UC Davis

This dissertation is comprised of three independent chapters. The first chapter investigates the role of automation exposure for the innovation response to competition. The second chapter quantifies the impact of automation on workers' employment, wages, and educational decisions. The third chapter discusses how global financial conditions influence the intensity of capital inflow restrictions in emerging countries.

In the first chapter, I examine the role of automation exposure for innovation decisions under competitive pressure. Using surveys of more than a quarter-million manufacturing firms and industry trade flows for European countries for the 2000-2014 period, I analyze what type of innovation strategy manufacturing firms choose when face intensifying competition from competitors with a cost advantage. I find that firms with high automation exposure are more likely to engage in the product rather than process innovation. I justify this choice of innovation by a strategy to avoid pure price competition with cost-advantaged competitors. While firms with high automation exposure could match a low-price competitor, product innovation allows increasing profitability without engaging in the race to the bottom.

In the second chapter, I explore the effect of automation on worker's welfare in a general equilibrium model with two skill types, wage bargaining, and education. I present a model where automation does not necessarily displace workers, but it may compete with workers for the same job tasks affecting the negotiated wages of workers. I use data from European countries to calibrate the model and evaluate the impact of automation. Distinguishing between changes in automation price and its capabilities I demonstrate that they may affect employment rate and wages differently. Their impact also depends on whether individuals adjust their education decisions. First, when the educational composition is fixed, a decline in price and expansion of automation capabilities lower wages. However, price decline increases the employment rate, while automation capabilities may increase or decrease it, depending on the labor market institutions. Secondly, when educational composition adjusts in response to changes in automation, both wages and employment rates could increase. Using numerical simulations, I show that between 2005 and 2016, advancement in automation, rather than institutional changes or a shift to services, accounts for a significant portion of changes in educational attainment, employment, and wage inequality.

In the third chapter, joint work with Johannes Matschke, we argue that emerging markets may rationally decide to implement pro-cyclical capital inflow restrictions. Capital flows into emerging markets are volatile and associated with risks. A common prescription is to impose counter-cyclical capital controls that would tighten during economic booms to mitigate future sudden stop dynamics. The opposite appears true in the data. Based on a large sample, we show that emerging markets increase their capital controls in response to volatility in international financial markets and elevated risk aversion. We theoretically justify this behaviour by a desire to manipulate the risk premium. When investors are more risk-averse or markets are volatile, investors require a high marginal compensation to hold risky emerging market debt. Regulators are able to exploit this tight link and raise capital inflow controls, thereby lowering the risk premium and reducing the overall debt burden.

Disclosure statement: The results and conclusions are mine and not those of Eurostat, the European Commission or any of the national statistical authorities whose data have been used.