It is widely perceived that globalization is a threat to tax …nanced public sector activities. Th... more It is widely perceived that globalization is a threat to tax …nanced public sector activities. The argument is that public activities (public consumption and transfers) …nanced by income taxes distort labour markets and cause higher wages and thus a loss of competitiveness. Since this link is strengthened by globalization, it is inferred that the marginal costs of public funds increase and a retrenchment of the public sector follows. We challenge whether these conclusions have support in a general equilibrium model featuring standard e¤ects from open macroeconomics and trade theory. Even though income taxation unambiguously worsens wage competitiveness, it does not follow that marginal costs of public funds increase with product market integration due to gains from trade. Moreover, non-cooperative …scal policies do not have a race-to-the-bottom bias despite that taxes harm competitiveness. In fact we identify an expansionary bias in …scal policies that is likely to increase with globalization when taxes …nance either public consumption or transfers.
Globalization in the form of product market integration affects labour markets and produces winne... more Globalization in the form of product market integration affects labour markets and produces winners and losers. While there are aggregate gains, it is in general ambiguous how inequality is affected. We explore this issue in a Ricardian model and show that it depends on the balance between "protection" and "specialization" rents. In particular, wage inequality among similar workers (residual wage inequality) may be U-shaped, at first decreasing and then increasing in the process of product market integration. Consequently, there may be gains in both the efficiency and the equity dimension until integration reaches a certain level at which a trade-off arises. JEL: F15, F16, J39, J50, J63.
Globalization in the form of product market integration affects labour markets and produces winne... more Globalization in the form of product market integration affects labour markets and produces winners and losers. While there are aggregate gains, it is in general ambiguous how inequality is affected. We explore this issue in a Ricardian model and show that it depends on the balance between "protection" and "specialization" rents. In particular, wage inequality among similar workers (residual wage inequality) may be U-shaped, at first decreasing and then increasing in the process of product market integration. Consequently, there may be gains in both the efficiency and the equity dimension until integration reaches a certain level at which a trade-off arises. JEL: F15, F16, J39, J50, J63.
This paper addresses welfare e¤ects from trade liberalization in a heterogeneous-…rms trade model... more This paper addresses welfare e¤ects from trade liberalization in a heterogeneous-…rms trade model including the empirically important perunit (i.e. additive) trade costs in addition to the conventional iceberg (i.e. multiplicative) and …xed trade costs. The novel contribution of the paper is the result that the welfare gain for a given increase in trade openness is higher for reductions in per-unit (additive) trade costs than for reductions in iceberg (multiplicative) trade costs. The ranking derives from di¤erences in intra-industry reallocations and in particular from dissimilar impacts on the number of exporters (i.e., the extensive margin of trade).
The marginal costs based representation of firm productivity in the Melitz [Melitz, M.J., 2003. T... more The marginal costs based representation of firm productivity in the Melitz [Melitz, M.J., 2003. The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica 71 (6), 1695-1725] model, predicts positive exporter productivity premia. We show that this prediction is reversible when computing the theoretical equivalent of the empirically measurable productivity expression (value added per worker) in the model. The paper discusses implications of this finding for empirical research.
Trade liberalization comes about through reductions in various types of trade barriers. This pape... more Trade liberalization comes about through reductions in various types of trade barriers. This paper introduces, apart from the customary real trade costs (i.e. iceberg and fixed export costs), two revenue generating trade barriers (i.e. an ad valorem tariff and a trade license) into a standard heterogeneous-firms-trade model with Pareto distributed productivities. We derive analytical welfare rankings of all four liberalization channels for an equal effect on two openness measures, for any trade cost level and while all four barriers are simultaneously present, i.e. for any initial equilibrium. We show that when openness is measured at retail prices, not border prices, the welfare rankings are sensitive to the degree of efficiency in revenue redistribution, e.g. the share of tariff revenues wasted on rent-seeking activities. As a result, multilateral tariff reductions can switch from the least to the most preferred mode of liberalization. Among the other three barriers we establish a universal welfare ranking for any strictly positive level of revenue redistribution and for either measure of openness.
This paper compares the Allowance for Corporate Equity (ACE) tax and the Comprehensive Business I... more This paper compares the Allowance for Corporate Equity (ACE) tax and the Comprehensive Business Income Tax (CBIT) in a general equilibrium model with firms that face entry costs, fixed production costs and increasing marginal costs. We add the empirical regularity of heterogeneity (productivity and size) among firms and thus capture selection effects based on firm profitability. Corporate taxation affects selection and consequently the industry structure. An ACE tax distorts the industry structure by permitting the survival of less productive firms. In contrast, a CBIT is neutral on selection. Aggregate real income increases for an equal yield switch from ACE to CBIT. Yet, this switch hurts small low-productivity firms, while it boosts the earnings of large high-productivity firms.
This paper shows how a specific tax—in contrast to an ad valorem tax—alters industry structure an... more This paper shows how a specific tax—in contrast to an ad valorem tax—alters industry structure and firm‐level performance in a monopolistic competition framework, where firms chose product quality endogenously and differ exogenously in productivity (i.e., marginal production efficiency). Industry equilibrium mechanisms and selection based on productivity play a significant role: A specific tax shifts market shares and profits toward firms with costs and prices above the industry average at the expense of low‐cost firms. This reallocation of market shares releases a novel scale effect such that low‐cost firms may quality downgrade, while high‐cost firms always quality upgrade. There exists a parameter subspace, where this combines to a decrease on average quality for the industry. In comparison: An ad valorem tax only reduces the number of firms/varieties in the industry due to demand absorption, but affects neither firm‐level performance nor industry structure.
An astonishing 33% of all rm-product-destination export spells in Danish data turn out to be isol... more An astonishing 33% of all rm-product-destination export spells in Danish data turn out to be isolated single-month one-o export transactions (observed once in a 49-month window). On average, for an export-active rm, one-o events generate 17% of foreign sales. These patterns cannot be explained by the lumpiness of trade (e.g., seasonal shipments), nor do they sit well with available trade models. To reconcile theory with the data, we introduce passive (i.e., buyer-side driven) exporting. Our empirical investigation establishes novel stylized facts on rm and destination characteristics associated with one-o exporting. JEL: F14, F12, L10, D40
Why is it that exporter productivity premia (EP) differ so widely in magnitude? We take this ques... more Why is it that exporter productivity premia (EP) differ so widely in magnitude? We take this question to the theory and to the data. First, we compute the theoretical equivalent of empirical measures of sectoral EP in a standard heterogeneous firms trade model. This gives novel predictions: a larger variance in the productivity distribution and larger trade costs (both fixed and variable) in a sector increases the sectors EP, while the effect of the degree of product differentiation is ambiguous. Second, based on 15 years of data for the universe of Danish manufacturing firms, we confirm the role of trade costs for sectoral EP. Most importantly, we establish that the variance in the underlying productivity distribution is decisive for the size of a sectors EP. These findings imply substantial room for refinements when conducting empirical research into exporter performance. JEL: F12, F15, O33, L11, L16
Public Economics: Fiscal Policies & Behavior of Economic Agents eJournal, 2007
It is widely perceived that globalization is a threat to tax financed public sector activities. T... more It is widely perceived that globalization is a threat to tax financed public sector activities. The argument is that public activities (public consumption and transfers) financed by income taxes may distort labour markets and cause higher wages and thus a loss of competitiveness. If the importance of the latter effect is reinforced by globalization, it is inferred that the marginal costs of public funds increase and a retrenchment of the public sector follows. We consider this issue in a Ricardian trade model in which production and specialization structures are endogenous. Even though income taxation unambiguously worsens wage competitiveness, it does not follow that tax distortions or marginal costs of public funds increase with product market integration. The reason is that gains from trade tend to reduce both. Moreover, non-cooperative fiscal policies do not have a bias towards retrenchment due to a positive terms of trade effect from taxation.
Isolated single-month one-off export transactions (observed once in a 49-month window) turn out t... more Isolated single-month one-off export transactions (observed once in a 49-month window) turn out to be the dominant spell length in granular firm-product-destination trade data. Moreover, on average, for an exportactive firm, such one-off events generate a significant part of foreign sales. These patterns cannot be explained by the lumpiness of trade (e.g., seasonal shipments), nor do they sit well with available trade models. To reconcile theory with the data, we introduce passive (i.e., buyer-side driven) exporting in addition to proactive exporting. Our empirical investigation establishes novel stylized facts on firm and destination characteristics associated with one-off exporting.
Do firms redirect their exports to other markets when they face a sudden negative shift in export... more Do firms redirect their exports to other markets when they face a sudden negative shift in export demand? Do they change export prices with respect to markets that are not affected by a sudden shock? We use the Danish cartoon crisis in 2005/2006 as a natural experiment to address how firms behave on international markets when exposed to a sudden downward shift of demand. At that time, the publication of caricatures of Muhammad triggered a consumer boycott across the Islamic world. Using a difference-in-differences approach for a panel of Danish pork and dairy exporters, we find no evidence for contemporaneous reallocation of export sales across markets: Even though firms lower their export prices to non-Islamic markets caused by the crisis, exported quantities remain unaffected by the shock. Moreover, the consumer boycott in Islamic countries seems not to have triggered contemporaneous market entry to other markets.
Why is it that exporter productivity premia (EPP) differ so widely in size? We take this question... more Why is it that exporter productivity premia (EPP) differ so widely in size? We take this question to the theory and to the data. We derive the sectoral EPP in a standard heterogeneous firms trade model and apply the insights from the model to 13 years of data for all Danish manufacturing firms. We show that a significant share of the observed variation in EPPs across sectors, and hence across countries, can be explained by the variation in productivity dispersion, trade costs and the elasticity of substitution.
Will the current employment crisis produce lost generations with permanently lower labour market ... more Will the current employment crisis produce lost generations with permanently lower labour market attachment? Taking an explicit cohort perspective and based on Danish data we do not find strong persistence in employment rates at the cohort level. Younger workers tend to be more exposed to business cycle fluctuations than older workers, but importantly they recover more quickly from such set-backs than older workers for whom persistence is stronger. Moreover, no cohorts have been disproportionately affected by exposure to a sequence of adverse shocks. An explicit account of overlapping cohorts is shown to affect assessments of persistence in aggregate employment rates.
It is widely perceived that globalization is a threat to tax …nanced public sector activities. Th... more It is widely perceived that globalization is a threat to tax …nanced public sector activities. The argument is that public activities (public consumption and transfers) …nanced by income taxes distort labour markets and cause higher wages and thus a loss of competitiveness. Since this link is strengthened by globalization, it is inferred that the marginal costs of public funds increase and a retrenchment of the public sector follows. We challenge whether these conclusions have support in a general equilibrium model featuring standard e¤ects from open macroeconomics and trade theory. Even though income taxation unambiguously worsens wage competitiveness, it does not follow that marginal costs of public funds increase with product market integration due to gains from trade. Moreover, non-cooperative …scal policies do not have a race-to-the-bottom bias despite that taxes harm competitiveness. In fact we identify an expansionary bias in …scal policies that is likely to increase with globalization when taxes …nance either public consumption or transfers.
Globalization in the form of product market integration affects labour markets and produces winne... more Globalization in the form of product market integration affects labour markets and produces winners and losers. While there are aggregate gains, it is in general ambiguous how inequality is affected. We explore this issue in a Ricardian model and show that it depends on the balance between "protection" and "specialization" rents. In particular, wage inequality among similar workers (residual wage inequality) may be U-shaped, at first decreasing and then increasing in the process of product market integration. Consequently, there may be gains in both the efficiency and the equity dimension until integration reaches a certain level at which a trade-off arises. JEL: F15, F16, J39, J50, J63.
Globalization in the form of product market integration affects labour markets and produces winne... more Globalization in the form of product market integration affects labour markets and produces winners and losers. While there are aggregate gains, it is in general ambiguous how inequality is affected. We explore this issue in a Ricardian model and show that it depends on the balance between "protection" and "specialization" rents. In particular, wage inequality among similar workers (residual wage inequality) may be U-shaped, at first decreasing and then increasing in the process of product market integration. Consequently, there may be gains in both the efficiency and the equity dimension until integration reaches a certain level at which a trade-off arises. JEL: F15, F16, J39, J50, J63.
This paper addresses welfare e¤ects from trade liberalization in a heterogeneous-…rms trade model... more This paper addresses welfare e¤ects from trade liberalization in a heterogeneous-…rms trade model including the empirically important perunit (i.e. additive) trade costs in addition to the conventional iceberg (i.e. multiplicative) and …xed trade costs. The novel contribution of the paper is the result that the welfare gain for a given increase in trade openness is higher for reductions in per-unit (additive) trade costs than for reductions in iceberg (multiplicative) trade costs. The ranking derives from di¤erences in intra-industry reallocations and in particular from dissimilar impacts on the number of exporters (i.e., the extensive margin of trade).
The marginal costs based representation of firm productivity in the Melitz [Melitz, M.J., 2003. T... more The marginal costs based representation of firm productivity in the Melitz [Melitz, M.J., 2003. The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica 71 (6), 1695-1725] model, predicts positive exporter productivity premia. We show that this prediction is reversible when computing the theoretical equivalent of the empirically measurable productivity expression (value added per worker) in the model. The paper discusses implications of this finding for empirical research.
Trade liberalization comes about through reductions in various types of trade barriers. This pape... more Trade liberalization comes about through reductions in various types of trade barriers. This paper introduces, apart from the customary real trade costs (i.e. iceberg and fixed export costs), two revenue generating trade barriers (i.e. an ad valorem tariff and a trade license) into a standard heterogeneous-firms-trade model with Pareto distributed productivities. We derive analytical welfare rankings of all four liberalization channels for an equal effect on two openness measures, for any trade cost level and while all four barriers are simultaneously present, i.e. for any initial equilibrium. We show that when openness is measured at retail prices, not border prices, the welfare rankings are sensitive to the degree of efficiency in revenue redistribution, e.g. the share of tariff revenues wasted on rent-seeking activities. As a result, multilateral tariff reductions can switch from the least to the most preferred mode of liberalization. Among the other three barriers we establish a universal welfare ranking for any strictly positive level of revenue redistribution and for either measure of openness.
This paper compares the Allowance for Corporate Equity (ACE) tax and the Comprehensive Business I... more This paper compares the Allowance for Corporate Equity (ACE) tax and the Comprehensive Business Income Tax (CBIT) in a general equilibrium model with firms that face entry costs, fixed production costs and increasing marginal costs. We add the empirical regularity of heterogeneity (productivity and size) among firms and thus capture selection effects based on firm profitability. Corporate taxation affects selection and consequently the industry structure. An ACE tax distorts the industry structure by permitting the survival of less productive firms. In contrast, a CBIT is neutral on selection. Aggregate real income increases for an equal yield switch from ACE to CBIT. Yet, this switch hurts small low-productivity firms, while it boosts the earnings of large high-productivity firms.
This paper shows how a specific tax—in contrast to an ad valorem tax—alters industry structure an... more This paper shows how a specific tax—in contrast to an ad valorem tax—alters industry structure and firm‐level performance in a monopolistic competition framework, where firms chose product quality endogenously and differ exogenously in productivity (i.e., marginal production efficiency). Industry equilibrium mechanisms and selection based on productivity play a significant role: A specific tax shifts market shares and profits toward firms with costs and prices above the industry average at the expense of low‐cost firms. This reallocation of market shares releases a novel scale effect such that low‐cost firms may quality downgrade, while high‐cost firms always quality upgrade. There exists a parameter subspace, where this combines to a decrease on average quality for the industry. In comparison: An ad valorem tax only reduces the number of firms/varieties in the industry due to demand absorption, but affects neither firm‐level performance nor industry structure.
An astonishing 33% of all rm-product-destination export spells in Danish data turn out to be isol... more An astonishing 33% of all rm-product-destination export spells in Danish data turn out to be isolated single-month one-o export transactions (observed once in a 49-month window). On average, for an export-active rm, one-o events generate 17% of foreign sales. These patterns cannot be explained by the lumpiness of trade (e.g., seasonal shipments), nor do they sit well with available trade models. To reconcile theory with the data, we introduce passive (i.e., buyer-side driven) exporting. Our empirical investigation establishes novel stylized facts on rm and destination characteristics associated with one-o exporting. JEL: F14, F12, L10, D40
Why is it that exporter productivity premia (EP) differ so widely in magnitude? We take this ques... more Why is it that exporter productivity premia (EP) differ so widely in magnitude? We take this question to the theory and to the data. First, we compute the theoretical equivalent of empirical measures of sectoral EP in a standard heterogeneous firms trade model. This gives novel predictions: a larger variance in the productivity distribution and larger trade costs (both fixed and variable) in a sector increases the sectors EP, while the effect of the degree of product differentiation is ambiguous. Second, based on 15 years of data for the universe of Danish manufacturing firms, we confirm the role of trade costs for sectoral EP. Most importantly, we establish that the variance in the underlying productivity distribution is decisive for the size of a sectors EP. These findings imply substantial room for refinements when conducting empirical research into exporter performance. JEL: F12, F15, O33, L11, L16
Public Economics: Fiscal Policies & Behavior of Economic Agents eJournal, 2007
It is widely perceived that globalization is a threat to tax financed public sector activities. T... more It is widely perceived that globalization is a threat to tax financed public sector activities. The argument is that public activities (public consumption and transfers) financed by income taxes may distort labour markets and cause higher wages and thus a loss of competitiveness. If the importance of the latter effect is reinforced by globalization, it is inferred that the marginal costs of public funds increase and a retrenchment of the public sector follows. We consider this issue in a Ricardian trade model in which production and specialization structures are endogenous. Even though income taxation unambiguously worsens wage competitiveness, it does not follow that tax distortions or marginal costs of public funds increase with product market integration. The reason is that gains from trade tend to reduce both. Moreover, non-cooperative fiscal policies do not have a bias towards retrenchment due to a positive terms of trade effect from taxation.
Isolated single-month one-off export transactions (observed once in a 49-month window) turn out t... more Isolated single-month one-off export transactions (observed once in a 49-month window) turn out to be the dominant spell length in granular firm-product-destination trade data. Moreover, on average, for an exportactive firm, such one-off events generate a significant part of foreign sales. These patterns cannot be explained by the lumpiness of trade (e.g., seasonal shipments), nor do they sit well with available trade models. To reconcile theory with the data, we introduce passive (i.e., buyer-side driven) exporting in addition to proactive exporting. Our empirical investigation establishes novel stylized facts on firm and destination characteristics associated with one-off exporting.
Do firms redirect their exports to other markets when they face a sudden negative shift in export... more Do firms redirect their exports to other markets when they face a sudden negative shift in export demand? Do they change export prices with respect to markets that are not affected by a sudden shock? We use the Danish cartoon crisis in 2005/2006 as a natural experiment to address how firms behave on international markets when exposed to a sudden downward shift of demand. At that time, the publication of caricatures of Muhammad triggered a consumer boycott across the Islamic world. Using a difference-in-differences approach for a panel of Danish pork and dairy exporters, we find no evidence for contemporaneous reallocation of export sales across markets: Even though firms lower their export prices to non-Islamic markets caused by the crisis, exported quantities remain unaffected by the shock. Moreover, the consumer boycott in Islamic countries seems not to have triggered contemporaneous market entry to other markets.
Why is it that exporter productivity premia (EPP) differ so widely in size? We take this question... more Why is it that exporter productivity premia (EPP) differ so widely in size? We take this question to the theory and to the data. We derive the sectoral EPP in a standard heterogeneous firms trade model and apply the insights from the model to 13 years of data for all Danish manufacturing firms. We show that a significant share of the observed variation in EPPs across sectors, and hence across countries, can be explained by the variation in productivity dispersion, trade costs and the elasticity of substitution.
Will the current employment crisis produce lost generations with permanently lower labour market ... more Will the current employment crisis produce lost generations with permanently lower labour market attachment? Taking an explicit cohort perspective and based on Danish data we do not find strong persistence in employment rates at the cohort level. Younger workers tend to be more exposed to business cycle fluctuations than older workers, but importantly they recover more quickly from such set-backs than older workers for whom persistence is stronger. Moreover, no cohorts have been disproportionately affected by exposure to a sequence of adverse shocks. An explicit account of overlapping cohorts is shown to affect assessments of persistence in aggregate employment rates.
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Papers by Allan Sørensen