In this dissertation, I assess sources of aggregate fluctuations in emerging markets using a small open economy model. I focus on the importance of permanent versus transitory technology shocks. Notably, emerging countries present short quarterly national accounts data, usually since the late eighties, but longer annual series, since 1950. To use this information efficiently, I estimate the model implementing a Bayesian mixed frequency strategy that combines quarterly and annual data for 1950-2010. The mixed strategy allows us to extend the sample period 40 years back with annual data, which helps to identify permanent versus transitory shocks. And at the same time, it keeps the information of shorter quarterly series, addressing potential temporal-aggregation bias of estimation with annual data. In Chapter I, I outline the DSGE Bayesian mixed frequency estimation methodology. Then, I estimate a small open economy model featuring financial frictions for twelve emerging countries under the baseline mixed frequency estimation. I find that transitory technology shocks are the main driver of fluctuations in emerging markets, accounting for 48% of output growth variance on average, while permanent productivity shocks explain 35%. For comparison, I also estimate the model using alternative single frequency estimators based either on quarterly or annual data. Interestingly, these estimators assign a larger role to permanent shocks than the mixed frequency strategy. In Chapter II, I perform a Monte Carlo experiment for a representative emerging economy to assess the relative merits of the mixed frequency strategy. Strikingly, estimations based on short quarterly series exhibit large upward bias for the contribution of permanent technology shocks, yielding an incorrect ranking of shocks importance. Further, I find that the mixed frequency estimation drastically reduces this bias, sorting the shocks in the right order. Finally, the mixed strategy also does a better job than annual estimation along several dimensions. Interestingly, the predictions of the Monte Carlo experiment are in line with the different role assigned to permanent shocks across alternative estimation strategies in Chapter I. Also, I show that the magnitude and sign of these biases are sensitive to the true parameter values in the data generating process, especially with respect to the relative volatility of technology shocks. Overall, the proposed mixed frequency strategy presents large efficiency gains compared with alternative single frequency estimators. In Chapter III, in turn, I analyze the ability of a simpler RBC model driven only by technology shocks to explain emerging markets' business cycles. I find that a frictionless RBC does a poor job at reproducing main business cycle facts. However, the model fit presents a remarkable improvement if I assume a moderate degree of financial frictions by calibrating a larger debt-elasticity of the interest rate. Finally, using artificial data for a representative emerging economy, I find that the mixed frequency estimations deliver significant efficiency gains compared with quarterly estimations, but the gains are not as large as for the financial frictions model of Chapter I and II.

Understanding how firms set prices is a key step towards settling classic debates in economics regarding the sources of nominal price rigidities, the mechanisms through which disturbances are transmitted within and across countries, and the effectiveness of monetary policy in dampening business cycle fluctuations. This dissertation examines patterns of price adjustment at the firm level, both empirically and theoretically. The first chapter studies pricing patterns in US grocery store data. Using a novel empirical method, I identify changes in the distribution of product-level prices over time. These changes typically occur every seven months and mark the transition to new pricing regimes. Inside regimes, prices alternate among a small set of prices with high frequency. This evidence motivates a theory of price setting in which firms respond to shocks using multiple-price policies that are simple enough to only specify a small number of prices, and that are updated only on discrete occasions. The second chapter presents a theory of costly information that generates such simple, sticky policies. In order to economize on the costs of acquiring information, the firm designs a pricing policy that is a noisy, coarse representation of market conditions. Moreover, it updates this policy infrequently, based on imprecise signals about the state of the economy. Despite the high volatility of observed prices, the firm responds imperfectly to changes in market conditions. The third chapter, co-authored with Ryan Chahrour, addresses the patterns of adjustment in international relative prices. We develop a two-country model in which retailers have imperfect information and search for producers operating in different regions in the two countries. We demonstrate that frictions at the regional level within countries generate dispersion in international relative prices in the absence of additional frictions at the national border.

This dissertation consists of three essays exploring how trade models with monopolistic competition can help us understand and evaluate the history of domestic policy coordination in the multilateral trading system. Relative to perfect competition, imperfect competition gives rise to new cross-border concerns that governments do not internalize when setting both trade policy and domestic policy. An open question is whether these international policy externalities matter for the design of the multilateral trading system. The first chapter develops the workhorse model for the dissertation and applies it to the evolution of subsidy rules in the multilateral trading system. Why did countries achieve a consensus to impose explicit restrictions on trade-distorting subsidies when the WTO was formed in 1995, but not decades earlier under the GATT? This chapter rationalizes the historical pattern of subsidy rules. Politically-motivated governments benefit from international subsidy restraints only after achieving sufficient cooperation in restraining tariffs. Once tariffs fall, as they did in the 1950s and 1960s, governments prefer to protect domestic sales through international subsidy restraints and countervailing duties rather than to allow consumers to benefit from unfettered subsidization. The second chapter applies the same model to the international coordination of competition policy (antitrust in the United States). In 1948, 53 nations signed the Havana Charter which would have led to the creation of the International Trade Organization and international coordination of competition policy, if the charter had been ratified by the U.S. Congress. Decades later, there is no direct international coordination of competition policy, despite direct coordination in other domestic policies. The theory argues that when countries have noncooperative policies, international coordination toward stronger competition policy can lead to increased consumer welfare. As countries reduce import tariffs, they tend away from coordination on stronger competition policy and toward no coordination or weaker competition policy. The model predicts that if countries were ever to coordinate on competition policy, it would be toward weaker competition policy. The first two chapters each argue that externalities arising under imperfect competition can explain the history of domestic policy coordination, given the actual path of trade liberalization. In contrast, the final chapter evaluates whether the world trading system could have chosen rules that eliminate these externalities. If these externalities could have been eliminated, then monopolistic competition does not create any new fundamental problem for trade agreements to solve. We re-evaluate two claims about international externalities that hold true under perfect competition and are also consistent with the rules and norms of the 1947 GATT: (1) reciprocal trade negotiations can guide countries toward globally efficient policies, such that countries act as if they do not value their ability to manipulate their terms of trade, and (2) globally efficient policies can be preserved by rules that prevent countries from using domestic policies to undermine the market access implied by tariff negotiations. This chapter shows that both claims fail to hold when countries have subsidies for the marginal cost of production and subsidies for firm entry. The source of inefficiency is countries free-riding off of each other's entry subsidies. A market access rule that preserves both a trading partner's home volume and export volume can prevent opportunism in domestic policy choices. The results suggest that the rise of trade in imperfect competition was a factor in limiting the effectiveness of the 1947 GATT rules, long before other challenges for the world trading system like offshoring became predominant.

In this dissertation, I consider multiple dimensions of international integration. In chapter one, I consider the impact of immigration on public finance. In chapter two, I study capacity constrained firms and the transmission of foreign shocks to the domestic market through these firms. In chapter three, I focus on the importing behavior of firms and how macro and micro patterns of trade and production diverge. In the first chapter, I investigate the role diversity plays in the provision of public goods. The conventional wisdom holds that diversity is a significant hindrance to collective action and the provision of public goods. Empirical support for this view comes primarily from the observation that measures of diversity are negatively correlated with provisions of public goods in the cross-section. The generally held conjecture is that this negative relationship is true within countries over time as well. I address this belief directly by exploiting a natural migration experiment and a unique IV strategy to causally identify the impact of diversity on public goods expenditures and revenues. With the political collapse of the Soviet Union in the fall of 1989, mass migration to Israel increased the population there by roughly seven percent over two years. This led to substantial changes in diversity in local communities, with some becoming more homogeneous and others becoming more diverse. I confirm the usual negative relationship in the cross-section by using data on local government budgets at disaggregated levels. However, I find limited evidence that increased diversity leads to lower expenditures on local public goods when I instrument for changes in diversity using historic settlement patterns. Local revenue generating mechanisms do respond to changes in diversity, but are offset by national government transfers. Chapter two challenges a central assumption of standard trade models: constant marginal cost technology. We present evidence consistent with the view that increasing marginal cost is present in the data, and further identify financial and physical capacity constraints as the main sources of increasing marginal costs. To understand and quantify the importance of increasing marginal costs faced by financially and physically constrained exporters, we develop a novel structural estimation framework that incorporates these micro frictions. Our structural estimates suggest that the presence of such capacity constrained firms can (1) reduce aggregate output responses to external demand shocks by 30% and (2) result in welfare loss by around 23%.

This dissertation offers an integrated collection of essays that seek to understand how economic policies and output volatility of countries depend on their level of development. Chapter 1 presents a general introduction, with the motivation and main results of the project. Chapter 2 introduces the main theoretical piece: a model that explains endogenous limited liability rules and market failures, using a dynamic environment with asymmetric information, with emphasis on wealth effects. Chapter 3 discusses why poor countries are more volatile than rich countries, from an empirical and theoretical perspective. Chapter 4 investigates how the structure of ownership (public, private, foreign) of strategic productive activities in the economy can change along the development path. Chapter5 develops the analytical and numerical foundations of the two-period model used in Chapters 1, 3 and 4, which corresponds to a reduced form of the model developed in Chapter 2.

This dissertation consists of essays on communication in game theory. The first chapter develops a model of dynamic persuasion. A sender has a fixed number of pieces of hard evidence that contain information about the quality of his proposal, each of which is either favorable or unfavorable. The sender may try to persuade a decision maker (DM) that she has enough favorable evidence by sequentially revealing at most one piece at a time. Presenting evidence is costly for the sender and delaying decisions is costly for the DM. I study the equilibria of the resulting dynamic communication game. The sender effectively chooses when to give up persuasion and the DM decides when to make a decision. Resolving the strategic tension requires probabilistic behavior from both parties. Typically, the DM will accept the sender's proposal even when she knows that the sender's evidence may be overall unfavorable. However, in a Pareto efficient equilibrium, the other type of error does not occur unless delays costs are very large. Furthermore, the sender's net gain from engaging in persuasion can be negative on the equilibrium path, even when persuasion is successful. we perform comparative statics in the costs of persuasion. I also characterize the DM's optimal stochastic commitment rule and the optimal non-stochastic commitment rule; compared to the communication game, the former yields a Pareto improvement, whereas, the latter can leave even the DM either better or worse off. The second chapter studies a unidimensional Hotelling-Downs model of electoral competition with the following innovation: a fraction of candidates have "competence", which is unobservable to voters. In our model, competence means the ability to correctly observe a policy-relevant state of the world. This structure induces a signaling game between competent and incompetent candidates. We show that in equilibrium, proposing an extreme platform serves as a signal about competence, and has a strictly higher winning probability than that of the median platform. Polarization happens and the degree of it depends on how uncertain the state is and how much political candidates are office-motivated. The third chapter examines the dynamic extension of Che, Dessein, and Kartik (2011). They study strategic communication by an agent who has non-verifiable private information about different alternatives. The agent does not internalize the principal's benefit from her outside option. They show that a pandering distortion arises in communication. This chapter studies the long-run consequence of their model when a new agent-principal pair is formed in each period, and principals in later periods may learn some information from predecessors' actions. I show that informational cascade, in which communication completely breaks down, can arise, even when communication can benefit both parties. I also characterize the conditions under which effective communication between principal and agent can continue in perpetuity.

My dissertation consists of three essays that allow me to investigate two related trade induced economic phenomena -- processing trade and offshoring -- using diverse datasets and theory. In Chapter 1, a joint work with Mi Dai and Miaojie Yu from Peking University, we solve the documented puzzle that exporters in China are less productive than non-exporters in the labor intensive sectors and in the Foreign Invested Enterprises (FIE). We show that this anomalous finding is entirely driven by firms that engage only in export processing -- the activity of assembling tariff exempted imported inputs into final goods for resale in the foreign markets. We find that pure processing exporters are less productive than non-exporters, but other types of exporters -- those doing only non-processing trade and those doing both processing and non-processing trade -- have superior performance relative to non-exporters. Our results show that distinguishing between processing and ordinary exporters is crucial for understanding firm-level exporting behavior in China. In Chapter 2, a joint work with Henrik Bursland Fosse, from Copenhagen Business School, we investigate the effects of offshoring on wages. Offshoring firms are found to pay higher average wages than purely domestic firms. We provide a unifying empirical approach by capturing the different channels through which offshoring may explain this wage difference: (i) due to a change in the composition of workers (skill composition effect) (ii) because all existing workers get higher pay (rent sharing effect). Using Danish worker-firm data we explain how much each channel contributes to higher wages. To estimate the causal effect of offshoring on wages we use China's accession to the WTO in December 2001 and the soon after boom in Chinese exports as positive exogenous shocks to the incentive to offshore to China. Both skill composition and rent sharing effects are found to be important in explaining the resultant gain in wages. We also show that the firm's timing in the offshoring process determines the relative importance of a channel. For firms offshoring to China in 2002 but not in 1999, only rent sharing explains the gain in wages. However, for firms offshoring to China both before and after China's WTO accession the wage increase is explained more by the skill composition effect. Moreover, these patterns are not discernable from the measures of skill composition and rent sharing available in typical firm level datasets-- such as ratio of educated to uneducated workers and sales per employee. In Chapter 3, I extend the Sethupathy (2008) model to investigate the wage effects of offshoring in the presence of heterogeneous firms, heterogeneous workers, and imperfections in the labor market with rent sharing. The salient features of the model are: first, there are heterogeneous firms who differ in terms of productivity; second, presence of heterogeneous workers who vary at the skill level; third, imperfect labor market with presence of search costs, wage bargaining leading to rent sharing between firms and workers; fourth, performance of high-skilled and low-skilled tasks are required for production of the good; fifth, there is opportunity for offshoring each type of task, requiring a marginal cost that varies with the degree of non-routineness of the task and a fixed cost. In this framework I show that a fall in the cost of offshoring increases average wage in the offshoring firm due to a rent sharing effect. This effect can be further reinforced or weakened by an accompanying skill composition effect. Average wages in the non-offshoring firms decline due to a rent sharing effect only; there is no skill composition effect for these firms in the model.

The goal of this thesis is to investigate changes in consumers' choices and their welfare due to the introduction of new products, taking firms' reactions into consideration. I perform empirical analyses using Korean transportation industry data to evaluate the impact of high-speed train introduction on passenger travel. This work adds to the existing literature by considering the changes in product characteristics or the set of products offered to consumers after new product introduction, and investigates how those changes affect consumer welfare. The analysis provides a rich insight into the transportation industry and the relationship between the modes of transportation which contributes to enhancing the quality of government's policies regarding related industries. The first part of my thesis investigates the changes in utilization of different modes of transportation in Korea after the introduction of high-speed train using a fixed effect model and a difference in differences model. My results show the significant impact of the introduction of high-speed train on the entire transportation industry and provide evidence that modes of transportation not only compete but also complement each other. After high-speed trains were introduced in 2004, inter-city bus and airline industries lost their customers in routes where they directly competed with high-speed rails, while the numbers of rail passengers increased. The losses in the airline industry were particularly severe. On the other hand, the passengers of other rail lines for some routes not connected by high-speed trains but branch routes of high-speed rail lines, increased. The increase was perhaps induced by the consumers who traveled on those routes in order to reach high-speed rail lines. After the introduction of high-speed trains, other changes such as service schedule adjustment ensued. The results from the reduced form models show only the overall impact of high-speed train introduction, but they cannot disentangle the impact of high-speed train introduction itself from that of ensuing changes. In order to separately examine the impact of high-speed train introduction and that of ensuing changes in product characteristics, I estimate a structural model of the demand for travel that incorporates consumers' heterogeneous preferences over travel schedules into a standard discrete choice model. The model treats the rail company's choice of train schedules as endogenous in order to take the firm's choices of product line into account. My results show that consumers are affected differentially by both the introduction of high-speed trains and the ensuing changes in train schedules. The welfare implications for consumers depend on the availability of high-speed trains in their choice set. Consumers who travel between two cities that are connected by high-speed trains are the main beneficiaries of the new service. However, reductions in schedule frequencies of non-high-speed trains operating along high-speed rail lines, generate losses that offset 50% of gains even for these consumers. Travelers on these lines who are not served by high-speed trains only experience substantial losses due to reduced schedule frequencies. Consumers who travel between two cities that are not located along high-speed rail lines gain from increased train frequencies, and the gains make up for the losses in other markets without high-speed trains. These results highlight the importance of accounting for changes in existing products when analyzing the impact of new product entry on consumers.

In Krugman (1991), agglomeration is driven by consumption externalities related to differences in the average price across locations. Variety plays a central role here: the price index is lower in larger cities because more varieties are produced there, but all products are available everywhere, so there are no direct consumption gains from variety. Chapter 1 extends this model to allow for these variety differences across cities via an extensive margin of intercity trade. In this model, scale economies yield more production variety in larger cities so that, with positive trade costs, consumers in these locations can benefit from two consumption advantages - lower average prices and more varieties of products. This model sets the stage for the empirical chapters that measure the impact of these consumption benefits on consumer utility. The urban economics literature has paid relatively little attention to these consumption externalities for two reasons. First, the fact that wages are higher in larger cities indicates, in the context of a spatial equilibrium model, that purchasing power must be lower in these locations, which is inconsistent with the NEG theoretical predictions that price indexes are lower in larger cities. Second, there are reasons to believe that intranational trade frictions are much smaller than those across international borders. While there is a large body of work documenting that these frictions yield significant variation in the prices charged and varieties offered across different countries, we know relatively little about the spatial variation of price and variety in a domestic context. Chapter 2, co-authored with David E. Weinstein, addresses both of these issues. We first show that, controlling for purchaser demographics and store amenities, the prices of tradable products do, in fact, vary across cities as predicted by Krugman (1991). Additionally, we find that there are significant differences in the variety of products offered in large as opposed to small cities. We finally measure the extent to which this variation in prices and variety lowers price indexes for tradable products in large cities relative to small cities. This low price index over tradables in large cities is consistent with nominal wages being higher there, as long as there are congestion costs that equalize real income across locations. A major assumption in the work described above is that the consumption benefits of cities do not vary systematically across consumer types. The final chapter of my dissertation considers how systematic differences in prices and variety across space might impact different individuals differently. Previous research has tested whether firms vary prices and product offerings in order to cater local tastes in a market. I extend this analysis to structurally estimate how this behavior of individual firms differentially affects the price indexes faced by consumers with systematically heterogeneous tastes. I allow for tastes to vary with income and find that poor consumers face lower costs in low-income cities, while the opposite holds for wealthy consumers, whose tastes are better-suited to the variety of products available in high-income cities. In conclusion, this dissertation finds that there is significant variation in prices and variety across U.S. cities. In particular, the spatial distributions of prices, variety, and consumers in the U.S. are correlated in a manner consistent with there being consumption externalities. Consumers in larger cities have access to more varieties of products at a lower average price and, conditional on city size, consumers have access to varieties better-suited to the tastes of they share with their income group in cities with per capita incomes closer to their own. These patterns are reflected in the variation in the tradables price indexes that consumers face across large and small and across wealthy and poor cities. This evidence on the existence of the pecuniary consumption externalities hypothesized in early NEG papers supports a growing literature exploring the role of consmption externalities in generating the aggregate and skill-biased agglomeration patterns that the more recent NEG literature associates with production externalities.

Prices determine allocation of resources in a market economy, yet their role in international trade theory is often underappreciated. In these three essays I provide novel empirical implementations of several theories relating to the prices of traded goods and show the implications for measuring the impact of quality, boosting welfare through increased variety, and explaining exchange rate fluctuations. Chapter 1 uses a variation on the well-known gravity model of trade to show that the observed correlation of export prices with distance is largely due to aggregating across shipping modes. Distance has no affect on free on board export prices once mode of transportation is controlled for; where goods are shipped by multiple modes, the observed distance premium conflates a selection effect with a direct effect. I also demonstrate that the standard Alchian-Allen analysis does not apply if goods are shipped by multiple modes of transportation, undermining an additional theoretical basis for predicting that average quality is increasing with distance in these industries. Thus, prior interpretations of the distance premium as indicating the existence of firm quality differentiation are shown to be largely unfounded. As a whole, the chapter highlights the important and little-studied role of transportation mode, and shows that it has a significant and overlooked impact on traded goods prices. Chapter 2, joint work with David Weinstein of Columbia University and Christian Broda of Duquesne Capital Management, evaluates the importance of countries worldwide gaining access to new varieties of traded goods in an semi-endogenous growth model framework. As producers gain access to new imported varieties, productivity rises and the cost of innovation falls, resulting in the creation of new varieties. These in turn can be exported, thus multiplying the impact on the world economy as a whole. We construct an exact price index that incorporates the effect of variety, using detailed trade data on thousands of markets in a large multicountry dataset, and we confirm that increased import variety translated into a large increase in productivity growth. In turn, this boosted world permanent income by almost a fifth over the decade we analyzed. In Chapter 3, I revisit the debate on exchange rate determination, in particular why the link between changes in prices and movements in the exchange rate seems so weak. I test two hypotheses to ascertain whether previous research failed to confirm purchasing power parity due to misspecification. I find support for substituting import price indices for the consumer price indices typically used, although an additional proposed correction due to the non-continuous nature of the underlying data does not affect the results. This outcome may be attributable to choosing a base country with relatively low variation in its consumer price index. Nonetheless, the paper highlights the importance of focusing on traded goods prices and in doing so shows that the extent of unexplained exchange rate variation is greatly reduced.