Professor James Anderson

Professor James E. Anderson

William B. Neenan S.J. Millennium Professor of Economics
Chairman of the Economics Department
 

 

Research
Abstracts Papers and Software
Recently Published Papers
Policy in a Predatory Economy abstract Efficient Policy in a Predatory Economy
Specific Factors Continuum Abstract Specific Factors Continuum Model
Measurement of Protection Abstract Measurement of Protection
Costs/Benefits of Public Goods Abstract Costs of Taxation/Benefits of Public Goods
Gravity Model Abstract The Gravity Model
The Incidece of Geography Abstract The Changing Incidence of Geography
Incidence of Gravity Abstract The Incidence of Gravity
Political Pressure Deflection Abstract Political Pressure Deflection
Consistent Policy Aggregation Abstract Consistent Policy Aggregation
Trade Fosters Enforcement? Abstract Does Trade Foster Contract Enforcement?
Integration and Institutional Change Integration and Institutional Change
New Palgrave Dictionary Essay International Trade Theory
Welfare vs. Market Access Abstract Welfare vs. Market Access
Traders, Cops and Robbers abstract Traders, Cops and Robbers
Trade & Contract Enforcement Abstract Trade and Contract Enforcement
Mercantilist Index Abstract The Mercantilist Index of Trade Policy
Gravity with Gravitas abstract Gravity with Gravitas
Trade and Insecurity: Empirics Abstract Trade and Insecurity: Empirics
Borders, Trade and Welfare Abstract Borders, Trade and Welfare
 Autarky and Anarchy Abstract Autarky and Anarchy
Enforcement and Efficiency Abstract Private Enforcement and Social Efficiency
Trade Costs abstract Trade Costs
   
Book Sample

Measuring Trade Restrictiveness

Chapters 1-2
Forthcoming Papers
Incidence of Geography in Services Abstract Incidence of Geography in Services
Unpublished Papers
 
Gravity, Scale and Exchange Rates Abstract Gravity, Scale and Exchange Rates  
Intra-national Trade Costs Abstract Intra-national Trade Costs
Terms of Trade Effects of FTAs Abstract Terms of Trade Effects of FTAs
Specialization: Pro- and Anti-Globalizing Abstract Specialization: Pro- and Anti-Globalizing
Terrorism and Trade Abstract Terrorism, Trade and Public Policy
Gravity and Productivity Abstract Gravity, Productivity and Trade
Revenue Tariff Reform abstract Revenue Tariff Reform
Software
software and data for gravity incidence Incidence of Geography archive
software to estimate gravity Gravity with Gravitas archive
software to calculate the TRI TRI model zip archive

ABSTRACTS



THE MERCANTILIST INDEX OF TRADE POLICY*
 

 James E. Anderson
 Boston College and NBER

 and

 J. Peter Neary
 University College Dublin

 March 6, 1998
 Revised September 6, 1999
  May 2003 International Economic Review.

 Abstract

 This paper develops and characterizes an index of trade policy restrictiveness defined as the uniform tariff equivalent which maintains the same volume of trade as a given set of tariffs, quotas, and domestic taxes and subsidies.  We relate this volume-equivalent index to the Trade Restrictiveness Index, a welfare-equivalent measure, and to the trade weighted average tariff  Applications to international cross-section and time-series comparisons of trade policy show that the new index frequently gives a very different picture than do standard indexes.
 

JEL:  F13

Keywords:  International trade policy; tariffs; quotas; Trade Restrictiveness Index; trade liberalisation.
 research downloads


Autarky and Anarchy: Endogneous Predation and Trade

James E. Anderson                     Douglas Marcouiller, S.J.
Boston College and NBER                       Boston College
International Economic Review (2005), 46,189-213.


Abstract

This paper offers a general equilibrium model in which a common and analytically "clean" transactions cost --- that which arises from exposure to theft --- is endogenously determined by forward-looking, utility-mazimizing individuals.  Insecurity dramatically restricts specialization and trade, affects the welfare of the trading partners asymmetrically, and reflects the state of institutions for risk-sharing and coordination of defense. We show that anarchy presumptively implies autarky. The model provides an excellent framework for understanding the collapse of trade between Spain and its American colonies and may also apply to many contemporary forms of corruption.

This paper reflects helpful comments from participants in seminars at the University of Konstanz, Pompeu Fabra University, Ludwig Maximilian University (Munich), the London School of Economics, the University of Notre Dame, the Latin American and Caribbean Economic Association, the Midwest International Economics Group, and the NBER Summer Institute. Anderson acknowledges the hospitality of the NBER and the Institute for International Economic Studies, Stockholm, during work on this paper.
 

JEL: F10
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Private Enforcement and Social Efficiency

 James E. Anderson                    Oriana Bandiera
    Boston College and NBER                 London School of Economics

Journal of Development Economics (2005), 77, 341-66.
 
 

Abstract
This paper makes precise the distributional consequences and social
efficiency of private enforcement of property rights. We develop a model
where properties of different values are subject to predatory attacks and
owners must choose between self-defense and purchasing private enforcement
services. A distributional conflict of interest arises as private protection
purchased by rich owners deflects predators on low value properties.
We show that the market structure of private enforcement and the level of
development affect the distribution of property income through relative
changes in the security of high and low values property. We also show that
privately provided enforcement can be higher than its socially optimal level
because of the negative externality that enforcers and their rich customers
impose on poorer owners. The availability of private enforcement may then
constrain the enforcement policy of a welfare maximizing State.

Keywords: enforcement, predation, informal sector. JEL Classification: H11, H42, K42.


 

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Political Pressure Deflection
 

 James E. Anderson
 Boston College and NBER  

Maurizio Zanardi

Free University of Brussels
 
 

Abstract

Much economic policy is deliberately shifted away from direct political processes to administrative processes --- political pressure (group) deflection. Pressure deflection poses a puzzle to standard political economy models which suggest that having policies to `sell' is valuable to politicians. The puzzle is solved here by showing that incumbents will favor pressure deflection since it can deter viability of a challenger, essentially like entry deterrence. US trade policy since 1934 provides a prime example, especially antidumping law and its evolution.
 December 2002. Prepared for the Econometric Society meetings, Jan. 2003. Public Choice, (2009), 141, 129-50.
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Trade and Contract Enforcement
  James E. Anderson                     Boston College and NBER
Leslie Young                   Chinese University of Hong Kong

July, 2006
 

Abstract
We model imperfect contract enforcement when the victims of default resort to spot trading because the act of repudiation reveals a favorable outside option. We show that enforcement imperfection is essentially distinct from the contract incompleteness analyzed in the previous literature. Improved contract execution benefits traders on the excess side of the spot market by attracting potential counter-parties, but harms them by impeding their exit from unfavorable contracts. Multiple optima are possible, with anarchy a local optimum, perfect enforcement a local minimum and imperfect enforcement a global optimum. LDCs exhibit parameter combinations such that imperfect enforcement may often be optimal.
(100 words)
JEL Classification: F0, F1, H1, O170.
Keywords: Contract enforcement, trade, institutions.

Contributions to Economic Analysis & Policy (2006), Vol 5 (1), Article 30.
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Trade Costs

James E. Anderson* and Eric van Wincoop**

Journal of Economic Literature, (2004), 42, 691-751.

Abstract
This paper surveys trade costs --- what we know, and what we don't know but may usefully attempt to find out. Partial and incomplete data on direct measures of costs go together with inference on implicit costs from the pattern of trade across countries. Representative margins for full trade costs in rich countries exceed 170\% based on our pushing the data very hard. Poor countries face even higher trade costs. There is a lot of variation across countries and across goods within countries, much of which makes economic sense. Theory looms large in our survey, providing interpretation and perspective on the one hand and suggesting improvements for the future on the other hand. Some new results are presented to apply and interpret gravity theory properly and to handle aggregation appropriately.
  * Economics Department, Boston College and NBER, Chestnut Hill, MA 02467, USA, Tel: 617-552-3691,e-mail: James.Anderson.1@bc.edu
** Department of Economics, University of Virginia, e-mail: vanwincoop@virginia.edu Prepared for the Journal of Economic Literature.
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Gravity with Gravitas: A Solution to the Border Puzzle*

 James E. Anderson
 Boston College and NBER  Eric van Wincoop
 Federal Reserve Bank of New York

 

 Abstract

The gravity model has been widely used to infer substantial trade flow effects of institutions such as customs unions and exchange rate mechanisms. McCallum [1995] found that the US-Canada border led to trade between provinces that was a factor 22 (2,200%) times trade between states and provinces, a spectacular puzzle in light of the low formal barriers on this border. We show that the gravity model usually estimated does not correspond to the theory behind it. We solve the ``border puzzle'' by applying the theory seriously. We find that national borders reduce trade between the US and Canada by about 40%, while reducing trade among other industrialized countries by about 30%. The spectacular McCallum headline number is the result of a combination of omitted variables bias and the small size of the Canadian economy. Revised version of NBER WP 8079; October, 2001. American Economic Review March 2003.
JEL:  F10, F13

Keywords: Gravity model; border effects; trade liberalization.
 #research downloads
 


Borders, Trade and Welfare
 James E. Anderson
 Boston College and NBER

 Eric van Wincoop
 Federal Reserve Bank of New York
August, 2001
Published in the Brookings TradeForum 2001, Jan. 2002.

We find that international economic integration has large potential welfare effects, even in a static constant returns competitive world economy. Our method has elements of novelty. The effect of border barriers on trade flows is often inferred from gravity models. But their rather atheoretic structure precludes welfare analysis. Computable general equilibrium models are designed for tight welfare analysis, but lack econometric foundation and are often black boxes. Our method combines these approaches. We show that gravity models based on Anderson's (1979) interpretation are full general equilibrium models of a special simple sort. In Anderson and van Wincoop (NBER WP 8079, 2001) we develop this structure to estimate and calculate the comparative static effects on trade flows of border barriers. In this paper we further deploy the model to explore the comparative statics of welfare with respect to borders, to currency unions and to NAFTA.  Our NAFTA exercise does a much better job of replicating the actual trade flow changes than do the main computable general equilibrium models. An interesting implication of gravity models is that terms of trade changes are very important, even for 'small' countries such as Mexico. JEL classification: F0

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Trade and Informal Institutions
James E. Anderson
November, 2001
This chapter surveys recent work on informal institutions and trade. Trade barriers other than tariffs, quotas and transport costs are apparently very large even between developed countries such as the US and Canada. Nations exhibit wide variation in their use of informal institutions in trade, suggesting complex relations between formal and informal institutions and the volume of trade. New institutional economic research on informal institutions and trade attempts to explain these phenomena. The institutions presumptively lower trade costs but impose costs of their own. Informal institutions presumptively substitute for but may complement formal institutions. Better institutions are not always in every trader's interest. Handbook of International Trade: Economic and Legal Analysis of Laws and Institutions, E. Kwan Choi and James Hartigan, eds., Oxford: Basil Blackwell, 2005.
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Traders, Cops and Robbers
James E. Anderson     Oriana Bandiera
Journal of International Economics (2006), 70, 197-215.



We propose a simple model of trade outside the law preyed on by robbers and
possibly protected by private cops. We establish the conditions for trade
collapse, secure trade and insecure trade. Endogenous predation and
enforcement can explain both puzzling failures of commonly observed state
policies against illegal trade and puzzlingly large trade responses to
liberalization in licit goods.

JEL Classification: F1, K42

 

An earlier version was presented to the Peace Science Society meetings, Atlanta, GA, Jan. 2002, at Brown University and at the LSE. We are indebted to Hong-bin Cai, Herschel Grossman, Evi Pappa and Steve Redding for helpful comments.
 
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Does Trade FosterContract Enforcement ?

James E. Anderson
August 2009

Economic Theory, 41(1), 105-131

Contract enforcement is probabilistic, but the probability depends on rules and processes. A stimulus to trade may induce traders to alter rules or processes to improve enforcement. In the model of this paper, such a positive knock-on effect occurs when the elasticity of supply of traders is sufficiently high. Negative knock-on is possible when the elasticity is low. Enforcement strategies in competing markets are complements (substitutes) if the supply of traders is sufficiently elastic (inelastic). The model provides a useful structure of endogenous enforcement that gives promise of explaining patterns of institutional development.

JEL Classification: F10, O17, K42.

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Consistent Policy Aggregation

August 2009

International Economic Review, 50(3), 903-927

Much empirical work requires the aggregation of policies. This paper provides methods of policy aggregation that are consistent with two common objectives of empirical work. One is to preserve real income. The other is to preserve the real volume of activity in one or more parts of the economy. Trade policy aggregation is an acute example of the aggregation problem with thousands of highly dispersed trade barriers to be aggregated. An application to India shows that the standard atheoretic method of aggregation is seriously misleading compared to the consistent method.

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Efficient Policy in a Predatory Economy:

To him who hath shall be given?

International Economic Review, 53, 157-74 (2012, February)

Trade subject to predation generates externalities within and between markets. Efficient tax, infrastructure and enforcement policies internalize the net externality --- more trade implies fewer predators but drawn to trade at rising cost. The balance is positive (negative) as enforcement is weak (strong). Dual economies pair weak Periphery and strong Core enforcement markets. Efficient taxation and infrastructure promote the Core at the expense of the Periphery. Efficient enforcement promotes both. Tolerance (intolerance) of smuggling is efficient when Core enforcement is weak (strong). Tolerance of informal market Mafias that provide enforcement and infrastructure is efficient when Core enforcement is strong.

 

Forthcoming in International Economic Review

JEL Classification: F13, O17, K42.

Keywords: dual economy, Core-Periphery, predation.

research downloads


Revenue Tariff Reform

James E. Anderson J. Peter Neary
Boston College and NBER Oxford University and CEPR

August 2006

What kind of tariff reform is likely to raise welfare in situations where tariff revenue is important? Uncertainty about speci cation and risk from imprecise parameter estimates of any particular speci cation reduce the credibility of simulation estimates. A promising alternative is to develop rules which are robust with respect to such uncertainty. We present sufficient conditions for a class of linear rules that guarantee welfare-improving tariff reform. The rules span cones of welfare-improving tariff reforms consisting of convex combinations of (i) trade-weighted-average-tariff-preserving dispersion cuts; and (ii) uniform tariff cuts that preserve domestic relative prices among tariff-ridden goods.

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Welfare vs. Market Access

James E. Anderson J. Peter Neary
Boston College and NBER Oxford University and CEPR

Journal of International Economics (2007), 71, 187-205.

We show that the effects of tariff changes on welfare and import volume are fully characterised by their effects on the generalised mean and variance of the tariff distribution, implying two "cones of liberalisation" in commodity price space. Because welfare is negatively but import volume positively related to the generalised variance, the cones do not intersect, which poses a policy dilemma. We present a new radial tariff reform rule, which implies new results for welfare- and market-access-improving tariff changes. Finally, we show that generalised and trade-weighted moments are mutually proportional when the trade expenditure function is CES.

JEL classification: F13, F15.

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Economic Integration and the Civilizing Commerce Hypothesis

James E. Anderson

World Economy, (2008), 31, 141-57

Economic integration lowers one form of trade costs, tariffs, and stimulates changes in other trade costs. This paper offers a model in which integration may raise or lower the important trade cost associated with insecurity. The model can help to explain the varied experience with integration and it points to the usefulness of combining enforcement policy integration with trade policy integration.

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Gravity, Productivity and the Pattern of Production and Trade

James E. Anderson
December, 2008

In a global economy the incidence of productivity in distribution and production is what matters for welfare and the pattern of production and trade. Incidence is derived from the gravity model. Sectoral and national differences in the incidence of TFP have sharp implications for the equilibrium pattern of production and trade in a specific factors model of production. Productivity shocks induce incidence shocks. Below (above) average incidence sectors produce less and have below (above) average skill premia. In contrast to the generalized Ricardian gravity model of Eaton and Kortum (2002), relative factor endowments play a role and import-competing production and wage premia in exporting are featured.

JEL Classification: F10, D24

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The Specific Factors Continuum Model, with Implications for Globalization and Income Risk

James E. Anderson
Revised, July 2011

Journal of International Economics, 85, 174-85.

This paper embeds the specific factors model in the goods continuum approach of Dornbusch, Fischer and Samuelson (1977, 1980) and applies it to analyze the effect of globalization on income risk. Globalization amplifies sector specific income risk induced by idiosyncratic sectoral technology shocks, but tends to reduce income risk to both mobile and immobile factors induced by aggregate technology shocks that differ by country. Aggregate risk bears most heavily on the poorest specific factors.


JEL Classification: F10.
Keywords: goods continuum, extensive margin, factoral terms of trade.

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The Changing Incidence of Geography

James E. Anderson Yoto V. Yotov
Boston College and NBER Drexel University

NBER Working Paper No. 14123, October, 2008

American Economic Review, (2010) 100, 2157-2186

Neglected properties of the structural gravity model offer a theoretically consistent method to calculate the incidence of estimated trade costs, disaggregated by commodity and region, and re-aggregated into forms useful for economic geography. For Canada's provinces, 1992-2003, incidence is on average some five times higher for sellers than for buyers. Sellers' incidence falls over time due to specialization, despite constant gravity coefficients. This previously unrecognized globalizing force drives big reductions in `constructed home bias', the disproportionate share of local trade; and large but varying gains in real GDP. Aggregation biases gravity coefficients downward.

JEL Classification: F10, D24

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Gravity, Scale and Exchange Rates

James E. Anderson Mykyta Vesselovsky Yoto V. Yotov
Boston College and NBER DFAIT, Canada Drexel University

Feb., 2013

We develop a structural gravity model that introduces scale effects in bilateral trade. Scale effects and incomplete passthrough give two channels through which exchange rates have real effects on trade patterns. Estimates from Canadian provincial trade data identify these effects through their interaction with the US border. We find statistically and quantitatively significant economies of scale in cross-border trade in almost 2/3 of sectors. Real effects of exchange rate changes on trade are found for 12 of 19 goods sectors and none of 9 services sectors.

JEL Classification: F13, F14, F16

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Measurement of Protection

James E. Anderson
Palgrave Handbook of International Trade, eds. Daniel Bernhofen, Udo Krieckemeier and David Greenaway (2011)

Protection is defined broadly as government action or inaction that discriminates in favor of home producers against foreign producers. Measurement of protection has two aspects: observing or inferring protection at the product level and appropriately aggregating the highly differentiated product level protection to manageable indexes of protection. Better practice in each aspect makes a very significant difference to the measured level of protection across product groups, countries and time.

JEL Classification: F13

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Terrorism, Trade and Public Policy

James E. Anderson
December, 2008

Are bigger markets safer? How should government policy respond to terrorist threats? Trade draws potential terrorists and economic predators into productive activity, but trade also draws terrorist attacks. Larger trade reduces the risk of terrorist attack when the wage elasticity is high, associated with low ratios of predators to prey and high wages; but it may increase the risk of terrorist attack when the wage elasticity is low, associated with high ratios of predators to prey. Anti-terrorist trade policy should always promote trade in simultaneous play. Government first mover advantage and inelastic wage may imply trade restriction. Tolerance of smuggling may improve security. Better enforcement should ordinarily be provided for bigger, inherently safer and higher wage markets.

JEL Classification: F13, O17, K42

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Costs of Taxation and Benefits of Public Goods with Multiple Taxes and Goods

James E. Anderson
Will Martin
Boston College and NBER
Worlld Bank

Journal of Public Economic Theory (2011) 13, 289-309

The fact that raising taxes can increase taxed labor supply through income effects is
frequently used to justify greater public good provision than indicated by traditional,
compensated analyses. We develop a model including multiple public goods and taxes
and derive consistent measures of the marginal benefit of public goods and their marginal
social cost inclusive of tax distortions using both compensated and uncompensated
measures of the Marginal Cost of Funds (MCF). Our analysis confirms that the
desirability of tax financed public projects is independent of whether compensated or
uncompensated methods are used. The main innovation shows that the costs or benefits
of providing particular public goods should be adjusted by a simple, benefit multiplier not
previously seen in the literature if an uncompensated MCF is used.


JEL Code: D61, F11, H21, H43.

Keywords: fiscal policy; second best; public goods; distortions; costs of taxation,
marginal cost of funds; marginal excess burden, thought experiment.

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The Incidence of Gravity

James E. Anderson
in The Gravity Model in International Trade: Advances and Applications, Steven Brakman and Peter Bergeijk, eds., Cambridge University Press, 2010

The high trade costs inferred from gravity are rarely used in the wide class of trade models. Two related problems explain this omission of a key explanatory variable. First, national seller and buyer responses to trade costs depend on their incidence rather than on the full cost. Second, the high dimensionality of bilateral trade costs requires aggregation for most practical uses in interpretation or standard trade modeling. This paper provides an intuitive description of a resolution to the aggregation and incidence problems. For each product, it is as if each province or country sells to a world market containing all buyers and buys from from that market containing all sellers, the incidence of aggregated bilateral trade costs being divided between sellers and buyers according to their location. Measures of incidence described here give intuitive insight into the consequences of geography, illustrated with results from Anderson and Yotov (2008). The integration of the incidence measures with standard general equilibrium structure opens the way to richer applied general equilibrium models and better empirical work on the origins of comparative advantage.

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The Gravity Model

James E. Anderson

Annual Review of Economics, vol. 3 (2011), 133-160.

 

The gravity model in economics was until relatively recently an intellectual orphan, unconnected to the rich heritage of economic theory. This review is a tale of the orphan's reunion with its family and the benefits that flowed from it. Gravity has long been one of the most successful empirical models in economics. Incorporating the theoretical foundations of gravity into recent practice has led to a richer and more accurate estimation and interpretation of the spatial relations described by gravity. Recent developments are reviewed here and suggestions are made for promising future research.

 

 

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Specialization: Pro- and Anti-Globalizing: 1990-2002

James E. Anderson
Yoto V. Yotov
Boston College and NBER
Drexel University

 

Specialization alters the incidence of trade costs to buyers and sellers, with pro-and anti-globalizing effects on 76 countries from 1990-2002. The structural gravity model yields measures of Constructed Home Bias and the Total Factor Productivity effect of changing incidence. A bit more than half the world's countries experience declining constructed home bias and rising real output while the remainder of countries experience rising home bias and falling real output. The effects are big for the outliers. A novel test of the structural gravity model restrictions shows it comes very close in an economic sense.

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Terms of Trade and Global Efficiency Effects of Free Trade Agreements, 1990-2002

James E. Anderson
Yoto V. Yotov
Boston College and NBER
Drexel University

 

This paper infers the terms of trade effects of Free Trade Agreements (FTAs) with the structural gravity model. Using panel data methods to resolve two way causality between trade and FTAs, we estimate direct FTA effects on bilateral trade volume in 2 digit manufacturing goods from 1990-2002. We deduce the terms of trade changes implied by these volume effects for 40 countries plus a rest-of-the-world aggregate. Some gain over 10%, some lose less than 0.2%. Overall, using a novel measure of the change in iceberg melting, global efficiency rises 0.62%.

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Intra-national Trade Costs: Measurement and Aggregation

Delina E. Agnosteva
James E. Anderson
Yoto V. Yotov
Drexel University
Boston College and NBER
Drexel University

 

We develop and apply a procedure to flexibly estimate intra-national border barriers and intra-regional trade costs. Bilateral border barriers very significantly depress Canadian inter-provincial trade for some pairs,
though the overall effect is rather small. Bilateral distance imposes much larger inter-provincial trade costs. Contiguity between provinces accounts for little. Intra-regional trade cost variation affects relative bilateral costs and trade flows,
and alters comparative statics except in a neutral case rejected by the data. Consistent trade cost aggregation procedures are developed and applied for groups of regions and/or sectors.

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How Much Does Geography Deflect Services Trade? Canadian Answers

James E. Anderson
Catherine A. Milot
Yoto V. Yotov
Boston College and NBER
DFAIT
Drexel University

International Economic Review, forthcoming

We estimate geographic barriers to trade in nine service categories
for Canada's provinces from 1997 to 2007 with novel high quality
bilateral provincial trade data. The border directly reduces average
provincial trade with the US relative to interprovincial trade to
2.4% of its borderless level. Incorporating multilateral resistance
reduces foreign trade relative to interprovincial to 0.1% of its
frictionless potential. Geography reduces services trade some 7
times more than goods trade overall. Surprisingly, intra-provincial
(local) trade in services and goods is equally deflected upward, implying that the
border increases interprovincial trade much more in services than
goods.

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