Three Essays on International Trade, Firms’ Corruption Engagement, and Internal Trade Costs

Song, Ge

Graduate Thesis Or Dissertation

Three Essays on International Trade, Firms’ Corruption Engagement, and Internal Trade Costs Public Deposited

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Citeable URL: https://scholar.colorado.edu/concern/graduate_thesis_or_dissertations/qv33rz339

Abstract

My dissertation consists of three chapters on international trade, firms’ corruption engagement, and internal trade costs. Chapter 1 of my dissertation studies the role of trade liberalization in shaping domestic corruption. I develop a model of trade with heterogeneous firms that features endogenous corruption and export participation decisions. In the model, firms face a tradeoff between engaging in corruption, thereby obtaining higher profits in the domestic market, or preserving their non-corrupt status in foreign markets to obtain higher export profits. In equilibrium, there is an inverted U-shaped relationship between firm productivity/size and corruption engagement. This prediction is confirmed in firm-level and aggregate data on international trade. I then calibrate the model to China and evaluate the extent to which trade policy is an effective tool for fighting domestic corruption. My findings suggest that (i) the share of firms that are “missing from trade” due to domestic corruption is 1%; (ii) conditional on the same reduction in the level of domestic corruption, trade liberalization is preferable to direct anti-corruption campaigns in terms of the associated gains in consumer welfare.

Domestic trade costs are vitally influential on international trade. Chapter 2 of my dissertation examines the impact of domestic trade costs on firms’ export performance by exploiting variation in firm-to-port distances. With a merged firm-level dataset linking firm-level production, income, balance sheet, export, and geographic location information, I construct a measure of firm-to-port distance as a port-specific trade share weighted average of distances from a firm’s location to each location of ports used by the firm. Then, I guide my empirical specification with an extension of the heterogeneous firm model of trade incorporating domestic trade costs. I find that when domestic trade costs increase by 10%, firm’s export values decrease by 1.5% on average.

Does within-border corruption affect cross-border trade, and vice versa? In the literature of international trade and corruption, firms’ corruption at the border may be trade-dampening through official’s taxing deeds on exporters (extortion effect), or may be trade enhancing when custom officials help exporters evade tariff barriers (evasion effect). Most firms’ corrupt behaviors, however, happen within borders. Chapter 3 of my dissertation supplements the literature complementarily with a parsimonious stylized model, highlighting trade and within-border corruption as competing forces that induce selection of firms into corrupt behaviors with local government officials or into export based on their heterogeneous productivity levels. Theory-consistent evidence is documented using the 2005 World Bank Enterprise Survey linking information on firms’ corruption expenses, production, and foreign sales. In the simulation exercise, predictions from the model are the following: (i) trade liberalization helps to ameliorate domestic corruption at the aggregate level; (ii) domestic anti-corruption campaign promotes aggregate export; (iii) welfare gains form trade liberalization is higher when the interplay between trade and corruption exists.

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