Comparative Advantage, Capital Destruction, and Hurricanes

Cahiers de Recherche du GRÉDI, No 14-09

60 Pages Posted: 23 Nov 2014 Last revised: 5 May 2017

See all articles by Martino Pelli

Martino Pelli

Université de Sherbrooke; University of Montreal - Center for Interuniversity Research in Econometrics; Center for Interuniversity Research and Analysis on Organization (CIRANO)

Jeanne Tschopp

Ryerson University, Faculty of Arts - Department of Economics

Date Written: May 1, 2017

Abstract

The comparative advantage of countries evolves over time, yet firms do not continuously adapt their production structure to this evolution. This slow adaptation may be due to high adjustment costs, such as those associated with the disposal of existing physical capital. In practice, these costs may explain why we observe that countries export goods at both ends of the comparative advantage spectrum. This article investigates what happens if the cost of adjusting to the dynamics of comparative advantage is unexpectedly reduced. We use hurricanes to evaluate whether a negative exogenous shock to firms’ physical capital leads to a reorganization of exports towards comparative advantage industries. Using a panel of 46 countries and 4-digit industries over the period 1980-2000, we show that the effect of hurricanes on exports is monotonically increasing in comparative advantage. Specifically, export levels drop for industries with a low comparative advantage and grow for industries with a high comparative advantage. Our results also indicate that the process of shifting resources towards higher comparative advantage industries intensifies within the three years following the shock. These findings suggest that if the opportunity cost of adjustment decreases, firms tend to build back better and move up the spectrum of comparative advantage.

Keywords: comparative advantage, physical capital, hurricane

JEL Classification: F14, O10, Q54

Suggested Citation

Pelli, Martino and Tschopp, Jeanne, Comparative Advantage, Capital Destruction, and Hurricanes (May 1, 2017). Cahiers de Recherche du GRÉDI, No 14-09, Available at SSRN: https://ssrn.com/abstract=2529660 or http://dx.doi.org/10.2139/ssrn.2529660

Martino Pelli (Contact Author)

Université de Sherbrooke ( email )

2500, Blvd de l'Université
Sherbrooke, Quebec J1K 2R1
Canada

HOME PAGE: http://sites.google.com/site/martinopelli

University of Montreal - Center for Interuniversity Research in Econometrics ( email )

C.P. 6128, Succursale Centre-ville
Montreal, Quebec H3C 3J7
Canada

Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

2020 rue University, 25th floor
Montreal H3C 3J7, Quebec
Canada

Jeanne Tschopp

Ryerson University, Faculty of Arts - Department of Economics ( email )

Canada

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