Knowledge that Transforms

We study the incentives that governments have to protect intellectual property in a trading world economy. We consider a world economy with ongoing innovation in two countries that differ in market size and in their capacity for innovation. After describing the determination of national patent policies in a noncooperative regime of patent protection, we ask, “Why is intellectual property better protected in the North than in the South?” We also study international patent agreements by deriving the properties of an efficient global regime of patent protection and asking whether harmonization of patent policies is necessary or sufficient for global efficiency.

Economists since John Richard Hicks have known that one of the principal means, if not the principal means, through which countries benefit from international trade is by the expansion of varieties. The seminal work of Paul R. Krugman (1979) brought the study of varieties into sharp focus by presenting a simple generalequilibrium model in which countries gain from trade through the import of new varieties. Since then, economists have been hampered in their ability to quantify the impact of new varieties on national welfare by the econometric and data hurdles that need to be surmounted. In this paper, we document some stylized facts about the growth in global varieties which suggest that there may have been substantial welfare gains through the import of new varieties. Moreover, we calculate the impact of increased variety on import prices and find that conventional measures of import price inflation may be dramatically biased upward. Classical international-trade theory postulates that the elimination of trade barriers improves welfare by reducing the wedge between domestic and import prices as well as the ensuing deadweight loss. An entirely different reason for the gains from trade arises from models of monopolistic competition. If consumers value variety and countries cannot produce all varieties due to a fixed cost in the production of each variety, countries stand to gain from trade because it expands the set of available varieties. In these models, the gains hinge crucially on a number of parameters and variables. The first is the elasticity of substitution among varieties. If varieties are highly substitutable, as might be true for varieties of gasoline, then increasing the number of varieties is unlikely to have much of an effect on prices and welfare. Second, quality variation across varieties may matter. Presumably, most Americans care more about having access to French red wine than to Japanese red wine. Finally, import quantities matter as, ceteris paribus, one cares more about variety growth in big sectors than in small sectors. In Broda and Weinstein (2004), we carefully estimate the impact of increased variety in the United States over the period from 1972 to 2001. Using the most disaggregated import data available, we document that the number of varieties imported by the United States, defined as the number of import categories multiplied by the average number of source countries for each category, quadrupled. About half of this increase was due to increases in the number of categories and half due to a doubling of the number of countries from which the United States imported each good. Measuring the impact of this increase on U.S. import prices and welfare is a complex process that we will only discuss briefly here. Essentially, we used Robert C. Feenstra’s (1994) methodology to estimate 30,000 elasticities and then construct an aggregate price index that is robust to common changes in quality variation, the arbitrary splitting of categories, the introduction of new goods, and a host of other data problems. After reconstructing the U.S. import price index, we found that the price of U.S. imports has been falling at a rate 1.2 percent per year faster than one would have thought without taking new varieties into account. To get some sense of the enormity of this bias, consider that the impact of quality adjustments on the consumer price index is estimated to be 0.6 percent per year. Using this adjusted import price index, we estimate the impact of new imported varieties on * Broda: Research Department, Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045; Weinstein: Economics Department, Columbia University, 420 W. 118th Street, New York, NY 10027, and NBER. We thank Joshua Greenfield for excellent research assistance. We thank Robert Feenstra and Peter Klenow for excellent comments. 1 “The extension of trade does not primarily imply more goods ... the variety of goods available is (also) increased, with all the widening of life that that entails. There can be little doubt that the main advantage that will accrue to those with whom our merchants are trading is a gain of precisely this kind ... . This is a gain which ‘quantitative economic history,’ which works with index numbers of real income, is ill-fitted to measure, or even to describe” (Hicks, 1969 p. 56).

In this paper I use a panel data set to investigate the mechanics of sudden stops of capital inflows and current account reversals. I am particularly interested in four questions: (a) What is the relationship between sudden stops and current account reversals? (b) To what extent does financial openness affect the probability of a country being subject to a current account reversal? In other words, do restrictions on capital mobility reduce the probability of such occurrences? (C) Does openness -- both trade openness and financial openness -- play a role in determining the effect of current account reversals on economic performance (i.e. GDP growth)? And, (d) does the exchange rate regime affect the intensity with which reversals affect real activity? The empirical analysis shows that sudden stops and current account reversals have been closely related. The econometric analysis suggests that restricting capital mobility does not reduce the probability of experiencing a reversal. Current account reversals, in turn, have had a negative effect on real growth that goes beyond their direct effect on investment. The regression analysis indicates that the negative effects of current account reversals on growth will depend on the country's degree of trade openness: More open countries will suffer less in terms of lower growth relative to trend than countries with a lower degree of trade openness. On the other hand, the degree of financial openness does not appear to be related to the intensity with which reversals affect real economic performance. The empirical analysis also suggests that countries with more flexible exchange rate regimes are able to accommodate better shocks stemming from a reversal than countries with more rigid exchange rate regimes.

Do Conditional Cash Transfers Improve Child Health? Evidence from PROGRESA's Control Randomized Experiment by Paul Gertler. Published in volume 94, issue 2, pages 336-341 of American Economic Review, May 2004

Was Electricity a General Purpose Technology? Evidence from Historical Patent Citations by Petra Moser and Tom Nicholas. Published in volume 94, issue 2, pages 388-394 of American Economic Review, May 2004

support, and Kent Smetters and Julie Collins for comments. A central point in the recent debate about Social Security in the United States has been the extent to which the federal government should take significant positions in the equity market. But, as this paper shows, the government already has a much more significant, if implicit position in the U.S. equity market through its claim to future tax revenues. Using estimates of the sensitivity of federal tax revenues to stock market returns, I calculate the implicit equity position of the federal government, defined as the equity position that would be as sensitive to the stock market as the present value of federal revenues. Although standard errors are large, point estimates indicate that the implicit federal equity position exceeds the size of the stock market itself, a result that is consistent with the fact that revenues from all sources, not just taxes on corporate source income, are responsive to stock market returns.