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Faculty of Law, Business & Economics

VWL VI: Chair of Empirical Economics – Prof. Dr. Mario Larch

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The research of the Chair of Economics VI: Empirical Economics mainly focuses on the application of microeconometric methods to numerous research questions. In particular, we use spatial and panel data econometrics, structural estimations, numerical general equilibrium models, count data models, and econometric methods of program evaluation to empirically analyze questions related to international trade, migration, multinational corporate activity, and environmental and resource economics.

Recent publications are listed on the personal pages of the team members:

The chair also contributes to current economic policy debates via research projects. Project partners are e.g. the United States International Trade Commission, the World Trade Organization (WTO), the United Nations, the European Commission and various ministries.

The current work of the Chair of Economics VI: Empirical Economics can be broadly divided into two research areas:

1. Trade and Institutions

How do different policies such as the conclusion of regional trade agreements, institutional changes, or bilateral investment treaties affect trade flows, income, and welfare? Many of these policies take place at a country level, but also have impact on other countries or the global economy due to international interdependencies. Thus, any policy change will simultaneously effect both, the domestic economy and all trading partners.

In the last few years, structural estimation approaches were developed which allow investigating these questions empirically. These new approaches are based on the gravity equation, which explains trade between two countries by economic size and trade barriers. However, the model proposed in the literature relies on some restrictive assumptions. One aim of our research was and is to modify some of these assumptions. Firstly, we replaced the assumption of bilateral trade balance with the empirically more plausible assumption of multilateral trade balance. Secondly, we attempted to adequately take into account the possible endogeneity of trade policy variables, such as the conclusion of regional trade agreements. Thirdly, we relaxed the assumption of perfect labor markets, which allows us to analyze the effects on unemployment. This extension is important as it addresses the concerns of many workers who are claiming that globalization leads to job losses. We also added a dynamic component to quantify additional growth effects of trade measures. These structural estimation approaches are then applicable to various questions - such as an evaluation of the European Union Association Agreements, the evaluation of TTIP, the evaluation of CETA and the evaluation of the Pacific Alliance.

In this research area, we also developed a method to quantify the effects of country-specific measures on international trade. The basic idea is to use a dataset that contains not only international trade flows but also domestic sales. This allows quantifying the effect of country-specific measures on international trade relative to domestic sales. We use this approach to quantify the effects of changes in currency, MFN tariffs, and institutional frameworks.

Differences in legal institutions play a major role for cross-border economic activities. Although multilateral agreements exist in some areas, such as international arbitration (e.g. the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, known as the New York Convention), there are still substantial differences, for example concerning the enforcement of contracts across countries. Studying the causes and consequences of these differences are the aims of several research projects conducted at the chair.

As part of these research activities, we recently published a book in cooperation with the UN and the WTO describing current developments in this field (An Advanced Guide to Trade Policy Analysis: The Structural Gravity Model, available for download at http://vi.unctad.org/tpa/index.html).

2. International Environmental Policy

Many environmental problems are of an inherently international nature. The global (or regional) public good character of e.g. clean air or high biodiversity often precludes unilateral, national measures from being effective. Therefore, we use multi-country models to analyze these effects adequately.

We extended a quantitative trade model to a multi-sector model with carbon emissions. This allows us to analyze environmental effects. In particular, we quantified the effects of carbon tariffs and decomposed the emission changes into scale, composition, and technique effect. In addition, we also account for international shifts in emissions, i.e. an increase in emissions in countries that are not affected by a carbon tax or that are subject to lower carbon taxes. Such leakage effects reduce the direct effects of emission reductions.

A prominent example of international cooperation on reducing carbon emissions is the European Union Emissions Trading System (EU ETS). To quantify the effects adequately, we use a multi-sector, multi-country, heterogeneous firm model with endogenous technology for emission avoidance, intermediate goods, and emission trading. To better understand the impact of the EU ETS on the distribution of emissions across countries and industries, we decompose the effects.

Since unilateral policies are often ineffective due to relocations and the global nature of emissions, multi- and bilateral environmental agreements have been negotiated since the 19th century.  The number of agreements has been rising sharply over the last 50 years. This increase is puzzling as these agreements are voluntary and there is no supranational institution to enforce compliance. The theoretical literature also suggests that a common environmental concern is not sufficient to explain the formation of an environmental agreement. Hence, the question remains why we observe so many environmental agreements when it is hard to explain their existence theoretically. To answer this question, we examine which factors determine the formation of multi- and bilateral environmental agreements and which country pairs are particularly likely to agree on environmental cooperation. We would also like to examine whether the conclusion of regional trade agreements and environmental agreements often coincides. The combination of different agendas (issue linkage), such as international trade and environmental policy, could provide a potential explanation for why we observe so many environmental agreements empirically.

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