EconPol Working Paper Series

Cover of EconPol Working Paper 19

International Competition and Rent Sharing in French Manufacturing: A Firm-Level Analysis

Lionel Nesta and Stefano Schiavo

This paper investigates the impact of import competition on rent sharing between firms and employees using a large panel of French manufacturing firms. First, by applying recent advances in the estimation of price-costs margins, we are able to classify each firm into labour- and product-market regimes based on the presence/absence of market power and to estimate the degree of rent sharing among firms and workers. Second, we investigate the hypothesis that import penetration acts as a discipline device on the labour market, reducing workers’ bargaining power. We find that competition from OECD countries has a negative effect on bargaining power, whereas imports from low-wage countries have a more muted impact. By providing firm-level evidence for the relationship between international trade and rent sharing, the paper sheds new light on the effect of trade liberalisation on the labour market.

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Cover of EconPol Working Paper 18

Investment Incentives and Tax Competition under the Allowance for Growth and Investment (AGI)

Seppo Kari, Jussi Laitila and Olli Ropponen

The European Commission’s Allowance for Growth and Investment (AGI) has proposed investment incentives in its two-step approach towards the Common Consolidated Corporate Tax Base (CCCTB). In this latest EconPol working paper, the authors demonstrate that the AGI strengthens investment incentives in high-tax countries and decreases the CCCTB-induced investment push towards low-tax countries. They also demonstrate that the AGI decreases tax competition and that a sufficiently generous AGI reduces tax competition between countries when introduced with the CCCTB.

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Cover of EconPol Working Paper 17

The EU Budget and Common Agricultural Policy Beyond 2020: Seven More Years of Money for Nothing?

Friedrich Heinemann and Stefani Weiss

The European Commission’s proposals for the post-2020 Common Agricultural Policy (CAP) are under discussion, and these cautious reform ideas have set the parameters for upcoming negotiations. CAP will continue to have a two-pillar structure of direct payments and rural development, with a seven-year budget of €365 billion. As before, almost three-quarters of the budget - €265 billion - is reserved for direct payments to farmers. However, ‘European added value’ must be urgently applied to CAP, say Friedrich Heinemann and Stefani Weiss, who have developed a series of recommendations to justify direct payments in their latest report for EconPol.

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Cover EconPol Working Paper 16

Shadow Banking and the Four Pillars of Traditional Financial Intermediation

Emmanuel Farhi and Jean Tirole

Traditional banking is built on four pillars: SME lending, access to public liquidity, deposit insurance, and prudential supervision. This paper unveils the logic of the quadrilogy by putting core services to “special depositors and borrowers” at the heart of the analysis, and makes room for bank and depositor implicit and explicit guarantees. It analyzes how prudential regulation must adjust to the emergence of shadow banking. The model also rationalizes ring fencing between regulated and shadow banking and the sharing of liquidity in centralized platforms to counter syphoning and financial contagion.

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Cover EconPol Working Paper 15

Fragmentation and Strategic Market-Making

Laurence Daures Lescourret and Sophie Moinas

Information technology, infrastructure enhancement, and arbitrage strategies all contributeto link trading venues in fragmented markets. Our paper highlights a new cross-market linking channel: the interdependence of liquidity providers' inventory costs. We use a two-venue duopoly model involving strategic risk-averse market-makers. Costs to provide immediacy depend on market-makers' inventory aggregated across venues, implying that absorbing a shock in one venue simultaneously changes marginal costs in all other venues. Moreover, market-makers strategically choose which shock(s) to absorb. These two forces may lead to competitive prices and enhanced liquidity. Using Euronext proprietary data, we uncover evidence for these crossmarket inventory cost linkages.

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