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Featured Publications

Reallocation, Competition, and Productivity: Evidence from a Financial Liberalization Episode

Liliana Varela, The Review of Economic Studies (2018)

This article studies the impact of distortions in the access to international capital markets on competition and productivity. I show that a reduction in these distortions leads to an increase in aggregate productivity through two different channels. First, firms that were previously credit constrained respond to better financing terms by increasing their investment in technology, a reallocation effect. Secondly, non-constrained firms also expand their investment in technology because of increased competition, a pro-competitive effect. I provide evidence for these two channels using firm-level census data from the deregulation of international financial flows in Hungary.

Movers and Shakers

Akerlof, Robert and Richard Holden, The Quarterly Journal of Economics (2016)

Most projects, in most walks of life, require the participation of multiple parties.While it is difficult to unite individuals in a common endeavor, some people, whomwe call “movers and shakers,” seem able to do it. The paper specifically examinesmoving and shaking of an investment project, whose return depends both on itsquality and the total capital invested in it. We analyze a model with two types ofagents: managers and investors. Managers and investors initially form social connections.Managers then bid to buy control of the project and the winning bidderputs effort into making investors aware of it. Finally, a subset of aware investors aregiven the chance to invest and they decide whether to do so after receiving privatesignals of the project’s quality. We first show that connections are valuable sincethey make it easier for a manager to “move and shake” the project (i.e., obtain capitalfrom investors). When we endogenize the network, we find that, while managersare identical ex ante, a single manager emerges as most connected; he consequentlyearns a rent. In extensions, we move away from the assumption of ex ante identicalmanagers to highlight forces that lead one manager or another to become a moverand shaker. Our theory sheds light on a range of topics including: entrepreneurship,venture capital, and anchor investments.

Endogenous Entry to Security-Bid Auctions

Bernhardt, Dan, Takeharu Sogo, and Tingjun Liu, American Economic Review (2016)

We endogenize entry to a security-bid auction, where participationis costly, and bidders must decide given their private valuationswhether to participate. We first consider any minimum reservesecurity-bid of a fixed expected value that weakly exceeds the asset’svalue when retained by the seller. Demarzo, Kremer and Skrzypacz(2005) establish that with a fixed number of bidders, auctionswith steeper securities yield the seller more revenues. Counterintuitively,we find that auctions with steeper securities also attractmore entry, further enhancing the revenues from such auctions.We then establish that with optimal reserve securities, auctionswith steeper securities always yield higher expected revenues.

Trade-Induced technical Change: The Impact of Chinese Imports on Innovation, IT and Productivity, The Review of Economic Studies

Draca, Mirko, Nick Bloom, and John Van Reenen, The Review of Economic Studies (2016)

We examine the impact of Chinese import competition on broad measures of technical change - patenting, IT and TFP – using new panel data across twelve European countries from 1996-2007. In particular, we establish that the absolute volume of innovation increases within the firms most affected by Chinese imports in their output markets. We correct for endogeneity using the removal of product-specific quotas following China’s entry into the World Trade Organization in 2001. Chinese import competition led to increased technical change within firms and reallocated employment between firms towards more technologically advanced firms. These within and between effects were about equal in magnitude, and account for 15% of European technology upgrading over 2000-2007 (and even more when we allow for offshoring to China). Rising Chinese import competition also led to falls in employment and the share of unskilled workers. In contrast to low-wage nations like China, developed countries imports had no significant effect on innovation.