of conflict or stability? Empirical studies demonstrate that rents from natural resources, and in particular oil, are an important source of civil war. Allegedly, resource rents attract rent-seekers, which destabilize society. However, there is a large literature on how so-called rentier states manage to pacify opposition groups by handing out special favors. The present paper attempts to bridge the gap between the rent-seeking view of resource rents as a source of conflict and the rentier state view which emphasizes the role of resource rents in promoting peace and stability. The mechanism that we highlight relies on the notion that higher rents may activate more interest groups in a power struggle. We demonstrate that the associated increased cost of conflict may in fact promote regime stability. The peaceful solution is upheld by a self reinforcing transfer program, in the form of patronage employment. The chance of conflict and rent dissipation in our model is highest for intermediate levels of resource rents, where the government cannot make credible commitments to the opposition groups.
	"Offshoring Production: A Simple Model of Wages, Productivity, and Growth" (with C. Davis), Economic Inquiry: 49(2), 334-348, 2011. link Abstract: We examine the relationship between offshoring and the labour market in an occupational choice model of trade and endogenous growth where workers are employed on the basis of their individual skill levels. Trade liberalization leads to offshoring and reduces employment in the manufacturing sector. Displaced workers move into the traditional and innovation sectors according to their skill levels, shaping real wages and aggregate productivity in the manufacturing sector. The paper aims to show how inter-sectoral labour market adjustments, highlighted by skill heterogeneity, could be a possible explanation for the simultaneous rise in productivity and reduction in real wages that have coincided with the sharp escalation of offshoring activities in the US manufacturing sector since 2004.
	“Intellectual Property Rights and Entry into a Foreign Market: FDI vs. Joint Ventures” (with D. Leahy), Review of International Economics: 18(4), 633-649, 2010. link Abstract: We study the effect of the intellectual property rights (IPR) regime of a host country (South) on a multinational's decision between serving a market via greenfield foreign direct investment to avoid the exposure of its technology or a North-South joint venture (JV) with a local firm, which allows R&D spillovers under imperfect IPRs. JV is the equilibrium market structure when R&D intensity is moderate and IPRs strong. The South can gain from increased IPR protection because it encourages a JV, whereas policies to limit foreign ownership in a JV gain importance in technology intensive industries as complementary policies to strong IPRs.
	"Outsourcing, Complementary Innovations and Growth " (with G.I.P. Ottaviano), Industrial and Corporate Change: 19(4), 1009-1035, 2010. link Abstract: This paper studies the parallel creation of complementary innovations serving the upstream and downstream stages of a production chain with the aim of shedding light on the impact of outsourcing on R&D when supply contracts are incomplete. We argue that outsourced upstream production contributes to the emergence of innovation networks by creating a demand for upstream R&D. The bargaining weight of the two parties determines whether outsourcing decisions that lead to static specialization gains also generate dynamic gains when compared to vertically integrated production that relies on integrated R&D. In particular, growth is maximized when the bargaining power is split in a way that search and hold-up frictions are minimized. Putting this result next to the decision of firms to outsource, we conclude that complementary innovations are more likely to foster growth in Schumpeterian Mark I sectors, while vertical integration does so in Schumpeterian Mark II sectors.
	“Trade Sanctions and Green Trade Liberalization”, Environment and Development Economics: 15(4), 379-394, 2010. link Abstract: This paper studies the impact of a WTO withdrawal of trade concessions against countries that fail to respect globally recognized environmental standards. We show that a punishing tariff can be effective when environmental and trade policies are endogenous. When required standards are not too stringent with respect to the marginal damage of pollution, compliance along with free trade as a reward is the unique equilibrium outcome. A positive optimal tariff in the case of non-compliance prevents complete relocation to pollution havens, but only works as a successful credible threat and does not emerge in equilibrium.
	"Firm Heterogeneity, Contract Enforcement, and the Industry Dynamics of Offshoring" (with G.I.P. Ottaviano), Scandinavian Journal of Economics: 111, 629-653, 2009. link Abstract: We develop an endogenous growth model with R&D spillovers to study the long run consequences of offshoring with firm heterogeneity and incomplete contracts. In so doing, we model offshoring as the geographical fragmentation of a firm's production chain between a home upstream division and a foreign downstream one. While there is always a positive correlation between upstream bargaining weight and offshoring activities, there is an inverted U-shaped relationship between these and growth. Whether offshoring with incomplete contracts also increases consumption depends on firm heterogeneity. As for welfare, whereas with complete contracts an R&D subsidy is enough to solve the inefficiency due to R&D spillovers, with incomplete contracts a production subsidy is also needed.
	“Offshoring and Product Innovation” (with G.I.P. Ottaviano), Economic Theory : 38, 517-532, 2009. link Abstract: We propose an endogenous growth model with offshoring to investigate its effects on product innovation and growth in the country of origin. Offshoring is associated with reduced feedback from offshored plants to domestic labs as well as coordination problems between the offshored and domestic divisions of firms. Production and transport cost parameters affect the static decision to relocate plants but not R&D. Hence, offshoring may be chosen by firms when it damages the growth rate of their countries of origin. In particular, if offshoring reduces the feedback from plants to labs, it is likely to bring dynamic losses when the countries of origin are large, especially in sectors in which R&D is cheap and product differentiation is strong. It is also likely to slow growth in sectors in which contractual incompleteness gives a strong bargaining power to offshored divisions in intra-firm transactions.
	“Outsourcing, Contracts, and Innovation Networks” (with G.I.P. Ottaviano), in S. Brakeman and H. Garretson, Eds., Foreign Direct Investment and the Multinational, MIT Press, Cambridge MA, 2008. download Abstract: We study the decision of firms between vertical integration and outsourcing in a dynamic setting with product innovation. In so doing, we model an industry in which R&D is performed by independent research labs and outsourcing production requires complementary upstream and downstream inventions. In the presence of search friction and incomplete outsourcing contracts, we show that the ex-post bargaining power of upstream and downstream parties at the production stage feeds back to R&D incentives, thus affecting the emergence and the performance of labs specialized in complementary inventions.
	“Strategic Intellectual Property Rights Policy and North-South Technology Transfer”, Review of World Economics: 143, 55-78, 2007. link Abstract: This paper analyzes welfare implications of protecting intellectual property rights (IPR) in the framework of TRIPS for developing countries (South) through its impact on innovation, market structure and technology transfer. In a North-South trade environment, the South sets its IPR policy strategically to manipulate multinationals’ decisions on innovation and location. Firms can protect their technology by exporting or risk spillovers by undertaking FDI to avoid tariffs. A stringent IPR regime is always optimal for the South as it triggers technology transfer by inducing FDI in less R&D-intensive industries and stimulates innovation by pushing multinationals to deter entry in high-technology sectors.
	“Asymmetric Labor Markets, Southern Wages, and the Location of Firms”, Review of Development Economics: 11, 463-481, 2007. link Abstract: This paper studies the behavior of firms towards weak protection of labor standards in developing countries (South). A less than perfectly elastic labor supply in the South gives firms an oligopsony position in the labor market tempting them to strategically reduce output to cut wages. In an open economy, competitors operating where labor standards are recognized meanwhile enjoy less aggressive competitors and raise output. Delocation also increases Southern wages and triggers a competition effect, lowering ex post output and hence potential profits of a relocating firm. These effects reduce relative profitability of moving production to the South casting doubts on traditional beliefs that multinationals are attracted to regions with lower wages. Moreover, adopting a minimum wage policy in the South eliminates the oligopsony distortion and improves competitiveness of Southern firms in the world product market. It also enhances consumer and wage surplus in the South and hence unambiguously raises Southern welfare.
	“Can R&D Inducing Green Tariffs Replace International Environmental Regulations?”, Resource and Energy Economics: 29, 284-299, 2007. link Abstract: This paper investigates the link between trade and environment by exploring the effects of green tariffs on innovation, location of production and the environment. It shows that tariffs levied on polluting goods could result in less world pollution than global harmonization of environmental standards by inducing more pollution-abatement R&D effort and generating lower unit emissions from production. Specifically, green tariffs reduce pollution by (1) shifting production to the region where environmental standards are respected, (2) inducing the firm in the clean country to engage in more abatement R&D by granting it a higher market power/share in its home market, (3) instigating green R&D investment by deterring delocation. When these outweigh the R&D-creating effect of environmental harmonization in the dirty country, green tariffs bring about a cleaner environment.
	“Bootlegging in the Music Industry: A Note” (with G. Schulze), European Journal of Law and Economics: 12, 57-72, 2001. link Abstract: This paper analyzes bootlegging of music, i.e. the unauthorized recording and distribution of previously unreleased music (e.g. a live concert). In particular, we investigate whether, and if so, how this illegal activity may hurt bands and record companies. Bootlegging is different from pirating, where legal releases are illegally copied and sold, because it adds to the product variety. It turns out that welfare implications of bootlegging are decisively different from those of pirating-bootlegged music does not crowd out legal sales.

Working Papers :

NEW: “Autocracies and Development in a Global Economy: A Tale of Two Elites” (with A. Akerman and A. Larsson), University of Bologna WP DSE/775, FEEM WP 65/2011. link (revised version: March 2012)

Abstract: This paper studies how comparative advantage and the political elites' endowments shape long-run performance in an economy with imperfect political institutions. In a capital-scarce economy, an autocrat catering to the needs of landowners favors openness to trade at an early stage of development, while an autocrat complying with the preferences of capitalists chooses to shelter the economy from trade. The resulting trade regime interacts with economic institutions, and with policies on capital mobility, to govern capital accumulation. A landed autocrat neglects to improve institutions and blocks foreign capital to maximise extractable rents, leading the economy towards stagnation. By contrast, a capitalist autocrat strengthens the institutional quality, which over time shifts the comparative advantage towards manufacturing and renders the economy attractive to foreign investors. Trade and capital market liberalisation are thus complementary policies that provide an environment of growth and development in the capital autocracy.

NEW: “The Grand Experiment of Communism: Discovering the Trade-off between Equality and Efficiency” (with E. Farvaque and A. Mihailov), University of Bologna WP DSE/776, FEEM WP 70/2011. link (revised version: February 2012)

Abstract: This paper aims to explain the rise and fall of communism by exploring the interplay between economic incentives and social preferences transmitted by ideology. We introduce inequality-averse and inefficiency-averse agents and analyze their conflict through the interaction between leaders with economic power and followers with ideological determination. The socioeconomic dynamics of our model generate a pendulum-like switch from markets to a centrally-planned economy abolishing private ownership, and back to restoring market incentives. The grand experiment of communism is thus characterized to have led to the discovery of a trade-off between equality and efficiency at the scale of alternative economic systems. While our focus is on the long-run transitions from capitalism to communism and back observed in the course of the 20-th century, the model also derives conditions under which each of the systems can remain stable.

NEW: “Cross-Border Intellectual Property Rights: Contract Enforcement and Absorptive Capacity” (with Y. Tsai), University of Bologna WP DSE/809, FEEM WP /.link

Abstract: This paper studies cross-border intellectual property rights (IPR) as a North-South contract using a Nash bargaining approach and distinguishes between the outcome and its actual enforcement. The absorptive capacity of the Southern country to exploit technology transfer plays a key role in the negotiated level of IPRs and its post-treaty enforcement. The optimal level of IPR protection relates positively to absorptive capacity. This provides a rationale for the longer time-frame provided to least developed countries in Article 66 of TRIPS to implement its provisions. In addition, monitoring is only effective in preventing contract violation up to a critical level of absorptive capacity. We relate this to the US Trade Representative “Special 301” report, which flags countries that deny adequate IPR protection as “priority watch list”. While disputes with less developed economies are promptly resolved, emerging economies, where most losses from copyright piracy originates from, continue to remain on the list.

“Intellectual Property Rights, International Migration and Diaspora Knowledge Networks ” (with C. Strozzi), University of Bologna WP DSE/774, FEEM WP 60/2011, and IZA Discussion Paper 5864. link (this version: October 2011)

Abstract: This paper studies the interaction between skilled emigration and intellectual property rights (IPR) protection in determining innovation in developing countries (South). We argue that a diaspora channel through which knowledge acquired by emigrants abroad can flow back into the home innovation sector enhances skills of the remaining workers in the South. Strong IPR protection in the sending country magnifies this effect by increasing the size of the innovation sector and the skill-intensity of emigration. IPRs can therefore transform brain drain into brain gain. Our empirical analysis uses a panel dataset of emerging and developing countries and finds a positive correlation between emigration and innovation when the IPR regime is sufficiently strong.

“Intellectual Property Rights and South-North R&D Linkages ” (with M. Comune and G. Prarolo), University of Bologna WP DSE/764, FEEM WP 59/2011. link (this version: October 2011)

Abstract: With the rise of the knowledge economy, delivering sound innovation policies requires a thorough understanding of how knowledge is produced and diffused. This paper takes a step to analyze a new form of globalization, the so-called system of Global Innovation Networks (GINs), to shed light on how the protection of intellectual property rights (IPRs) influences their creation and development. We focus on the role of IPR protection in fostering international innovative activities in emerging economies (South), such as China and India, and more generally, how IPRs affect the development of GINs between newly industrialized countries and OECD countries. Using both survey-based firm-level and country-level global data, we find IPRs to be an important determinant of participation in GINS from a Southern perspective. We find IPR protection at home and its harmonization across county pairs foster South-North formation of GINs. We also find that a stringent regime in the destination country discourages foreign international innovative activities that originate in NICs. Both levels of our analysis confirm the ICT industry, particularly the hardware segment, to rely on IPRs when engaging in the international outsourcing and offshoring of innovation or in patenting activities abroad.

“International Sourcing, Product Complexity, and Intellectual Property Rights” (with J. Spies and F. Toubal), University of Bologna WP DSE/773, FEEM WP 78/2011. link (this version: June 2011)

Abstract: In this paper, we propose the technological complexity of a product and the level of Intellectual Property Rights (IPRs) protection to be the co-determinants of the mode through which multinational firms purchase their goods. We study the choice between intra-firm trade and outsourcing given heterogeneity at the product- (complexity), firm- (productivity) and country- (IPRs) level. Our findings suggest that the above three dimensions of heterogeneity are crucial for complex goods, where firms face a trade-off between higher marginal costs in the case of trade with an affiliate and higher imitation risks in the case of sourcing from an independent supplier. We test these predictions by combining data from a French firm-level survey on the mode choice for each transaction with a newly developed complexity measure at the product-level. Our fractional logit estimations confirm the proposition that although firms are generally reluctant to source highly complex goods from outside the firm's boundaries, they do so when a strong IPR regime in the host country guarantees the protection of their technology.

“Trade and Geography in the Economic Origins of Islam: Theory and Evidence” (with S. Michalopoulos and G. Prarolo), University of Bologna WP DSE/700, FEEM WP 75/2010, and ARDA/ASREC Working Paper. link (this version: May 2011)

Abstract: This research examines the economic origins of Islam and uncovers two empirical regularities. First, Muslim countries, virtual countries and ethnic groups, exhibit highly unequal regional agricultural endowments. Second, Muslim adherence is systematically larger along the pre-Islamic trade routes in the Old World. The theory argues that this particular type of geography (i) determined the economic aspects of the religious doctrine upon which Islam was formed, and (ii) shaped its subsequent economic performance. It suggests that the unequal distribution of land endowments conferred differential gains from trade across regions, fostering predatory behavior from the poorly endowed ones. In such an environment it was mutually beneficial to institute a system of income redistribution. However, a higher propensity to save by the rich would exacerbate wealth inequality rendering redistribution unsustainable, leading to the demise of the Islamic unity. Consequently, income inequality had to remain within limits for Islam to persist. This was instituted via restrictions on physical capital accumulation. Such rules rendered the investments on public goods, through religious endowments, increasingly attractive. As a result, capital accumulation remained low and wealth inequality bounded. Geography and trade shaped the set of economically relevant religious principles of Islam affecting its economic trajectory in the preindustrial world.

Current Work in Progress:

“Liberalization, Democratization and Technology Adoption” (with M. Cervellati and F. Toubal).

“Offshoring, Innovation, and Multiproduct Firms” (with S. Bakhtiari and A. Minniti).

“Offshoring, Relation-Specific Investments and Subcontractor Selection" (with S.K. Peng and Y. Tsai).

“Religion, State, and Inequality " (with G. Pignataro and G. Prarolo).

Other Publications :

“Green Trade Liberalization” , Bologna Center Journal of International Affairs: Special Issue on the Environment, 2008.

“The Globalisation of Innovation: Challenges and Opportunities for Europe and the Newly Emerging Economies” (with M. Comune), Review of Environment, Energy and Economics: forthcoming, 2012.