Kyle Handley

Research

Working Papers

Exporting Under Trade Policy Uncertainty: Theory and Evidence

Abstract: Policy commitment and credibility are important for inducing agents to make costly, irreversible investments. Policy uncertainty can delay investment and reduce the response to policy change. I provide theoretical and novel quantitative evidence for these effects by focusing on trade policy, a ubiquitous but often overlooked source of uncertainty, when a firm's cost of export market entry is sunk. While an explicit purpose of the World Trade Organization (WTO) is to secure long term market access, little theoretical and empirical work analyzes the value of WTO institutions for reducing uncertainty for prospective exporters. Within a dynamic model of heterogeneous firms, I show that trade policy uncertainty will delay the entry of exporters into new markets and make them less responsive to applied tariff reductions. Policy instruments that reduce or eliminate uncertainty such as binding trade policy commitments at the WTO can increase entry even when applied protection is unchanged. I test the model using a disaggregated and detailed dataset of product level Australian imports in 2004 and 2006. I use the variation in tariffs and binding commitments across countries, products and time, to construct model-consistent measures of uncertainty. The estimates indicate that lower WTO commitments increase entry. Reducing trade policy uncertainty is at least as effective quantitatively as unilateral applied tariff reductions for Australia. These results illuminate and quantify an important new channel for trade creation in the world trade system.

Trade and Investment under Policy Uncertainty: Theory and Firm Evidence (with Nuno Limao)

Abstract: We provide theoretical and empirical evidence that trade policy uncertainty can significantly affect investment and entry into export markets. When market entry costs are sunk, policy uncertainty can create a real option value of waiting to enter foreign markets until conditions improve or uncertainty is resolved. Using a dynamic, heterogeneous firms model we show that: (i) investment and entry into export markets is reduced when trade policy is uncertain, and (ii) preferential trade agreements (PTAs) are valuable to exporters even if applied trade barriers are currently low or zero. We derive a structural equation that predicts how firm entry responds to changes in applied tariffs and a theory-based measure of policy uncertainty. We test our predictions using Portugal's accession to the European Community in 1986 with new firm-level trade data. Our estimates indicate that the accession removed uncertainty about future preferences and this channel lead to substantial investment and entry of Portuguese exporters into EC markets. We argue that these results have broader implications for many other PTAs that aim to secure pre-existing preferences and that our approach can also be applied to analyze other sources of policy uncertainty.

Country Size, Technology and Manufacturing Location (Forthcoming in Review of International Economics)

Abstract: Country size, technology and trade costs jointly affect the location of manufacturing activity. In this paper, the combined effects of country size and technology differences on manufacturing location are examined in a simple New Economic Geography model. The specification yields a closed-form, analytic relationship between measures of relative productivity, country size and trade costs. The patterns of agglomeration are consistent with recent empirical evidence. Market and supplier access favor manufacturing agglomeration in large countries for high to intermediate trade costs. High productivity countries, however small, are favored for low trade costs. The model's tractability facilitates policy and welfare analysis.

Private equity, jobs and productivity, with Steven Davis, John Haltiwanger, Ron Jarmin, Josh Lerner and Javier Miranda

Testing Gibrat's Law: Evidence from Microdata, in progress, with Xavier Gabaix, John Haltiwanger and Javier Miranda