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2 Publications found…

  • Working Paper 26 December 2022

    Globalization and market power

    By Giammario Impullitti and Syed Kazmi et al.

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    Summary CITP publication

    Economic theory suggests that the markup is the most appropriate measure of market power and that its relationship with trade is rich and complex. Trade liberalisation can reduce markups via a decline in the residual domestic demand but also increase it via several channels. First, the incomplete pass-through of the cost reductions produced by lower input tariffs. Second, trade leads to more concentrated markets via entry and exit, putting upward pressure on markups. Third, market shares reallocation toward larger, more powerful firms, increase the aggregate markup. We propose a simple model of trade under oligopoly which incorporates all these channels. Using a large episode of trade liberalisation in Spain, we test this rich set of mechanisms linking trade and markups. The overall effects of trade on firm level and aggregate markups is pro-competitive but we find evidence of offsetting effects via the other channels. In particular, we show that firms protected by higher barriers to entry, measured as high intangible investment, R&D spending and patents, experience a weaker reduction in markups. Supporting a new theoretical insight emerging from our model that the feedback effect on trade-induced concentration on markups is stronger with higher barriers to entry.

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  • Working Paper 26 October 2022

    Innovation Union: Costs and Benefits of Innovation Policy Cooperation

    By Teodora Borota, Fabrice Defever, Giammario Impullitti and Adam Spencer et al.

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    Summary CITP publication

    We build a two-region endogenous growth model to analyse the gains from innovation policy cooperation in an economic union. The model is calibrated to two blocks of the EU: the old and new members. R&D subsidy coordination is motivated by the distortion from subsidy competition, the strategic motive, and by intertemporal knowledge spillovers, which drive growth. The ideas production function features decreasing returns, making growth semi-endogenous, where policy affects growth temporarily. We compute gains from harmonised subsidies, chosen in each region to maximise EU welfare, with respect to competitive and observed subsidies. First, we find substantial gains to coordination, which derive exclusively from the strategic motive. Second, extending to include endogenous idea flows via FDI gives knowledge spillovers as the main driver of coordination gains. Third, extending to fully endogenous growth gives similar results. Fourth, conclusions based on steady state analysis have misleading optimal subsidies and overstate the estimated gains.

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