Three Essays in Empirical Microeconomics

De Pirro, Amanda and Foucart, Renaud and Chakraborty, Pavel (2023) Three Essays in Empirical Microeconomics. PhD thesis, Lancaster University.

Text (2023DePirroPhD)
2023DePirroPhD.pdf - Published Version
Available under License Creative Commons Attribution-NonCommercial-NoDerivs.
Download (6MB)

Abstract

As the world's complexity grows, economists are increasingly challenged to answer fundamental questions of individual behavior and societal phenomena. While economic theory provides the grounding intuition, the recent availability of large-scale micro-data and advanced econometric techniques allows us to exploit the linkages across disciplines to identify and explain counter-intuitive outcomes. The present work addresses an empirical investigation of the connections between three well-established areas: political economy, industrial organization, and trade policy. In the first chapter, I investigate how political support may influence the provision of intellectual property recognition by the central government. In most countries, governments are responsible for regulating and administering the granting of intellectual property rights to firms and individuals, in order to promote and protect innovation. However, very little is known about the extent to which this decision-making process can be affected by political considerations. I address this question using newly collected historical data from the fascist period in Italy. In the analysis, I exploit the province-level variation in political activism before Mussolini's rise to power to identify the areas of greater dissent for Fascism and to estimate the subsequent response in terms of patents and trademarks released. I show that local support for Mussolini was critical to the approval of new patents, that have been disproportionately more granted to firms located in areas where the consensus for the regime was originally weaker. My findings suggest that the recognition of these rights, rather than being a reward for innovation, was manipulated by the regime for political purposes. These findings are of particular relevance. This work is the first to provide empirical evidence that political objectives can substantially affect the provision of intellectual property rights. By showing that the allocation of these private legal rights can be subjected to distortive criteria, I uncover an alternative channel of misallocation that governments can exploit to affect the innovation process. Nevertheless, the direction of this effect is quite counter-intuitive when compared to the more popular strategy of rewarding government-supportive areas. Within my interpretation, Mussolini deliberated to allocate resources based on aggregate political preferences, favoring more the less supportive areas in an attempt to mitigate potential sources of instability. Whether governments provide efficient and successful incentives for innovation is also one of the broad questions behind the second chapter. In this chapter, a joint work with my supervisor, Dr. Renaud Foucart, we investigate the effects of delivering a radical innovation in a variety of a product when a market is characterized by low differentiated goods. The standard approach predicts innovation to provide a temporary competitive advantage to the innovator, which expires once innovation becomes freely available, restoring the pre-existing competition level. We show that when the above conditions apply, competition in the catch-up phase can actually become much stronger than it was in the pre-innovation one. Using a simple model of differentiated Cournot competition with endogenous choice of product variety, we find that innovation in one variety may lead to a decrease in product diversity in the catch-up phase, eventually decreasing the profit of the innovator and of all other producers. This result happens when the cost reduction delivered by the innovation is high enough for all producers to switch to the low-cost variety, but not sufficiently high to compensate for the negative effect of the increase in competition. We provide supporting evidence for our theory by studying the case of the shrimp import competition between Asia and the US. In the late nineties, the US government financed the development of an innovative technique that allowed them to massively increase the production of their native species of shrimps. The advantage lasted very short. In order to be able to exploit the same technology, Asian countries abandoned their native shrimp cultivation to switch to the US variety. Product diversity decreased and competition became much stronger, leading the US producers to almost disappear from the market due to the Asian import penetration. Finally, the third chapter examines the impact of China's competition shock on the use of a very popular instrument to correct trade policy infringement: the World Trade Organization (WTO) disputes. Following its accession to WTO in 2001, China has been repeatedly brought before the court due to its alleged violations of the global trade rules. I analyze the determinants of the trade disputes involving China as a respondent country in order to identify the major concerns of its complainants. I show that the peculiarities of the Chinese economic structure, and the consequent trade distortions, have been reflected in the determinants of its complaints - which differ from the determinants of disputes addressed against other members, including other powerful economies such as the US and EU. First, I show that tensions are grounded on a bilateral basis and are significantly linked to import penetration and the relative asymmetries in the exporting activity. Second, strategic arguments significantly affect the decision to file a dispute against China, with countries more likely to act when their retaliatory power increases. Last, the inverse relationship between unilateral tariff adjustments and dispute initiation suggests that the use of multilateral solutions became secondary to the imposition of direct measures.