Essays on International Trade and Political Economy

Abstract

This dissertation consists of two essays in international trade and one essay in political economy. The first essay analyzes the role of firm-level and country-level reputation for quality in international transactions. It studies the entry and pricing strategies of high-quality and low-quality exporters when buyers cannot observe the quality of a product prior to purchase. In a steady-state industry equilibrium, country reputations are endogenously set by the quality of their exports, leading to the possibility of multiple equilibria and low-quality traps. We show that export subsidies have a positive long-run effect on average quality, reputation and welfare in countries exporting low-quality goods. However, they have the opposite consequences in countries that export high-quality products. We present some evidence consistent with the model in the empirical pattern of US export prices. The second essay studies the choice between home country and host country financing for multinationals facing demand uncertainty. Three main channels are identified. The cost of capital depends on local financial development. A diversification channel arises from the ability of geographically diversified firms to generate more stable cash flows. By contrast, contagion risk may result in inefficient liquidations when firms raise funds exclusively on their home market. In particular, the model predicts that the prevalence of affiliate production and the share of parent finance should increase with the correlation of business cycles between the home and host markets. Moreover, exchange rate risk tilts the financing decision towards local debt. The third essay deals with the emergence of mass education. Using data from the last 150 years in 137 countries, we show that large investments in primary education systems tend to occur when countries face military rivals or threats from their neighbors. Interestingly, democratic transitions are negatively associated with education investments, although democratic political institutions magnify the positive effect of military rivalries. These empirical results are robust to a number of statistical concerns and hold when we instrument military rivalries with commodity prices or rivalries in a given country’s immediate neighborhood. We also present historical case studies, as well as a simple model, that are consistent with the econometric evidence.