Three Essays in International Trade

This thesis comprises three chapters: In Chapter I, I develop a general model to study the impact of labour mobility distortions on the gains from trade liberalization. The main feature of the model is that it combines comparative advantage forces with sectoral production misallocation. I use this framework to study the effect of labour market policies affecting the level of occupational mobility distortions on the gains from trade. I first show that differences in market structure across sectors lead to a misallocation of production. A planner is able to solve this misallocation by changing the composition of employment in the economy through changes in the level of labour market distortions. I use the model to study the impact of labour market distortions on the gains from trade from 1992 to 2007 in the US. I find that, relative to observed, optimal distortions lead to a 2.7% increase in the median cost of switching occupations and a doubling of welfare gains from trade. In Chapter II, I examine whether trade liberalization decreases investment misallocation in India. I provide evidence that, independently of firm heterogeneity, exporters earn more revenue from the extensive margin of production. Also, I show that this difference between exporters and non-exporters is increasing in the degree of external financing needs of the sector in which firms operate. This finding suggests that an increase in trade liberalization has the additional effect of increasing the efficiency of the allocation of investment in new product varieties from less-productive non-exporters to more-productive exporters. In Chapter III, I propose a model to explain deviations from the source-destination hierarchy prediction in models of trade with heterogeneous firms. I first show that firms do not follow a pecking order of foreign market entry. To explain these deviations, I show a two-period, partial equilibrium model with asymmetric information in product appeal. Firms know the appeal of their products but consumers are unaware of it. After consuming in the first period, consumers observe a noisy signal and update their expectations. Given the updating process, I show that there is an imperfect sorting of firms into markets.Ph.D