Research Papers
Your (Country's) Reputation Precedes You:
---Information Asymmetry, Externalities and the Quality of Exports (Job Market Paper)
Abstract: The problems of moral hazard and adverse selection can seriously impede the development of export markets for firms from less developed countries. Importing firms have little recourse in developing country courts should their suppliers provide sub-quality goods, and they face great difficulty in distinguishing good firms from bad ones. My paper is the first to develop and estimate a dynamic structural model that incorporates both features of asymmetric information, namely moral hazard and adverse selection. In the model, the information asymmetry is high for new entrants but then gradually fades as idiosyncratic fixed cost shocks drive inefficient firms from the market. Thus, a firm's tenure in export markets is a signal of its efficiency, and consequently the price that it can obtain rises with tenure. Market-wide shocks to fixed costs, as occur when product safety regulations are imposed, flatten the price-tenure gradient as they disproportionately induce inefficient firms to exit. Using a triple-difference strategy, I show that these predictions hold in firm-level Chinese export data. This variation in the data also allows me to estimate my model and use it for counterfactual analysis. I show that the problem of information asymmetry is severe for Chinese entrants into export markets and that the problem is made worse by government export subsidies. Reducing these subsidies would raise aggregate export profits for Chinese firms.
---Information Asymmetry, Externalities and the Quality of Exports (Job Market Paper)
Abstract: The problems of moral hazard and adverse selection can seriously impede the development of export markets for firms from less developed countries. Importing firms have little recourse in developing country courts should their suppliers provide sub-quality goods, and they face great difficulty in distinguishing good firms from bad ones. My paper is the first to develop and estimate a dynamic structural model that incorporates both features of asymmetric information, namely moral hazard and adverse selection. In the model, the information asymmetry is high for new entrants but then gradually fades as idiosyncratic fixed cost shocks drive inefficient firms from the market. Thus, a firm's tenure in export markets is a signal of its efficiency, and consequently the price that it can obtain rises with tenure. Market-wide shocks to fixed costs, as occur when product safety regulations are imposed, flatten the price-tenure gradient as they disproportionately induce inefficient firms to exit. Using a triple-difference strategy, I show that these predictions hold in firm-level Chinese export data. This variation in the data also allows me to estimate my model and use it for counterfactual analysis. I show that the problem of information asymmetry is severe for Chinese entrants into export markets and that the problem is made worse by government export subsidies. Reducing these subsidies would raise aggregate export profits for Chinese firms.
Agglomeration, Geographic Industry Distributions and Local Industry Policies (joint with Chong Liu)
Abstract: Many countries use place-based policies, such as regional tax breaks and/or subsidies, to promote local economies. The place-based policy in this paper is the dispersed tax rate that is offered by local Chinese governments to attract firms. To explore the overall welfare implication, we develop a general equilibrium model that features two agglomeration forces, Marshallian externalities and input-output linkages. The model also includes other salient factors that affect heterogeneous firms’ location choices. After calibrating the model to the Chinese data, we find that the status quo tax policy reduces the aggregate output by 1.51% relative to an alternative in which the central government imposed uniform tax rates across regions and industries. Intuitively, a competitive tax policy leads to an inefficiently dispersed production so that agglomeration benefits are not fully realized. Failing to account for agglomerative forces would underestimate the costs by 67%.
Abstract: Many countries use place-based policies, such as regional tax breaks and/or subsidies, to promote local economies. The place-based policy in this paper is the dispersed tax rate that is offered by local Chinese governments to attract firms. To explore the overall welfare implication, we develop a general equilibrium model that features two agglomeration forces, Marshallian externalities and input-output linkages. The model also includes other salient factors that affect heterogeneous firms’ location choices. After calibrating the model to the Chinese data, we find that the status quo tax policy reduces the aggregate output by 1.51% relative to an alternative in which the central government imposed uniform tax rates across regions and industries. Intuitively, a competitive tax policy leads to an inefficiently dispersed production so that agglomeration benefits are not fully realized. Failing to account for agglomerative forces would underestimate the costs by 67%.
Does Class Size Matter? How, and at What Cost? (joint with Désiré Kédagni, Kala Krishna, Rigissa Megalokonomou)
Abstract: Using data on Greek high schools and a nonparametric approach, we show that there is some evidence of an inverse shaped U in this relationship, suggesting that very small class sizes might not be beneficial to learning. We then use Hoxby's approach to estimate a nonlinear relationship between class size and GPA. We also estimate a dynamic structural model of class size choice with hiring and firing costs where the authorities want to maximize learning subject to costs. We find reasonable estimates of hiring and firing costs concerning teacher's salaries and estimate the cost of improving GPA given these estimates.
Abstract: Using data on Greek high schools and a nonparametric approach, we show that there is some evidence of an inverse shaped U in this relationship, suggesting that very small class sizes might not be beneficial to learning. We then use Hoxby's approach to estimate a nonlinear relationship between class size and GPA. We also estimate a dynamic structural model of class size choice with hiring and firing costs where the authorities want to maximize learning subject to costs. We find reasonable estimates of hiring and firing costs concerning teacher's salaries and estimate the cost of improving GPA given these estimates.