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WORKING PAPERS

BANK MARKET POWER AND CREDIT ALLOCATION - 2024 (Draft Coming soon)

With Rebecca De Simone

TAXATION WHEN MARKETS ARE NOT COMPETITIVE: EVIDENCE FROM A LOAN TAX - 2024 

With Rebecca De Simone

[Access paper here]  [Online Appendix]  

We study the interaction of market structure and tax-and-subsidy strategies utilizing pass-through estimates from the unexpected introduction of a loan tax in Ecuador, a quantitative model, and a comprehensive commercial-loan dataset. Our model generalizes bank competition theories, including Bertrand-Nash competition, credit rationing, and joint-maximization. While we find the loan tax is distortionary, neglecting the possibility of non-competitive lending inflates estimated tax deadweight loss by 80% because non-competitive banks internalize some of the burden. Conversely, subsidies are less effective in non-competitive settings. If competition were stronger, tax revenue would be 10% lower. Findings suggest policymakers consider market structure in tax-and-subsidy strategies.

Conference: NBER Corporate Finance Spring 2024 Meeting

Video: World Bank/IFS/ODI Conference (20 min)

Firms in developing countries often face concentrated input markets and contracting frictions. This paper studies the efficiency of self-enforced relational agreements, a common solution to contracting frictions, when sellers have significant market power and contracts cannot be enforced through courts. To this end, I develop a dynamic contracting model with limited enforcement in which buyers can default on their trade-credit debt without legal penalties. The model is shown to be identified and is estimated using a new transaction-level dataset from the Ecuadorian manufacturing supply chain. My key empirical finding is that bilateral trade is inefficiently low in early periods of the relationship, but converges toward efficiency over time, despite sellers’ market power. Counterfactual simulations imply that both market power and enforcement contribute to inefficiencies in trade, as addressing either friction alone leads to welfare losses, whereas relaxing both frictions can lead to significant efficiency gains.

This paper assesses the impact of the North American Free Trade Agreement on Mexican manufacturing plants’ output prices and markups. We distinguish between Mexican goods that are exported and those sold domestically, and decompose their prices separately into markups and marginal costs. We then analyze how these components were affected by the reductions in Mexican output tariffs, intermediate input tariffs, and U.S. tariffs on Mexican exports. We find that domestically sold products saw a decline in prices as Mexican plants faced more competition and gained access to cheaper inputs. By contrast, exported goods saw a slight increase in prices as plants increased their markups in response to a favorable competitive environment due to declines in U.S. tariffs.

PUBLICATIONS

We use new administrative data from Ecuador to study the welfare effects of the misallocation of procurement contracts caused by political connections. We show that firms that form links with the bureaucracy through their shareholders experience an increased probability of being awarded a government contract. We develop a novel sufficient statistic—the average gap in revenue productivity and capital share of revenue—to measure the efficiency effects, in terms of input utilization, of political connections. Our framework allows for heterogeneity in quality, productivity, and non-constant marginal costs. We estimate political connections create welfare losses ranging from 2 to 6% of the procurement budget.

Media Coverage: El Telégrafo 

Video: CEPR-STEG Workshop (45 min) [Conference program]

POLITICAL CONNECTIONS AND MISALLOCATION OF PROCUREMENT CONTRACTS - Journal of Development Economics (2024)

With Javier Brugués and Samuele Giambra

[Pre-print version] [Published Version]

THE IMPACT OF NAFTA ON PRICES AND COMPETITION: EVIDENCE FROM MEXICAN MANUFACTURING PLANTS - 2024 

With Ken Kikkawa, Yuan Meiand Pablo Robles     (R&R Journal of International Economics)

[Access paper here]  [Online Appendix]  

TAKE THE GOODS AND RUN: CONTRACTING FRICTIONS AND MARKET POWER IN SUPPLY CHAINS - 2024  (R&R American Economic Review) 

We study how bank competition affects commercial lending, extending the findings in Brugués and De Simone (2024). We find that 26% of observed markups are due to joint profit maximization and that moving to Bertrand-Nash would reduce equilibrium prices by 17%, increase loan use by 21% (intensive margin), and increase overall credit demand by 13% (extensive margin). These distortions vary greatly by borrower characteristics and dwarf those of financial transaction taxes. Through partial equilibrium instrumental variable regressions, we find large effects on firm size and productivity. We aggregate this partial equilibrium effect through a general equilibrium model of firm dynamics to measure the dynamic effects of credit and firm growth. Overall, our findings suggest that the lack of competition in banking has first-order implications for credit and misallocation.

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