Abstract: A unilateral carbon tax trades off the distortionary costs of taxation and the future gains from slowing down global warming. Because the cost is local and immediate, whereas the benefit is global and delayed, this tradeoff tends to be unfavorable to unilateral carbon taxes. We show that this logic breaks down in a world with trade and migration where economic geography is shaped by agglomeration economies and congestion forces. Using a multisector dynamic spatial integrated assessment model (S-IAM), this paper predicts that a carbon tax introduced by the European Union (EU) and rebated locally can, if not too large, increase the size of Europe’s economy by concentrating economic activity in its high-productivity non-agricultural core and by incentivizing immigration to the EU. The resulting change in the spatial distribution of economic activity improves global efficiency and welfare. A unilateral carbon tax with local rebating introduced by the US generates similar global welfare gains. Other forms of rebating can dilute or revert this positive effect.

Replication Files

Abstract: We provide theory and evidence on the relationship between globalization and pandemics. Business travel facilitates trade and travel leads to human interactions that transmit disease. Trade-motivated travel generates an epidemiological externality across countries. If infections lead to deaths, or reduce individual labor supply, we establish a general equilibrium social distancing effect, whereby increases in relative prices in unhealthy countries reduce travel to those countries. If agents internalize the threat of infection, we show that their behavioral responses lead to a reduction in travel that is larger for higher-trade-cost locations, which initially reduces the ratio of trade to output.

Appendix

Replication Files

Abstract: This paper quantitatively assesses the world's changing economic geography and sectoral specialization due to global warming. It proposes a two-sector dynamic spatial growth model that incorporates the relation between economic activity, carbon emissions, and temperature. The model is taken to the data at the 1° by 1° resolution for the entire world. Over a 200-year horizon, rising temperatures consistent with emissions under Representative Concentration Pathway 8.5 push people and economic activity northwards to Siberia, Canada, and Scandinavia. Compared to a world without climate change, clusters of agricultural specialization shift from Central Africa, Brazil, and India's Ganges Valley, to Central Asia, parts of China and northern Canada. Equatorial latitudes that lose agriculture specialize more in non-agriculture but, due to their persistently low productivity, lose population. By the year 2200, predicted losses in real GDP and utility are 6% and 15%, respectively. Higher trade costs make adaptation through changes in sectoral specialization more costly, leading to less geographic concentration in agriculture and larger climate-induced migration.

Replication Files

Abstract: We develop a dynamic spatial growth theory with realistic geography. We characterize the model and its balanced-growth path and propose a methodology to analyze equilibria with different levels of migration frictions. Different migration scenarios change local market size, innovation incentives, and the evolution of technology. We bring the model to the data for the whole world economy at a 1° × 1° geographic resolution. We then use the model to quantify the gains from relaxing migration restrictions. Our results indicate that fully liberalizing migration would increase welfare about threefold and would significantly affect the evolution of particular regions of the world.

Videos of Simulations

Replication Files

Abstract: This paper studies the impact of spatial frictions on Asia’s long-term spatial development. Using the framework provided in Desmet, Nagy, and Rossi-Hansberg (2016), we analyze the evolution of Asia’s economy and the relative performance of specific regions and countries. We then perform a number of counterfactual experiments and find that a worldwide drop in transport costs of 40% increases the present discounted value of real income by 70.7% globally and 78% in Asia. These figures are much larger than those found in standard quantitative trade models because they include dynamic effects and take into account intracountry transport costs. We also perform exercises in which we upgrade Asia’s road network or relax migratory restrictions between locations in Asia. These exercises emphasize the important role of spatial frictions in the development of Asia’s economy.

Abstract: This paper studies the recent spatial development of India. Services, and to a lesser extent manufacturing, are increasingly concentrating in high-density clusters. This stands in contrast with the United States, where in the last decades services have tended to grow fastest in mediumdensity locations, such as Silicon Valley. India’s experience is not common to all fast-growing developing economies. The spatial growth pattern of China looks more similar to that in the United States than to that of India. Our findings suggest that certain frictions are keeping medium-density places in India from growing faster.

Abstract: We present a theory of spatial development. Manufacturing and services firms located in a continuous geographic area choose each period how much to innovate. firms trade subject to transport costs and technology diffuses spatially. We apply the model to study the evolution of the US economy in the last half-century and find that it can generate the reduction in the manufacturing employment share, the increased spatial concentration of services, the growth in service productivity starting in the mid-1990s, the rise in the dispersion of land rents in the same period, as well as several other spatial and temporal patterns.

Online Appendix

Replication Files

Abstract: A firm’s productivity depends on how production is organized. To understand this relationship we develop a theory of an economy where firms with heterogeneous demands use labor and knowledge to produce. Entrepreneurs decide the number of layers of management and the knowledge and span of control of each agent. As a result, in the theory, heterogeneity in demand leads to heterogeneity in productivity and other firms’ outcomes. We use the theory to analyze the impact of international trade on organization and calibrate the model to the U.S. economy. Our results indicate that, as a result of a bilateral trade liberalization, firms that export will increase the number of layers of management. The new organization of the average exporter results in higher productivity, although the responses of productivity are heterogeneous across these firms. Liberalizing trade from autarky to the level of openness in 2002 results in a 1% increase in productivity for the marginal exporter and a 1.8% increase in its revenue productivity. Endogenous organization increases the gains from trade by 41% relative to standard models.

Abstract: We propose a theory of task trade between countries that have similar relative factor endowments and technological capabilities, but may differ in size. firms produce differentiated goods by performing a continuum of tasks, each of which generates local spillovers. Tasks can be performed at home or abroad, but offshoring entails costs that vary by task. In equilibrium, the tasks with the highest offshoring costs may not be traded. Among the remainder, those with the relatively higher offshoring costs are performed in the country that has the higher wage and the higher aggregate output. We discuss the relationship between equilibrium wages, equilibrium outputs, and relative country size.

Online Appendix with Proofs of Lemmas 1, 2, and 3

Abstract: We study a world with national external economies of scale at the industry level. In contrast to the standard treatment with perfect competition and two industries, we assume Bertrand competition in a continuum of industries. With Bertrand competition, each firm can internalize the externalities from production by setting a price below those set by others. This out-of-equilibrium threat eliminates many of the “pathologies” of the standard treatment. There typically exists a unique equilibrium with trade guided by “natural” comparative advantage. And, when a country has CES preferences and any finite elasticity of substitution between goods, gains from trade are ensured.

A Correction by Lyn and Rodríguez-Clare

Abstract: We propose a theory of the global production process that focuses on tradeable tasks, and use it to study how falling costs of offshoring affect factor prices in the source country. We identify a productivity effect of task trade that benefits the factor whose tasks are more easily moved offshore. In the light of this effect, reductions in the cost of trading tasks can generate shared gains for all domestic factors, in contrast to the distributional conflict that typically results from reductions in the cost of trading goods.

Abstract: We study the prediction of the theory in Rossi-Hansberg [Rossi-Hansberg E (2005) Am Econ Rev 95(5):1464–1491] that, under quite general circumstances, lower transport costs increase specialization of regions or countries and decrease (regional) concentration of industries. This prediction contradicts the contention of other models and many empirical papers that specialization and concentration should move in parallel. We use two data sets on manufacturing industries across US States and EU member countries to show specialization and concentration do not develop in parallel. The empirical data replicates some of the features of the divergence predicted in the model.

Abstract: The equilibrium relationship between trade and the spatial distribution of economic activity is fundamental to the analysis of national and regional trade patterns, as well as to the effect of trade frictions. We study this relationship using a trade model with a continuum of regions, transport costs, and agglomeration effects caused by production externalities. We analyze the equilibrium specialization and trade patterns for different levels of transport costs and externality parameters. Understanding trade via the distribution of economic activity in space naturally rationalizes the evidence on border effects and the "gravity equation".

Technical Appendix: Proofs of Propositions 1 and 2 and Matlab Program