Professor Carl Davidson


Current Working Papers:

A Simple Model of Globalization, Schooling and Skill Acquisition

Abstract: We develop a model of schooling and skill acquisition, highlighting informational asymmetries that distort the incentives to educate.  A key feature of our model is that education acts simultaneously as a signaling device and as a method for workers to enhance their productivity.  We show that when firms can only imperfectly screen workers, the result is an economy in which too many workers purchase schooling and too few workers devote sufficient effort to their coursework to qualify for the high skill labor pool.  We then examine how greater openness to international markets alters the skill mix of the domestic workforce and show that greater openness usually eases one labor market distortion while making the other distortion worse. Globalization impacts educational behavior and labor market outcomes differently as the extent of firms engaged in international markets varies, and affects wage inequality both within and across educational groups.

           (This paper is joint with Nick Sly)                                                

Globalization and Firm Organization

Abstract: Usingthe matched employer-employee data that include all firms in Sweden and half of all Swedish workers from 1997-2005, in this paper we investigate how occupational mix varies across different firms. We find a robust relationship between the degree of international integration and occupational mix. Multinationals, which are the most globally engaged, have a distribution of occupations skewed toward the more skilled. Non-multinational exporters have a distribution of occupations less skewed toward the skilled compared to multinationals, but more skewed toward the skilled compared to local non-exporters (which are the least globally engaged). Our results are little changed (1) when we control for firm size, productivity, capital intensity, and firm age, (2) when we use alternative methods to rank occupations, or (3) when we use alternative measures of international integration. In addition, the results are very similar for manufacturing and service sectors.

           (This paper is joint with Fredrik Heyman, Steve Matusz, Fredrik Sjoholm and Susan Zhu)

Globalization and Imperfect Labor Market Sorting

Abstract: This paper focuses on the ability of the labor market to correctly match heterogeneous workers to jobs within a given industry and the role that globalization plays in that process. Using matched worker-firm data from Sweden, we find strong evidence that openness improves the matching between workers and firms in export-oriented industries. This suggests that there may be significant gains from globalization that have not been identified in the past – globalization may improve the efficiency of the matching process in the labor market. On the other hand, we find no evidence that openness affects the degree of matching in import-competing industries. These results remain unchanged after adding controls

for technical change at the industry level or measures of domestic anti-competitive regulations and product market competition. In addition, we find no evidence that technical change has any impact on the degree of matching at the industry level. Our results are also robust to alternative measures of the degree of matching, openness, or the trade status of an industry.

(This paper is joint with Fredrik Heyman, Steve Matusz, Fredrik Sjoholm and Susan Zhu)

Pigou, Becker and the Regulation of Punishment-Proof Firms    
We study the use of fines and inspections to control production activities that create external damages.  The model contains a continuum of firms, differing in their compliance costs, so that only high-cost firms evade the regulations. If fines are low, then Pigouvian rules for taxing externalities apply, modified to account for costly inspections.   According to Becker’s classic work on crime and punishment, however, these inspection costs can be minimized by raising the fines to very high levels. But by bankrupting firms, high fines are shown to increase the external costs generated by a non-compliant firm’s production activities, although they reduce the number of firms that fail to comply with the regulation. We analyze this tradeoff in detail, and obtain some unexpected results about how it should be resolved.

(This paper is joint with Larry Martin and Jay Wilson) 

The Optimal Fine for Risk Neutral Offenders: A New Approach to the Becker Conundrum
Gary Becker’s classic 1968 paper demonstrates that fines dominate expenditures on detection as a means of controlling illegal activities, because fines represent socially-costless transfers of income.   As a result, fines should be set at their maximal levels.  Subsequent research has produced several exceptions to this rule, but they involve significant departures from Becker’s framework.  We use a model that is consistent with this framework (risk-neutral agents and only one type and level of “crime”) to demonstrate that it may be optimal to set fines below their maximal levels.  The novel feature of our model is that sufficiently high fines interfere with prior commitments made by offenders to compensate other private agents (e.g., debt).  In some cases, fines should be low enough to leave offenders with positive assets after honoring all such commitments.

(This paper is joint with Larry Martin and Jay Wilson)

Older Versions of Recently Published Papers:

Trade Liberalization and Compensation (working paper version; published version appeared in the International Economic Review in 2006)

Information Sharing in Union-Firm Relationships (working paper version; published version appeared in the International Economic Review in 2008)
(Supplemental Appendix)
(Previous Version)

Globalization and Firm Level Adjustment with Imperfect Labor Markets (early version; published version appeared in Journal of International Economics in 2008)

The Trade-Offs from Pattern Bargaining with Uncertain Production Costs (early versions; published in the European Economic Review in 2011)
(Previous Version1: Pattern Bargaining as an Equilibrium Outcome)
(Previous Version2)