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RESEARCH SPOTLIGHT

What Would Happen if Business Travel Stopped?Black silhouettes of people in an airport with orange sunrise through window


International travel is ubiquitous in business firms. In light of the recent shutdowns of air travel due to COVID-19 and the prevalence of virtual communication, however, one might question its value. New research from Michele Coscia, Franke Neffke, and Ricardo Hausmann - recently published in Nature Human Behaviour - shows that business travel, and its subsequent transfer of knowhow, actually drives economic growth. Further, the researchers quantify the value of business travel by estimating the loss in global GDP if it were to stop.

RECENT PUBLICATIONS

Hartog, M., Lopez-Cordova, J.E. & Neffke, F., 2020. Assessing Ukraine's Role in European Value Chains: A Gravity Equation-cum-Economic Complexity Analysis Approach.Abstract
We analyze Ukraine's opportunities to participate in European value chains, using traditional gravity models, combined with tools from Economic Complexity Analysis to study international trade (exports) and Foreign Direct Investment (FDI). This toolbox is shown to be predictive of the growth and entry of new exports to the EU's Single Market, as well as foreign direct investments from the Single Market in Ukraine. We find that Ukraine has suffered from a decline of trade with Russia, which has led not only to a quantitative but also a qualitative deterioration in Ukrainian exports. Connecting to western European value chains is in principle possible, with several opportunities in the automotive, information technology and other sectors. However, such a shift may lead to a spatial restructuring of the Ukrainian economy and a mismatch between the geographical supply of and demand for labor.
Schetter, U. & Tejada, O., 2020. On Globalization and the Concentration of Talent: A General Result on Superstar Effects and Matching.Abstract
We analyze how globalization affects the allocation of talent across competing teams in large matching markets. Focusing on amplified superstar effects, we show that a convex transformation of payoffs promotes positive assortative matching. This result holds under minimal assumptions on how skills translate into competition outcomes and how competition outcomes translate into payoffs. Our analysis covers many interesting special cases, including simple extensions of Rosen (1981) and Melitz (2003) with competing teams. It also provides new insights on the distributional consequences of globalization, and on the role of technological change, urban agglomeration, and taxation for the composition of teams.
revised October 2020
Zhao, D., Chen, Y. & Shen, J.H., 2020. Mortgage Payments and Household Consumption in Urban China. Economic Modelling , 93 , pp. 100-111.Abstract

By exploiting variation both in mortgage payoffs and mortgage interest rate resets, we find that a decline in mortgage payments induces a significant increase in nondurable goods spending, even when households have substantial amounts of liquidity. Following mortgage payoff, households increase consumption expenditures by 61% of the original payment. In comparison, households increase consumption by only 36% in response to a transitory payment adjustment induced by interest rate changes. Households with a higher payment-to-income ratio have a significantly lower marginal propensity to consume (MPC). These results have practical implications for policy markers seeking to design consumption boosting policies and are important for understanding how changes in monetary policy may affect consumer spending patterns.

Coscia, M., Neffke, F. & Hausmann, R., 2020. Knowledge Diffusion in the Network of International Business Travel. Nature Human Behaviour. Publisher's VersionAbstract

We use aggregated and anonymized information based on international expenditures through corporate payment cards to map the network of global business travel. We combine this network with information on the industrial composition and export baskets of national economies. The business travel network helps to predict which economic activities will grow in a country, which new activities will develop and which old activities will be abandoned. In statistical terms, business travel has the most substantial impact among a range of bilateral relationships between countries, such as trade, foreign direct investments and migration. Moreover, our analysis suggests that this impact is causal: business travel from countries specializing in a specific industry causes growth in that economic activity in the destination country. Our interpretation of this is that business travel helps to diffuse knowledge, and we use our estimates to assess which countries contribute or benefit the most from the diffusion of knowledge through global business travel.

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Hausmann, R. & Schetter, U., 2020. Horrible Trade-offs in a Pandemic: Lockdowns, Transfers, Fiscal Space, and Compliance.Abstract

In this paper, we develop a heterogeneous agent general equilibrium framework to analyze optimal joint policies of a lockdown and transfer payments in times of a pandemic. In our model, the effectiveness of a lockdown in mitigating the pandemic depends on endogenous compliance. A more stringent lockdown deepens the recession which implies that poorer parts of society find it harder to subsist. This reduces their compliance with the lockdown, and may cause deprivation of the very poor, giving rise to an excruciating trade-off between saving lives from the pandemic and from deprivation. Lump-sum transfers help mitigate this trade-off. We identify and discuss key trade-offs involved and provide comparative statics for optimal policy. We show that, ceteris paribus, the optimal lockdown is stricter for more severe pandemics and in richer countries. We then consider a government borrowing constraint and show that limited fiscal space lowers the optimal lockdown and welfare, and increases the aggregate death burden during the pandemic. We finally discuss distributional consequences and the political economy of fighting a pandemic.

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Schetter, U., 2020. Quality Differentiation, Comparative Advantage, and International Specialization Across Products.Abstract

We introduce quality differentiation into a Ricardian model of international trade. We show that (1) quality differentiation allows industrialized countries to be active across the full board of products, complex and simple ones, while developing countries systematically specialize in simple products, in line with novel stylized facts. (2) Quality differentiation may thus help to explain why richer countries tend to be more diversified and why, increasingly over time, rich and poor countries tend to export the same products. (3) Quality differentiation implies that the gains from inter-product trade mostly accrue to developing countries. (4) Guided by our theory, we use a censored regression model to estimate the link between a country’s GDP per capita and its export quality. We find a much stronger relationship than when using OLS, in line with our theory.

Shen, J.H., et al., 2020. Profit Sharing, Industrial Upgrading, and Global Supply Chains: Theory and Evidence.Abstract

This paper constructed a simple model to illustrate the global supply chain profit sharing and industrial upgrading mechanism, from which it was found that the average profitability distribution in the different supply chain stages was determined by two main factors: (1) the average product of the labor in the firms at each production stage; and (2) the ratio of the output elasticity of capital to the output elasticity of labor in each stage. This paper also proposed a new industrial upgrading mechanism, the ‘inter-supply chain upgrading’, for supply chain firms. Rises in production complexity and increased factor intensity in each production stage were found to be the two essential conditions for the inter-supply chain upgrading. The empirical study results were found to be broadly consistent with the proposed theories.

Revised May 2020.
Machine-learned patterns suggest that diversification drives economic development
Gomez, A., et al., 2020. Machine-learned patterns suggest that diversification drives economic development. Journal of the Royal Society Interface , 17 (162). Publisher's VersionAbstract
We combine a sequence of machine-learning techniques, together called Principal Smooth-Dynamics Analysis (PriSDA), to identify patterns in the dynamics of complex systems. Here, we deploy this method on the task of automating the development of new theory of economic growth. Traditionally, economic growth is modelled with a few aggregate quantities derived from simplified theoretical models. PriSDA, by contrast, identifies important quantities. Applied to 55 years of data on countries’ exports, PriSDA finds that what most distinguishes countries’ export baskets is their diversity, with extra weight assigned to more sophisticated products. The weights are consistent with previous measures of product complexity. The second dimension of variation is proficiency in machinery relative to agriculture. PriSDA then infers the dynamics of these two quantities and of per capita income. The inferred model predicts that diversification drives growth in income, that diversified middle-income countries will grow the fastest, and that countries will converge onto intermediate levels of income and specialization. PriSDA is generalizable and may illuminate dynamics of elusive quantities such as diversity and complexity in other natural and social systems.
The Value of Complementary Coworkers
Neffke, F., 2019. The Value of Complementary Coworkers. Science Advances , 5 (12). Publisher's VersionAbstract

As individuals specialize in specific knowledge areas, a society’s know-how becomes distributed across different workers. To use this distributed know-how, workers must be coordinated into teams that, collectively, can cover a wide range of expertise. This paper studies the interdependencies among co-workers that result from this process in a population-wide dataset covering educational specializations of millions of workers and their co-workers in Sweden over a 10-year period. The analysis shows that the value of what a person knows depends on whom that person works with. Whereas having co-workers with qualifications similar to one’s own is costly, having co-workers with complementary qualifications is beneficial. This co-worker complementarity increases over a worker’s career and offers a unifying framework to explain seemingly disparate observations, answering questions such as “Why do returns to education differ so widely?” “Why do workers earn higher wages in large establishments?” “Why are wages so high in large cities?”

Additional resources: WebsitePodcast | Video | Media Release

Nedelkoska, L. & Neffke, F., 2019. Skill Mismatch and Skill Transferability: Review of Concepts and Measurements. Papers in Evolutionary Economic Geography , 19 (21). Publisher's VersionAbstract
The notion of skills plays an increasingly important role in a variety of research fields. Since the foundational work on human capital theory, economists have approached skills through the lens of education, training and work experience, whereas early work in evolutionary economics and management stressed the analogy between skills of individuals and the organizational routines of firms. We survey how the concept of skills has evolved into notions such as skills mismatch, skill transferability and skill distance or skill relatedness in labor economics, management, and evolutionary approaches to economics and economic geography. We find that these disciplines converged in embracing increasingly sophisticated approaches to measuring skills. Economists have expanded their approach from quantifying skills in terms of years of education to measuring them more directly, using skill tests, self-reported skills and job tasks, or skills and job tasks reported by occupational experts. Others have turned to administrative and other large-scale data sets to infer skill similarities and complementarities from the careers of sometimes millions of workers. Finally, a growing literature on team human capital and skill complementarities has started thinking of skills as features of collectives, instead of only of individuals. At the same time, scholars in corporate strategy have studied the micro-determinants of team formation. Combined, the developments in both strands of research may pave the way to an understanding of how individual-level skills connect to firm-level routines.
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