Jonathan Eaton, 1950-2024

Ana Cecilia Fieler, Felix Tintelnot 

13 Aug 2024

https://cepr.org/voxeu/columns/jonathan-eaton-1950-2024

Jonathan Eaton, who passed away in February 2024, was a pioneering scholar in international economics. This column outlines his many contributions to our understanding of the global economy, including his work with Samuel Kortum integrating theory and data, notably an influential framework for analysing trade flows that also became the cornerstone of research in spatial economics and on the production networks of multinationals; his development with Mark Gersovitz of the foundational model for analysing sovereign debt defaults; and many insights into trade policy, sanctions, growth and technology diffusion. In addition to his wide-ranging intellectual legacy, he will be remembered as a wise and generous mentor to his students and other young scholars.

Jonathan Eaton passed away in February 2024. Together with Sam Kortum, Jonathan revolutionised the field of international economics by integrating theory with data. The models and methods that they developed have influenced fields far beyond their original domains and facilitated, for example, research in spatial economics and on the production networks of multinational enterprises.

In the 1970s, together with Mark Gersovitz, Jonathan developed the seminal model for analysing sovereign debt default, which remains the workhorse to this day. As a result of their work, the paradigm for studying sovereign debt shifted permanently from one of solvency and liquidity to that of a sovereign maximising welfare subject to the response of international capital markets.

Jonathan contributed to numerous other fields, including trade policy, sanctions, economic growth and technology diffusion. Jonathan and Sam Kortum jointly received the Frisch Medal in 2004 and the Onassis Prize in International Trade in 2018, among other honours. Jonathan will be remembered by many, including us, as a wise and generous mentor to his students and other young scholars. In this intellectual obituary, we describe his academic work and legacy.

Growth, diffusion, and international trade

Drawing on Kortum (1997) and Eaton and Eckstein (1997), Jonathan’s first papers with Sam (Eaton and Kortum 1996, 1999) proposed a multi-country model of technological innovation and diffusion where, in steady state, countries grew at the same rate but differed in their income levels, depending on their human capital endowment. This set-up stands in sharp contrast to the reigning predictions of convergence from the classical models of growth. Stylistically, these papers already featured the hallmark structure of their later work: empirical regularities, a theory justified by these regularities, and a quantification of the theory.

Their most influential work is Eaton and Kortum (2002), the recipient of the Frisch Medal. It extended some of the theoretical results from their work on economic growth and applied them to international trade. Up to that point, Ricardian trade models had been limited to two countries (i.e. Dornbusch et al. 1977) or made extreme assumptions on comparative advantage (i.e. each country produces a unique good) to incorporate geography. Jonathan and Sam’s work made it possible to combine the idea from Ricardo (1817) that comparative advantage, based on technology differences, is a determinant of trade with a realistic structure of geography.

The central innovation was to combine first, a representation of heterogeneity in productivity via probability theory; second, economic decision-making (i.e. cost minimisation); and third, general equilibrium (i.e. prices are set so that markets clear). The Eaton and Kortum (2002) model, building up from micro heterogeneity, is a tractable framework for analysing bilateral trade flows in a setting with many countries and a realistic geography.

Outside international trade, the Eaton and Kortum (2002) framework has become the cornerstone for a new literature on quantitative urban and spatial models. It facilitated research on multinational enterprises, a literature that had similarly ignored the geographical footprint of multinationals. Other applications include the fields of labour, development and agricultural economics. These applications also make extensive use of the Dekle et al. (2008) method to conduct counterfactuals in the Eaton-Kortum model.

Jonathan’s quest to unite theoretical and empirical analyses in international economics extended to firm-level data. Bernard et al. (2003) develop the implications of the 2002 model for Bertrand competition. In line with data, firms have heterogeneous mark-ups, and firms with higher mark-ups and productivity self-select into export markets. Eaton et al. (2011) present a series of striking empirical regularities using French firm-level data on how firms with heterogeneous sizes self-select into heterogeneous export destinations, and they rationalise them with an extension of the Melitz (2003) model.

Jonathan’s most recent articles study firm-to-firm trade in the presence of matching frictions. With these frictions, costs and sales no longer map one-to-one with productivity, as in standard models, because a firm’s cost depends on its success in matching with low-cost suppliers and its sales depend on its success in matching with customers.

Eaton et al. (2024) tackles the difficult derivation of the joint distributions of costs and sales, and other characteristics of the firm network. Eaton et al. (2022) shows that search frictions explain salient features of the life cycles of importers and exporters. And turning to bilateral trade data, Eaton and Fieler (2024) extend a gravity model to explain how trade values decompose into variety, quantity per variety, and prices, margins that were deemed inconsistent with gravity in much of the literature.

In the mid-1990s, Jonathan saw the field of international economics divorced from data and set out to bring theory and data together. His last article with Sam Kortum (Eaton and Kortum 2024, for the Annual Review of Economics) shows how the two of them accomplished this goal and reveals the unity of their many contributions outlined above. Starting with innovators’ efforts to improve the quality of existing ideas, Jonathan and Sam illustrate the ramifications of the framework for economic growth, technology diffusion, the technology frontier of each country, bilateral trade and firms’ behaviour with regard to mark-ups, sourcing decisions and selection into various export markets.

Sovereign default

Eaton and Gersovitz (1981) was Jonathan’s most influential work beyond the field of international trade. At the time of the paper’s writing, in the mid-1970s, sovereign debt defaults were rare: large episodes had not occurred in the post-war period. Other academic economists typically saw the paper’s topic as outdated, and capital-market participants viewed the large and growing debt of Latin American countries as inconsequential.

Hitherto, sovereign debt default was analysed through solvency and liquidity, parallel to the analysis of firm bankruptcy. The key insight in Eaton and Gersovitz (1981) is that governments are not subject to the same law-enforcement constraints as firms. Hence, the decision of a sovereign to default or not is deliberate. Jonathan and Mark cast this decision as that of a welfare-maximising sovereign subject to the response of capital markets. Default damages a country’s reputation and the willingness of capital markets to lend to it in the future.

Their foresight became evident shortly after the paper’s publication. In August 1982, Mexico defaulted on its debt sparking a banking crisis in the US and a global sovereign debt crisis that encompassed 40 countries, including Argentina, Brazil, and Venezuela.

Eaton and Gersovitz (1981) provided the theoretical structure for the ensuing literature on sovereign debt. The first wave of papers, led by Bulow and Rogoff (1988), studied potential commitment mechanisms that gave governments the incentives to repay and thereby make debt sustainable. The second wave, led by Aguiar and Gopinath (2006) and Arellano (2008), linked different versions of the Eaton-Gersovitz model to data. A more recent third wave extends the model to account for differences in debt maturity and currency denomination, and for contagion. More than 40 years after its publication, Eaton and Gersovitz (1981), with its parsimony and flexibility, remains the foundational model in this literature.

Strategic trade policy and sanctions

Jonathan also made important contributions to our understanding of strategic trade policy. Industrial policy is experiencing a revival and many of the targeted industries are dominated by a few firms. The influential work by Brander and Spencer (1984) showed that governments could increase welfare by subsidising exports if firms competed in a foreign market according to Cournot competition.

Eaton and Grossman (1986) showed that these conclusions are sensitive to the assumptions on conduct. As they demonstrated, if firms are competing à la Bertrand, the optimal policy instead becomes an export tax. Eaton and Grossman (1986), together with other complementary work by Dixit and Grossman (1986) and Horstman and Markusen (1984), showed the fragility of theories on the welfare gains from industrial policy and dampened enthusiasm for these policies.

Another area of increasing policy importance is that of economic sanctions. Eaton and Engers (1992) developed the first dynamic principal-agent model of sanctions. Their model is widely applicable to contexts where one country wants to induce another country to take a particular action on human rights, climate change, trade or debt payments.

Other contributions and conclusion

Jonathan left an enormous body of work, with nearly 60 published articles. He wrote influential papers on capital accumulation and growth (Eaton 1981), on how firms may implicitly collude if they set prices alternately (Eaton and Engers 1990), on the growth of cities (Eaton and Eckstein 1997) and on several other topics spanning labour and macroeconomics.

Jonathan was a keen observer of economic phenomena and anticipated many trends in the literature. He searched for empirical regularities in data and connected them to economic mechanisms. He enjoyed the process of interacting the model with data until the model had only the essential mechanisms.

The resulting models were so transparent and parsimonious that other researchers used them as skeletons to modify, expand and apply to a wide range of topics. We expect Jonathan’s intellectual legacy to be long lasting, but given this flexibility, we don’t attempt to anticipate its direction. We only look forward to watching it unfold.

References

Aguiar, M, and GiGta Gopinath (2006), “Defaultable Debt, Interest Rates and the Current Account”, Journal of International Economics 69(1): 64-83.

Arellano, C (2008), “Default Risk and Income Fluctuations in Emerging Economies”, American Economic Review 98(3): 690-712.

Bernard, A B, J Eaton, J B Jensen and S Kortum (2003), “Plants and Productivity in International Trade”, American Economic Review 93(4): 1268-90.

Brander, J A, and B J Spencer (1984), “Trade Warfare: Tariffs and Cartels”, Journal of International Economics 16(3-4): 227-42.

Bulow, J I, and K S Rogoff (1988), “Sovereign Debt: Is to Forgive to Forget?”, NBER Working Paper No. 2623.

Dekle, R, J Eaton and S Kortum (2008), “Global Rebalancing with Gravity: Measuring the Burden of Adjustment”, IMF Staff Papers 55(3): 511-40.

Dixit, A K, and G M Grossman (1986), “Targeted Export Promotion with Several Oligopolistic Industries”, Journal of International Economics 21(3-4): 233-49.

Dornbusch, R, S Fischer and P A Samuelson (1977), “Comparative Advantage, Trade, and Payments in a Ricardian Model with a Continuum of Goods”, American Economic Review 67(5): 823-39.

Eaton, J (1981), “Fiscal Policy, Inflation and the Accumulation of Risky Capital”, Review of Economic Studies 48(3): 435-45.

Eaton, J, and Z Eckstein (1997), “Cities and Growth: Theory and Evidence from France and Japan”, Regional Science and Urban Economics 27(4-5): 443-74.

Eaton, J and M Engers (1990), “Intertemporal Price Competition”, Econometrica 58(3): 637-59.

Eaton, J and M Engers (1992), “Sanctions”, Journal of Political Economy 100(5): 899-928.

Eaton, J and A C Fieler (2024), “The Margins of Trade”, NBER Working Paper No. 26124.

Eaton, J and M Gersovitz (1981), “Debt with Potential Repudiation: Theoretical and Empirical Analysis”, Review of Economic Studies 48(2): 289-309.

Eaton, J and G M Grossman (1986), “Optimal Trade and Industrial Policy under Oligopoly”, Quarterly Journal of Economics 101(2): 383-406.

Eaton, J, D Jinkins, J R Tybout and D Xu (2022), “Two-sided Search in International Markets”, NBER Working Paper No. 29684.

Eaton, J and S Kortum (1996). “Trade in Ideas Patenting and Productivity in the OECD”, Journal of International Economics 40(3-4): 251-78.

Eaton, J and S Kortum (1999), “International Technology Diffusion: Theory and Measurement”, International Economic Review 40(3): 537-70.

Eaton, J and S Kortum (2002), “Technology, Geography, and Trade”, Econometrica 70(5): 1741-79.

Eaton, J and S Kortum (2024), “Technology and the Global Economy”, NBER Working Paper No. 32062.

Eaton, J, S Kortum and F Kramarz (2011), “An Anatomy of International Trade: Evidence from French Firms”, Econometrica 79(5): 1453-98.

Eaton, J, S Kortum and F Kramarz (2024), “Firm-to-Firm Trade: Imports, Exports, and the Labor Market”, NBER Working Paper No. 29685.

Horstmann, I J and J R Markusen (1986), “Up the Average Cost Curve: Inefficient Entry and the New Protectionism”, Journal of International Economics 20(3-4): 225-47.

Kortum, S (1997), “Research, Patenting, and Technological Change”, Econometrica 65(6): 1389-1419.

Melitz, M J (2003), “The Impact of Trade on Intra‐industry Reallocations and Aggregate Industry Productivity”, Econometrica 71(6): 1695-1725.

Ricardo, D (1817), On the Principles of Political Economy and Taxation, John Murray.

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