After decades of globalisation and integration, the world seems to be fragmenting again, epitomised best, perhaps, by the return of geopolitics, protectionism, unilateral sanctions, treaty withdrawals, and even military and economic coercion. Challenged by the United States, the return of old (Russia) and the growing assertion of new (China) antiliberal powers, the multilateral system is shaken both in its normative foundations and its operational capacity.
An integral part of global supply chains is the selection by international buyers of trading partners in developing countries. However, our understanding of how buyers find a suitable long term supplier is limited. I use unique buyer-seller customs data to directly observe experimentation activity in a large market - the "fast fashion" industry in Bangladesh. I study how buyers of ready-made garments conduct trials of suppliers at the order-product level before settling into sustained sourcing relationships. To illustrate this process, I use a model of idiosyncratic search costs where the buyer’s costs of testing a manufacturer are determined by the heterogeneity of potential suppliers. The model shows that (1) higher supplier heterogeneity is associated with lower experimentation, (2) as heterogeneity increases, search activity falls more markedly for larger buyers than for their smaller counterparts, and (3) while buyer-seller matches are positively assortative, more heterogeneous settings see all buyers -and more markedly, large buyers- willing to accept relationships with (weakly) worse suppliers. These implications are strongly supported by the data, and hold in terms of within-buyer, cross-market differences in experimentation behavior. Finally I show that these information frictions, rooted in supplier heterogeneity, matter for the distribution of rents in these relationships: price-cost margins for suppliers are positively related to the degree of heterogeneity in the environment.
We examine whether political connections ease financial constraints faced by firms. Using firmlevel data from six Central and Eastern European economies, we show that politically connected firms are characterized by: (i) higher leverage, (ii) lower profitability, (iii) lower capitalization, (iv) lower marginal productivity of capital, and (v) lower levels of investment than unconnected firms. Politically connected firms borrow more because they have easier access than unconnected firms to credit but tend to be less productive than unconnected firms. Our results are consistent with the idea that political connections distort capital allocation and may have welfare costs.
According to economic theory, repeated interactions can play a crucial role in shaping trust. We randomly allocated people to treatments that promote interactions with bankers. Next, these people play incentivised trust games with their own banker and with an anonymous other banker. While the effect on trust in the own banker is limited, the impact on trust in other bankers is important. We also find account savings strongly associate with trust in one's own banker. Our experiment suggests that trust in one's banker matters for savings, but that it is more difficult to influence than trust in bankers in general.
During the European sovereign debt crisis of 2011-13, some nations faced with rising borrowing costs adopted commitments to treat bondholders as priority claimants. That is, if there was a shortage of funds, bondholders would be paid first. In this article, we analyze the prevalence and variety of these types of commitments and ask whether they impact borrowing costs. We examine a widely-touted reform at the height of the Euro sovereign debt crisis in 2011, in which Spain enshrined in its constitution a strong commitment to give absolute priority to public debt claimants. We find no evidence that this reform had any impact on Spanish sovereign bond yields. By contrast, our examination of the U.S. Commonwealth of Puerto Rico suggests that constitutional priority promises can have an impact, at least where the borrower government is subject to supervening law and legal institutions.
This paper presents a comprehensive examination of the determination and evolution of inflation expectations, with a focus on emerging market and developing economies (EMDEs). The results suggest that long-term inflation expectations in EMDEs are not as well anchored as those in advanced economies, despite notable improvements over the past two decades. Indeed, in EMDEs, long-term inflation expectations are more sensitive to both domestic and global inflation shocks. However, EMDEs tend to be more successful in anchoring inflation expectations in the presence of an inflation targeting regime, high central bank transparency, strong trade integration, and a low level of public debt.
