Essays on Economic Integration and Inequality

Download or read book Essays on Economic Integration and Inequality written by Mingzhi Xu and published by . This book was released on 2018 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Economic activities worldwide are becoming increasingly integrated, in terms of freely traded consumption, globalized production as well as information sharing alike. The tightened linkages are thought to improve resource allocation, promote technology transfer and enhance living standard, while the challenge for policymakers is to ensure that these benefits are sufficiently widely shared. It highlights the importance of understanding how economic integration affects labor. My dissertation focuses on the how integration shapes the organization of production and the effects on the well-being. The first chapter focuses the impacts of integration by removing information transmission barrier on the diffusion of economic activities as well as its welfare and inequality consequence. The paper studies the aggregate and distributional impacts of high-speed railways (HSR) in an economy with internal trade and migration costs. I make two contributions to the understanding of the impacts of large transportation infrastructure projects. Firstly, taking advantage of the rapid expansion as plausible exogenous shocks that improves firm-to-firm matching efficiency across regions over time, I identify the causal relationship between HSR connection and exporting performance in case of China. We find the connection to HSR significantly promotes a region's exports. Besides the direct impact, I also find the positive spillovers of HSR, and such effect is stronger in areas closer to HSR hubs. Our second contribution is to shed light on the mechanisms at work by relating the HSR-driven regional outsourcing to the HSR-driven increases in welfare and inequality. To do so, I construct and calibrate a quantitative spatial equilibrium model with producer-supplier linkage, taking care of trade, migration, and outsourcing in a unified framework to examine the general equilibrium effects of the HSR and to perform counterfactuals. Chapter 2 studies the role of international trade for household income polarization, the phenomenon in which the size of high- and low-income groups increases but mid-income group declines. I propose a new channel that emphasizes the supply change of skills in rationalizing the phenomenon. We build a simple theory of trade featuring endogenous choices on occupation and firm productivity. In the model, individuals choose to become low-skilled, high-skilled workers, or entrepreneurs based on their innate abilities. Entrepreneurs improve the firm efficiency by investing in the managerial effort. I show that while the households with high human capital optimally respond to export opportunity by moving up the income distribution, other households with median level human capital self-select downward the income distribution, the long run consequence of which may be the polarization in labor market. An empirical test of the model reveals that Chinese regions facing more export exposure exhibit stronger pattern of labor market polarization. While my first two research focus on the welfare changes within-country in case of the largest developing country in the world, China, my third part of dissertation compares a country's living standard in an international framework. Chapter 3, a joint work with my advisor Robert Feenstra and Alexis Antoniades, compares the cost of living for cities in China and in the United States using barcode data, as a complement to the International Comparisons Program (ICP) supervised by the World Bank. We find that, in both countries, there is a greater variety of products in larger cities. But in China, unlike the United States, the prices of products tend to be lower in larger cities. We attribute the lower prices to a pro-competitive effect, whereby larger cities attract more brands and retailers which leads to lower markups and prices. Combining the effect of greater variety and lower prices, it follows that the cost-of-living for grocery-store products in China is lower in larger cities. We further compare the cost-of-living indexes for particular product categories between China and the United States. In product categories with a significant presence of U.S. brands in the Chinese market, the availability of additional Chinese brands leads to greater variety than in the United States, and therefore lower Chinese price indexes for that reason. In product categories with much less presence of U.S. brands in the Chinese market, however, the observed prices differences between the countries (usually lower prices in China) are partially or fully offset by the variety differences (less variety in China), so that the cost of living in China is not as low as the price differences suggest, especially in smaller cities.