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1. Geography, Transportation, and Endogenous Trade Costs

   https://doi.org/10.3982/ECTA15455  

   Brancaccio, Giulia; Kalouptsidi, Myrto; Papageorgiou, Theodore (January 2020, Econometrica)

   In this paper, we study the role of the transportation sector in world trade. We build a spatial model that centers on the interaction of the market for (oceanic) transportation services and the market for world trade in goods. The model delivers equilibrium trade flows, as well as equilibrium trade costs (shipping prices). Using detailed data on vessel movements and shipping prices, we document novel facts about shipping patterns; we then flexibly estimate our model. We use this setup to demonstrate that the transportation sector (i) attenuates differences in the comparative advantage across countries; (ii) generates network effects in trade costs; and (iii) dampens the impact of shocks on trade flows. These three mechanisms reveal a new role for geography in international trade that was previously concealed by the frequently‐used assumption of exogenous trade costs. Finally, we illustrate how our setup can be used for policy analysis by evaluating the impact of future and existing infrastructure projects (e.g., Northwest Passage, Panama Canal). 

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2. Markets for Efficient Public Good Allocation with Social Distancing

   Jalota, Devansh; Pavone, Marco; Qi, Qi; Ye, Yinyu (December 2020, Conference of Web and Internet Economics)

   null (Ed.)

   Public goods are often either over-consumed in the absence of regulatory mechanisms, or remain completely unused, as in the Covid-19 pandemic, where social distance constraints are enforced to limit the number of people who can share public spaces. In this work, we plug this gap through market based mechanisms designed to efficiently allocate capacity constrained public goods. To design these mechanisms, we leverage the theory of Fisher markets, wherein each agent in the economy is endowed with an artificial currency budget that they can spend to avail public goods. While Fisher markets provide a strong methodological backbone to model resource allocation problems, their applicability is limited to settings involving two types of constraints - budgets of individual buyers and capacities of goods. Thus, we introduce a modified Fisher market, where each individual may have additional physical constraints, characterize its solution properties and establish the existence of a market equilibrium. Furthermore, to account for additional constraints we introduce a social convex optimization problem where we perturb the budgets of agents such that the KKT conditions of the perturbed social problem establishes equilibrium prices. Finally, to compute the budget perturbations we present a fixed point scheme and illustrate convergence guarantees through numerical experiments. Thus, our mechanism, both theoretically and computationally, overcomes a fundamental limitation of classical Fisher markets, which only consider capacity and budget constraints. 

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3. Volatility and the Gains From Trade

   https://doi.org/10.3982/ECTA14411  

   Allen, Treb; Atkin, David (January 2022, Econometrica)

   Trade liberalization changes the volatility of returns by reducing the negative correlation between local prices and productivity shocks. In this paper, we explore these second‐moment effects of trade. Using forty years of agricultural micro‐data from India, we show that falling trade costs due to expansions of the Indian highway network reduced the responsiveness of local prices to local yields but increased the responsiveness of local prices to yields elsewhere. In response, farmers shifted their production toward crops with less volatile yields, especially so for those with poor access to risk mitigating technologies such as banks. We then characterize how volatility affects farmers' crop allocation using a portfolio choice framework where returns are determined in general equilibrium by a many‐location, many‐good Ricardian trade model with flexible trade costs. Finally, we structurally estimate the model—recovering farmers' risk‐return preferences from the gradient of the mean‐variance frontier at their observed crop choices—to quantify the second‐moment effects of trade. The simultaneous expansion of both the highway and rural bank networks increased the mean and the variance of farmer real income, with the first‐moment effect dominating such that expected welfare rose 4.4%. But had rural bank access remained unchanged, welfare gains would have been only half as great, as risk mitigating technologies allowed farmers to take advantage of higher‐risk higher‐return allocations. 

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4. Markets for Public Decision-Making

   Garg, Nikhil; Goel, Ashish; Plaut, Benjamin (December 2018, Web and Internet Economics - 14th International Conference)

   A public decision-making problem consists of a set of issues, each with multiple possible alternatives, and a set of competing agents, each with a preferred alternative for each issue. We study adaptations of market economies to this setting, focusing on binary issues. Issues have prices, and each agent is endowed with artificial currency that she can use to purchase probability for her preferred alternatives (we allow randomized outcomes). We first show that when each issue has a single price that is common to all agents, market equilibria can be arbitrarily bad. This negative result motivates a different approach. We present a novel technique called "pairwise issue expansion", which transforms any public decision-making instance into an equivalent Fisher market, the simplest type of private goods market. This is done by expanding each issue into many goods: one for each pair of agents who disagree on that issue. We show that the equilibrium prices in the constructed Fisher market yield a "pairwise pricing equilibrium" in the original public decision-making problem which maximizes Nash welfare. More broadly, pairwise issue expansion uncovers a powerful connection between the public decision-making and private goods settings; this immediately yields several interesting results about public decisions markets, and furthers the hope that we will be able to find a simple iterative voting protocol that leads to near-optimum decisions. 

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5. Network embeddedness in illegal online markets: endogenous sources of prices and profit in anonymous criminal drug trade

   https://doi.org/10.1093/ser/mwab027  

   Duxbury, Scott W; Haynie, Dana L (January 2023, Socio-Economic Review)

   Abstract Although economic sociology emphasizes the role of social networks for shaping economic action, little research has examined how network governance structures affect prices in the unregulated and high-risk social context of online criminal trade. We consider how overembeddedness—a state of excessive interconnectedness among market actors—arises from endogenous trade relations to shape prices in illegal online markets with aggregate consequences for short-term gross illegal revenue. Drawing on transaction-level data on 16 847 illegal drug transactions over 14 months of trade in a ‘darknet’ drug market, we assess how repeated exchanges and closure in buyer–vendor trade networks nonlinearly influence prices and short-term gross revenue from illegal drug trade. Using a series of panel models, we find that increases in closure and repeated exchange raise prices until a threshold is reached upon which prices and gross monthly revenue begin to decline as networks become overembedded. Findings provide insight into the network determinants of prices and gross monthly revenue in illegal online drug trade and illustrate how network structure shapes prices in criminal markets, even in anonymous trade environments. 

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