Three Essays on the Role of Heterogeneity in Industrial Organization, International Trade, and Environmental Economics

Abstract

This dissertation consists of three studies on trade, industrial organization, and environmental economics. The first study investigates endogenous cartel formation with market entry and firm heterogeneity. We show why large firms do not join a cartel in some industries and choose to compete rather than cooperate with a cartel. We illustrate that, under certain conditions, only firms with intermediate productivity benefit from joining a cartel; and low-productive firms cannot compete efficiently for production quota in the cartel and hence choose to stay out. High-productive firms prefer to stay out because building excess capacity in cartel lowers their profits. The second study investigates whether NAFTA improves the productivity of crop industries in Mexico and how much does the yield catch-up effect contribute to the export increase. We construct a theoretical model to show how productivity catch-up effect affects export by integrating a productivity catch-up function into a general equilibrium trade model. We use piecewise regression to find the existence of yield catch-up effect. One additional year in NAFTA increases yield by 1.014 hg/ha in Mexico, and the total of 24 years (1994-2017) in NAFTA have increased Mexico’s agricultural exports to the United States by 1.267 thousand dollars due to the crop yield catch-up of Mexico. The third study investigates how policies attracting foreign direct investment (FDI) in a polluting sector affect home-country welfare relative to the closed economy case. We show that in a closed economy, environmental regulations are increasing over infrastructure. With FDI, a similar relationship holds but the optimal environmental regulations is lower and is more likely to be a subsidy because of an added marginal cost to such regulations: the marginal value of domestic labor hired by foreign firms. A critical infrastructure level exists where welfare in FDI and a closed economy are equal. Countries with infrastructure levels below the critical level are better off deterring FDI entrance. As infrastructure quality increases beyond the critical level, welfare is higher with FDI than under a closed economy.