Samuel Kortum Publications

We explore how connections between buyers and suppliers of intermediate inputs evolve over time to promote firm growth. To formalize this process we develop a dynamic model of a granular endogenous production network, making stark assumptions that yield a tractable parsimonious framework. In the model, producers gradually build up a network of contacts by meeting other producers and source an intermediate input from their cheapest contact at any moment. They retain full recall, so can always switch to a producer contacted previously, even if they never bought from it before. Through this process the production network itself becomes an endogenous state variable in the model that drives firm growth. Despite its simplicity, the implications we derive from this framework are realistic enough to test against numerous findings from the burgeoning empirical literature on firm-to-firm trade.

We develop a dynamic multi-country Ricardian trade model with aggregate uncertainty, where trade imbalances emerge as countries exchange goods and assets. We introduce a method for computing counterfactuals in this setting, which doesn't require specifying the stochastic process of shocks or solving for asset prices. Applying the model to tariff shocks, we quantify their effects on prices, income, spending, and trade imbalances. We find that higher U.S. tariffs reduce the U.S. trade deficit through general equilibrium adjustments, but raise domestic prices and lower real consumption. Our findings highlight that movements in trade imbalances are shaped by the structure of global trade and finance, and that attempts to influence external balances through changes in trade barriers carry significant implications for real economic outcomes.

This paper develops a complete-markets model to analyze the determinants of endogenous trade imbalances across countries. We introduce a framework where countries can trade in Arrow-Debreu securities to insure against different states of the world, which enables them to run deficits in some states and surpluses in others. The model allows for counterfactual analysis of various trade policy scenarios, such as unilateral tariff impositions. We derive the conditions under which trade deficits arise endogenously and discuss implications for welfare and trade policy analysis.

Climate policy by a coalition of countries can shift activities—extraction, production, and consumption—to regions outside the coalition. We build a stylized general-equilibrium model of trade and carbon externalities to derive a coalition’s optimal Pareto-improving policy in such an environment. It can be implemented through: (i) a tax on fossil-fuel extraction at a rate equal to the global marginal harm from carbon emissions, (ii) a tax on imports of energy and goods, and a rebate of the tax on exports of energy but not goods, all at a lower rate per unit of carbon than the extraction tax rate, and (iii) a goods-specific export subsidy. This combination of taxes and subsidies exploits international trade to expand the policy’s reach. It promotes energy efficient production and eliminates leakage by taxing the carbon content of goods imports and by encouraging goods exports. It controls the energy price in the non-taxing region by balancing supply-side and demand-side taxes. We use a quantitative version of the model to illustrate the gains achieved by the optimal policy and simpler variants of it. Combining supply-side and demand-side taxes generates first-order welfare improvements over current and proposed climate policies.

Interpreting individual heterogeneity in terms of probability theory has proved powerful in connecting behaviour at the individual and aggregate levels. Returning to Ricardo's focus on comparative efficiency as a basis for international trade, much recent quantitative equilibrium modeling of the global economy builds on particular probabilistic assumptions about technology. We review these assumptions and how they deliver a unified framework underlying a wide range of static and dynamic equilibrium models.

We derive the optimal unilateral policy in a general equilibrium model of trade and climate change where one region of the world imposes a climate policy and the rest of the world does not. A climate policy in one region shifts activities—extraction, production, and consumption—in the other region. The optimal policy trades off the costs of these distortions. The optimal policy can be implemented through: (i) a nominal tax on extraction at a rate equal to the global marginal harm from emissions, (ii) a tax on imports of energy and goods, and a rebate of taxes on exports of energy but not goods, both at a lower rate than the extraction tax rate, and (iii) a goods-specific export subsidy. The policy controls leakage by combining supply-side and demand-side taxes to control the price of energy in the non-taxing region. It exploits international trade to expand the reach of the climate policy. We calibrate and simulate the model to illustrate how the optimal policy compares to more traditional policies such as extraction, production, and consumption taxes and combinations of those taxes. The simulations show that combinations of supply-side and demand-side taxes are much better than simpler policies and can perform nearly as well as the optimal policy.

We develop a dynamic multicountry general equilibrium model to investigate forces acting on the global economy during the Great Recession and ensuing recovery. Our multisector framework accounts completely for countries' trade, investment, production, and GDPs in terms of different sets of shocks. Applying the model to 21 countries, we investigate the 29 percent drop in world trade in manufactures during the period 2008-2009. A shift in final spending away from tradable sectors, largely caused by declines in durables investment efficiency, accounts for most of the collapse in trade relative to GDP. Shocks to trade frictions, productivity, and demand play minor roles.

We develop a Ricardian trade model that incorporates realistic geographic features into general equilibrium. It delivers simple structural equations for bilateral trade with parameters relating to absolute advantage, to comparative advantage (promoting trade), and to geographic barriers (resisting it). We estimate the parameters with data on bilateral trade in manufactures, prices, and geography from 19 OECD countries in 1990. We use the model to explore various issues such as the gains from trade, the role of trade in spreading the benefits of new technology, and the effects of tariff reduction.