The Selection Panel also gave two honourable mentions to Jingting Fan of Pennsylvania State University for his paper entitled “Talent, Geography, and Offshore R&D” and to Zheli He of Columbia University for her paper entitled “Trade and Real Wages of the Rich and Poor: Cross-Country Evidence”.

Winning essay

Meredith Starz’s paper underlines the importance of face-to-face transactions for the importing of goods when there are search and contracting problems. The idea is very simple: in contrast to purchasing remotely, travelling to the point where goods are imported entails a higher fixed cost but allows importers to search more effectively for the most up-to-date products and to avoid contract-enforcement issues by engaging in an on-the-spot transaction.

The paper shows that removing search and contracting problems is important for the volume and gains from trade, and is likely to be especially important for developing countries. Using data from Nigeria, her paper shows that removing search and contracting frictions would: (1) increase the benefits from imported consumer goods by 29%; (2) provide significant benefits from removing physical and regulatory barriers; (3) allow small firms to remain in the market; and (4) lead to a wider variety of new products for customers.

Ms Starz discusses why other ways of dealing with search and contracting problems – such as using agents, escrow services and financial services – do not work (or are too costly) in the context of Nigerian imports. The results suggest that greater attention to market integration policies beyond transportation and tariffs could have large welfare effects, particularly in developing countries. In the judgement of the Selection Panel, her paper contributes significantly to understanding and quantifying the nature of trade costs.

Meredith Starz has Canadian and American nationality. She received her Ph.D. in economics from Yale University in 2017. She is currently affiliated with Princeton University.

Honourable mentions

Jingting Fan's paper looks at the issue of the location of research and development (R&D) as opposed to production location. It highlights that separating innovation and production activities is difficult because the incentive to locate production near the market to save on transport costs will also prompt innovation activities to have the same location. It also highlights the interaction between the relative abundance of talented inventors in the host country and the efficiency of a firm. The paper finds that offshore R&D increases countries’ gains from global integration by a factor of 1.2 on average, with developing countries making much larger gains.

Zheli He’s paper makes a compelling case for using the real wage rather than the nominal wage as the variable in the analysis of the effects of trade opening on inequality. It explores the interaction of two mechanisms through which trade can have an impact on wage inequality: an “income channel” that arises from changes in the wage perceived by workers and an “expenditure channel” that arises when changing consumer prices have different impacts on high-wage and low-wage workers due to the difference in the types of goods that these two sets of workers consume.

The paper finds that trade cost reductions decrease the relative nominal wage of the poor and the relative price index for the poor in all countries. But the latter effect dominates and on the whole, real-wage inequality falls everywhere.

Jingting Fan is a Chinese national. He received his Ph.D. in economics from the University of Maryland in 2017. He is currently Assistant Professor at Pennsylvania State University.

Zheli He is also a Chinese national. She received her Ph.D. in economics from the University of Columbia in 2017. She is currently affiliated with the Penn Wharton Public Policy Initiative.

Selection panel

The Selection Panel comprised Dr Avinash Dixit (Emeritus Professor of Economics, Princeton University), Dr Robert Staiger (Professor of Economics, Dartmouth College), Dr Alberto Trejos (Professor of Economics, INCAE Business School) and Dr Robert Koopman (Director, Economic Research and Statistics Division, WTO). Dr Roberta Piermartini (Chief of Section, Economic Research and Statistics Division, WTO) coordinated the work of the panel.