Date of Award

Spring 1-1-2016

Document Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Department

Economics

First Advisor

James Markusen

Second Advisor

Wolfgang Keller

Third Advisor

Keith E. Maskus

Fourth Advisor

Carol H. Shiue

Fifth Advisor

Yacheng Sun

Abstract

This thesis consists of three chapters investigating different aspects of factor markets and their interaction with trade, with a particular interest in developing countries.

The first chapter discusses how globalization affects welfare by reallocating labor across firms, sectors and space when factor markets are distorted. It incorporates a traditional agriculture sector into the trade literature with heterogeneous firms, matching frictions and multiple asymmetric regions in terms of their geographical locations. The model predicts that a reduction in trade impediments reallocates market share towards more productive producers, encourages firms to post more vacancies, and induces workers to migrate towards the manufacturing sector and towards the coastal regions. In addition, by comparing the decentralized competitive equilibrium with the socially optimal solution, I show that falls in trade barriers exacerbate existing distortions caused by matching frictions but decrease misallocation of labor across sectors and space. This implies potential gains from trade through increase in labor market efficiency. The main mechanism in the model is supported by empirical evidence from China.

In the second chapter, I analyze how trade cost reductions raise skill premium and human capital investment in developing countries by building a dynamic general equilibrium model featured with endogenous human capital accumulation and production fragmentation. The simulation results show that within the Heckscher-Ohlin framework, trade liberalization leads to divergence of the world income distribution by inducing skill accumulation in skilled labor abundant countries and skill de-accumulation in skilled labor scarce countries. On the contrary, when the production fragmentation is allowed, trade cost reduction leads to a convergence in income and factor endowments across countries. In addition, the transition path following the trade cost reduction is non-monotonic. The trade-induced increases in skill premium raise human capital investment, which increases labor supply and depresses returns to education over time. This indicates the equalizing effect of the endogenous adjustment in skills supply. I then examine the theoretical predictions in the context of China's trade reform in 1978. The estimated coefficients from the difference-in-difference regressions are consistent with the simulation results.

The last chapter is a joint work with Wolfgang Keller and Carol Shiue. In this chapter, my coauthors and I employ an asset-pricing model to estimate consistent interest rates and compare capital market development in Britain and China with the most comprehensive grain prices available. The estimated interest rates for Britain were at least 28% lower than those for China during 1770-1860. In addition, we analyze the integration of capital markets by examining the correlation of interest rates across regions with varying geographic distances. We find that the regional integration of capital markets in Britain was substantially higher than in China. Our results suggest that capital market performance may have been important to explain the divergence in incomes across countries in the 18th and 19th century.

Included in

Economics Commons

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