Research

Abstract: This paper introduces a method for estimating productivity and quality at the firm-product level using a transformation function framework. Using firms’ optimization conditions, we obtain a one-to-one mapping from observed data to unobserved productivity and quality without imputing inputs. The method scales to many products, avoids specifying productivity dynamics, corrects bias from unobserved heterogeneous input prices, and accommodates productivity–quality trade-off. Applying it to Mexican manufacturing industries, we show that an exogenous, product-specific technological improvement raises firm-level productivity mainly through within-firm reallocation and delivers substantial industry-level welfare gains, further amplified by across-firm and within-firm spillovers.

Abstract: Unobserved objective output quality complicates the analysis of firm productivity and demand because higher-quality products entail higher costs but offer greater consumption benefits. Using a panel of firms with output quality data, we decompose quantity-based productivity into fundamental productivity and the costs of quality, and separate the demand residual into fundamental demand and quality benefits. Fundamental demand accounts for most revenue variation, whereas quality’s revenue-enhancing benefits are largely offset by its costs. During the 2008 global financial crisis, shifts in quality diverged from changes in fundamental productivity and demand, highlighting the role of quality in assessing firm and industry performance.

Abstract: This paper investigates how domestic policy uncertainty stemming from discretionary fiscal policy disrupts efficient capital allocation across firms. While fiscal policy represents the government’s reaction to economic conditions, its volatility presents firms with considerable uncertainty about conditions affecting their future profitability and consequently disrupts decisions about investment in the presence of capital adjustment costs. Using firm-level data from Chinese manufacturing industries spanning from 1998 to 2007, we find that reducing fiscal policy volatility leads to a decrease in the dispersion of the marginal revenue product of capital, accounting for 8.3 percent of the observed improvement in capital allocation during the sample period. In addition to various fiscal reforms to curb fiscal policy volatility directly, policies contributing to lower capital adjustment costs and lower reliance of firms on government expenditure can alleviate the adverse effects of fiscal policy volatility.

Abstract: This paper investigates how external monitoring from government influences the performance of state-owned enterprises (SOEs), by affecting managerial expropriation in procurement (proxied by input prices) and shirking in production management (proxied by productivity). We estimate input prices and productivity separately using a structural approach. Empirical application demonstrates strong causal evidence that enhancing monitoring, as an important component of corporate governance, can substantially improve SOEs’ input prices and productivity, and higher monitoring costs have negative effects. The negative cost effects are largely alleviated by a monitoring-strengthening policy. The results suggest government monitoring is an effective policy instrument to improve SOE performance.

Abstract: We develop a dynamic model to analyze the impact of input tariff liberalization on input prices, trading decisions, and productivity. Although input tariffs directly affect input price benefits of importing, their impact on trade participation generates indirect benefits through productivity improvements and complementarity between importing and exporting. To disentangle these effects, we separately measure importing’s effect on input prices and productivity and examine Chinese paint manufacturers’ reaction to input tariff liberalization. We find that a mild short-term effect of tariff liberalization is amplified in the long run by induced trade participation, resulting in even higher productivity and lower input prices.

Abstract: Retailer differentiation exists in most industries and gives manufacturers an incentive to contract with different retailers to penetrate a market. This paper analyzes the impact of this penetration effect on vertical contract exclusivity in an oligopolistic model with differentiated retailers. In the model, manufacturers endogenously choose contract types and negotiate with the retailers on wholesale prices. We show that, when the penetration effect is sufficiently strong, non-exclusive contracts lead to higher profits for the manufacturers and retailers. The model is applied to an example with logit demand, which shows that both manufacturers choosing the non-exclusive contracts is a dominant-strategy Nash equilibrium, but they can obtain higher profits under the exclusive contracts when the products have high quality or low costs.

Abstract: Industrial policy, particularly through the provision of large-scale assistance to industry in the form of ‘tax holidays’ and subsidies to firms, is very important in China. A major contribution of this paper is to introduce firm-level measures of assistance directly into industry-level production functions determining firm output using Chinese firm-level panel data for 1998-2007 and analysing the impact of government assistance on TFP at the firm-level. Our results indicate inverted U-shaped gains from assistance: across the 26 industries considered, firms receiving assistance rates of 1-10%, 10-19%, 20-49% and 50+% experienced on average 4.5%, 9.4%, 9.2% and -3% gains in TFP level, respectively. We then decompose the growth of TFP and relate it to assistance and formal political connections between firms and the government. We find in general firms receiving assistance contributed relatively more to TFP growth than non-assisted firms. However, this was largely through new firms being ‘encouraged’ to start-up rather than through firms open throughout 1998 to 2007 improving. There is also evidence that closure rates were truncated as a result of assistance. Moreover, the better results for assisted firms was very much ‘driven’ by a sub-group that received assistance but had no formal political connections and were not State-owned.

Abstract: This paper develops and estimates a dynamic model of exporting to quantify how productivity and uncertain foreign demand separately influence firms’ export participation. In this model, firms face uncertainty about their own foreign demand, and they update their beliefs based on individual export transactions according to Bayes’ rule. I estimate the model using data on firm-level production and transaction-level exports to Germany in the Chinese ceramics and glass industry. The empirical results show substantial heterogeneity in productivity and demand belief. For experienced firms, productivity is the major driving force of export participation. In contrast, for potential entrants, demand learning plays a more important role. A counterfactual exercise suggests that trade cost reduction has a significant impact on stimulating the export participation of potential entrants. Importantly, more than half of the participation increase is attributed to firms’ endogenous reaction to demand learning in the foreign market.

Abstract: In the automobile industry, as in many tradable goods markets, firms usually earn their highest market share within their domestic market. The goal of this paper is to disentangle the supply- and demand-driven sources of the home market advantage. While trade costs, foreign production costs, and taste heterogeneity all matter for market outcomes, we find that a preference for home brands is the single most important driver of home market advantage – even after controlling for brand histories and dealer networks. Furthermore, we also find that consumers favor domestically producing brands even if these brands originated from a foreign country. Therefore, our results suggest a novel demand effect of FDI: Establishing local production increases demand for the brand even in the absence of any cost savings.

Abstract: We propose a method to consistently estimate production functions in the presence of input price dispersion when intermediate input quantities are not observed. The traditional approach to dealing with unobserved input quantities—using deflated expenditure as a proxy—requires strong assumptions for consistency. Instead, we control for heterogeneous input prices by exploiting the first order conditions of the firm’s profit maximization problem. Our approach applies to a wide class of production functions and can be extended to accommodate a variety of heterogeneous intermediate input types. A Monte Carlo study illustrates that the omitted price bias is significant in the traditional approach, while our method consistently recovers the production function parameters. We apply our method to a firm-level data set from Colombian manufacturing industries. The empirical results are consistent with the prediction that the use of expenditure as a proxy for quantities biases the elasticity of substitution downward. More-over, using our preferred method, we provide evidence of significant input price dispersion and even wider productivity dispersion than is estimated using proxy methods.