Abstract: Trade and industrial policies, while primarily intended to support domestic industries, may unintentionally stimulate technological progress abroad. We document this mechanism in the case of rare earth elements (REEs) - critical inputs for manufacturing at the knowledge frontier, with low elasticity of substitution, inelastic supply, and high production and processing concentration. To assess the importance of REEs across industries, we construct an input-output table that includes disaggregated REE inputs. Using REE-related patents categorized by a large language model, trade data, and physical and chemical substitution properties of REEs, we show that the introduction of REE export restrictions by China led to a global surge in innovation and exports in REE-intensive downstream sectors outside of China. To rationalize these findings and quantify the global impact of the adverse REE supply shock, we develop a quantitative general-equilibrium model of trade and directed technological change. We also propose a structural method to estimate sectoral input substitution elasticities for REEs from patent data and find REEs to be complementary inputs. Under endogenous technologies and with complementary inputs, input-supply restrictions on REEs induce a surge in REE-enhancing innovation and lead to an expansion of REE-intensive downstream sectors.

Abstract: This paper studies how globalization amplifies top inequality by shifting compensation from labor income to stock market wealth. Using data on individual stock market wealth of top earners in US and UK firms, I find that greater integration into global value chains disproportionately raises their stock market wealth. These capital gains are concentrated in the largest firms and arise both from equity returns and new grants, reducing the share of labor income at the top. To interpret these findings, I develop a model of heterogeneous firms with agency frictions in which managers hold equity claims. Calibrated to US and UK data, the model explains why globalization channels compensation toward capital income for top earners.

Abstract: This paper studies how managerial pay shapes the allocation of capital. We leverage quasi-experimental variation in the composition of managerial pay between cash bonuses and equity compensation. We find that a relative increase in cash bonuses leads firms to reallocate capital toward less durable investment projects. To interpret the evidence and quantify the effects of managerial compensation, we build a model with agency frictions and investment heterogeneity. In the model, higher cash bonuses intensify managerial short-termism, shifting investment toward less durable projects. The observed change in managerial pay exacerbates within-firm capital misallocation and generates a sizable output contraction.

Abstract: A large part of manufacturing has sizable backlog of unfilled orders. This paper explores several implications of order backlog. First, backlog leads to time to fill, the time wedge between order arrival and fulfillment. Using a novel administrative micro dataset on order books in Germany, we document that time to fill is half a year on average and features a pronounced right tail across establishments. Second, backlog makes deflation challenging. We propose a theoretically coherent deflation scheme that avoids high informational requirements. Third, quantity and price of sales are predetermined by quantity and price of new orders. Fourth, the rigidity of sales prices invalidates conventional strategies to identify demand and supply shocks. Instead, variation in quantity and price of new orders can identify such shocks. Fifth, backlog constitutes an adjustment margin to shocks, which we analyze theoretically and for which we provide empirical evidence.

Abstract: We examine the effects of unilateral structural reforms within a currency union. Focusing on the surge of German competitiveness following the introduction of the Euro, we first provide reduced-form causal evidence supporting the notion that German structural labor-market reforms in the early 2000s led to a crowding-out of manufacturing employment in other Eurozone economies. To assess the impact of this German competitiveness shock, we build a quantitative multi-sector trade model that features downward nominal wage rigidities, endogenous labor supply, unemployment-insurance benefits and international savings. The fixed nominal exchange rate can create binding nominal rigidities in response to a foreign real supply shock - like the one prompted by the German reforms - resulting in significant contraction of manufacturing sectors and increased involuntary unemployment across other Eurozone countries. We consider a number of counterfactual scenarios, such as the impact of German labor-market reforms in the absence of a fixed exchange-rate regime, the role of coordinated reforms within the Eurozone and a higher average inflation rate.

Media Coverage: Frankfurter Allgemeine Zeitung, VoxEU

Abstract: This paper studies the impact of working from home (WFH) on work relations and public health during the COVID-19 pandemic in Germany. Combining administrative data on SARS-CoV-2 infections and short-time work registrations, firm- and employee-level surveys and cell phone tracking data on mobility patterns, we find that working from home effectively shields employees from short-time work, firms from COVID-19 distress and substantially reduces infection risks. Counties with a higher share of teleworkable jobs experience fewer short-time work registrations and less SARS-CoV-2 cases. At the firm level, an exogenous increase in the take-up of WFH reduces the probability of filing for short-time work by up to 72 p.p. and the probability of being very negatively affected by the crisis by up to 75 p.p. Health benefits of WFH appeared mostly in the early stage of the pandemic and became smaller once tight confinement rules were implemented. This effect was driven by lower initial mobility levels in counties with more teleworkable jobs and a subsequent convergence in traffic levels once confinement was implemented. Our results imply that confinement and incentivizing WFH are substitutive policies to slow the spread of the coronavirus.

Media Coverage: Frankfurter Allgemeine Zeitung (1), Frankfurter Allgemeine Zeitung (2), DER SPIEGEL (1), DER SPIEGEL (2), Ökonomenstimme, ZDF heute, RTL, Hamburger Morgenpost, t-online, Deutschlandfunk, Deutsche Presse-Agentur, Mannheimer Morgen, heise online, WirtschaftsWoche, DIE ZEIT, Münchner Merkur, Westdeutsche Allgemeine Zeitung, Pforzheimer Zeitung, Heilbronner Stimme, HR Hessenschau, Tagesschau, MDR aktuell, SWR aktuell, Rhein Main TV, BILD, Quarks

Abstract: How does the exposure to product market competition affect the investment horizon of firms? When tougher competition reduces future profitability, firms have an incentive to shift investments towards more short-term assets. To study this mechanism empirically, we formulate a stylized theoretical framework of firm investments and derive a within-firm estimator that uses variation across investments with different durabilities. We exploit the Chinese WTO accession as a competition shock for US firms to estimate the effects of product market competition on the composition of firm investments using expenditures across different assets within listed US manufacturing companies. We find that firms that experienced tougher competition shifted their expenditures towards investments with a shorter durability. We find this effect to be larger for firms with lower total factor productivity.

Media Coverage: Oekonomenstimme

Abstract: In this paper, we incorporate trade in tasks into Marin and Verdier (2012) to examine how offshoring affects the way firms organize. We show that offshoring of production tasks and of managerial tasks can lead to more decentralized management and to larger executive wages in open economies. We study the predictions of the model with original firm level data and find that offshoring firms are 18% more decentralized than non-offshoring firms. We also find that offshoring of managers increases the level of decentralized management in open industries, but reduces the level of decentralized management in sufficiently closed industries.

Media Coverage: Vox EU

Abstract: How does globalization affect the balance of power between managers and firm owners? This paper studies the effect of economic integration on governance practices within firms. I propose a theory of endogenous corporate governance investments in industry equilibrium with monopolistic competition. Firms can use investments into better corporate governance as a cheap substitute to performance compensation to mitigate agency problems. International integration alters the demand for managers in the economy such that firms may reduce their corporate governance investments and offer higher performance payments. This globalization-induced deterioration of corporate governance in the economy diminishes the welfare gains from globalization. Using data on governance practices in U.S. manufacturing corporations, I provide empirical evidence that conforms to the model predictions. Firms in industries that experienced substantial trade liberalization between 1990 and 2006 have changed their governance practices allowing for more managerial slack and offered higher equity payments to their CEOs. These effects are particularly large in relatively dynamic industries that are characterized by large exit rates.

Media Coverage: National Affairs, Neue Zuercher Zeitung (NZZ)

Abstract: We study the impact of working from home on (i) infection risk in German regions and (ii) output using an input-output (IO) model of the German economy. We find that working from home is very effective in reducing infection risk: regions whose industry structure allows for a larger fraction of work to be done from home experienced much fewer Covid-19 cases and fatalities. Moreover, confinement is significantly more costly in terms of induced output loss in regions where the share of workers who can work from home is lower. When phasing out confinement, home office should be maintained as long as possible, to allow those workers who cannot work from home to go back to work, while keeping infection risk minimal. Finally, systemic industries (with high multipliers and/or high value added per worker) should be given priority, especially those where home office is not possible.

Media Coverage: DER SPIEGEL

Abstract: We study how the international spread of democracy shaped the comparative advantage of countries. Using data on the "Third Wave of Democratization" between 1976 and 2000 we find that democratizing countries shifted their exports towards more contract intensive goods that require a larger portion of relationship-specific inputs. This shift is observed on the intensive margin (volumes of industry-level exports) as well as the extensive margin of trade (number of goods a country exports). Using an instrumental variable strategy based on democracy waves, alternative proxy variables and subsamples suggests that the effects of democratization on trade specialization are causal.