Research papers

We study the US labor market transitions using a latent variable approach, explicitly modeling the persistent misclassification process and the non-Markovian nature of the underlying true labor force dynamics. A closed-form global identification for misclassification probabilities and labor transition probabilities is established through an eigenvalue-eigenvector decomposition. Contrary to existing studies, our empirical results suggest that the observed data have understated the true mobility in labor force statuses after we account for persistence in both the misclassification errors and the latent true labor force dynamics.

Using household- and firm-level data, we show that reductions in soybean tariffs lowered agricultural labor input and output, and improved agricultural efficiency. The shock induced a large reallocation of low-skilled labor into manufacturing, expanding firms’ employment but reducing firm-level productivity, while intensifying competition in urban low-skilled labor markets. Our quantitative analysis implies a small aggregate welfare loss, with substantial heterogeneity across sectors, regions, and skill groups. Importantly, lowering migration costs can substantially mitigate this welfare loss, highlighting the need to coordinate trade liberalization with domestic labor-market reforms. Comparing forces behind structural transformation, we find that agricultural import liberalization (“push”) was an important driver for labor reallocation, whereas manufacturing export expansion (“pull”) was the sole source of welfare gains.

Labour productivity in manufacturing differs starkly across regions in China. We document that productivity, wages, and start-up rates of non-state firms have nevertheless experienced rapid unconditional regional convergence after 1995. To analyse these patterns, we construct a Hopenhayn model that incorporates location-specific capital wedges, output wedges, and entry barriers. Using Chinese Industry Census data, we estimate these wedges and examine their role in explaining differences in performance and growth across prefectures. Entry barriers explain most of the differences. We investigate the empirical covariates of these entry barriers and find that changes in barriers are causally related to changes in the size of the state sector: a smaller state sector leads to lower entry barriers.

Do peers in childhood influence the development of noncognitive skills? Despite a large literature on peer effects, this question remains largely unanswered. In this paper, we use Big Five Inventory measures of personality traits linked to the administrative records of children randomly assigned to primary school classrooms. We find that children exposed to “left-behind” classmates whose parents have temporarily migrated away for work become less conscientious, agreeable, and emotionally stable. These impacts mirror the traits of their left-behind peers with whom children become friends.

Product quality is widely regarded as an important determinant for economic development. This paper investigates whether horizontal foreign direct investment (FDI) improves or deteriorates the quality of domestic firms’ exports. We use China’s FDI regulation changes in 2002 as an instrument variable (IV) for FDI penetration in China to identify the causal impact and introduce a theoretical model to rationalize our empirical work. We find that FDI inflows exert a significantly negative effect on Chinese firms’ export quality. The mechanism of the negative effect is that FDI intensifies the domestic market competition, which induces within-firm adjustment of product mix and lowers domestic firms’ incentive to invest in the quality of new products. In particular, while domestic firms drop some existing products and introduce new products, they invest less in the quality of new products and maintain the quality of continuing products.

We study the welfare costs of markups in a dynamic model with heterogeneous firms and endogenous markups. We provide aggregation results summarizing the macro implications of micro-level markup heterogeneity. We calibrate our model to US Census of Manufactures data and find that the costs of markups can be large. We decompose the costs into three channels: an aggregate markup that acts like a uniform output tax, misallocation of factors of production, and inefficient entry. We find that the aggregate-markup and misallocation channels account for most of the costs of markups and that the entry channel is much less important.

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.

We study the economics of international joint ventures using administrative data for China. We first show that foreign investors choose Chinese partners that are relatively large, productive, and more innovative to set up their joint venture. Using a difference-in-differences framework, we then provide evidence that joint ventures lead to domestic benefits in the form of productivity and technological spillovers to both the Chinese partners in joint ventures as well as other domestic Chinese firms. Exploiting the easing of joint venture requirements as China entered the WTO in the year 2001, we further show that intraindustry spillovers from joint ventures to other domestic firms increased in the wake of China’s WTO accession, consistent with gains from foreign technology rising due to enhanced commitment through the rules-based WTO system. Our results shed new light on the efficacy of FDI performance requirements as well as on claims regarding international technology transfer that underpinned the China–US trade war.

This study estimates the causal impact of the massive installation of surveillance cameras on crime, using novel data from China between 2014 and 2019. Leveraging the preexisting presence of local camera manufacturers as an instrument for camera deployment intensity, we find that cities with denser surveillance networks experienced significantly steeper declines in crime. The reduction is more pronounced for publicly visible crimes. Enhanced surveillance is linked to higher satisfaction with the government and a greater sense of security, which in turn leads to longer working hours. A back-of-envelope calculation shows that preventing a crime costs approximately $6,373, which is highly cost-effective.

Frictions that impede the mobility of workers across occupations and space are a prominent feature of developing countries. We disentangle the role of insecure property rights from other labor-mobility frictions for the reallocation of labor from agriculture to nonagriculture and from rural to urban areas. We combine rich household and individual-level panel data from China and an equilibrium quantitative framework featuring sorting of workers across locations and occupations. We explicitly model the farming household and the endogenous decisions of who operates the family farm and who potentially migrates, capturing an additional channel of selection in the household. We find that land insecurity has substantial negative effects on agricultural productivity and structural change, raising the share of rural households operating farms by over 40 percentage points and depressing agricultural productivity by more than 20%. Comparatively, these quantitative effects are as large as those from all residual labor-mobility frictions. We measure a sharp reduction in overall labor-mobility barriers over 2004–2018 in the Chinese economy, all accounted for by improved land security, consistent with reforms covering rural land in China during the period.

US spectrum licenses cover geographically distinct areas and often complement each other. A bidder seeking to acquire multiple licenses is exposed to the risk of winning only isolated patches. Using Auction 73 data, we model the bidding process as an entry game with interdependent markets and evolving bidder beliefs. Bidders' decisions on bidding provide bounds on licenses' stand-alone values and complementarity between licenses. We show that the effects of package bidding on bidders' exposure risks depend on package format and size. More importantly, package bidding increases auction revenue substantially at the cost of reducing bidder surplus and increasing license allocation concentration.

How does rural-urban migration shape urban production in developing countries? We use longitudinal data on Chinese manufacturing firms between 2000 and 2006, and exploit exogenous variation in rural-urban migration induced by agricultural income shocks for identification. We find that, when immigration increases, manufacturing production becomes more labor intensive and productivity declines. We investigate the reorganization of production using patent applications and product information. We show that rural-urban migration induces both labor-oriented technological change and the adoption of labor intensive product varieties.

We use household-level panel data from China and a quantitative framework to document the extent and consequences of factor misallocation in agriculture. We find that there are substantial within-village frictions in both the land and capital markets linked to land institutions in rural China that disproportionately constrain the more productive farmers. These frictions reduce aggregate agricultural productivity by affecting two key margins: (1) the allocation of resources across farmers (misallocation) and (2) the allocation of workers across sectors, in particular the type of farmers who operate in agriculture (selection). Selection substantially amplifies the productivity effect of distortionary policies by affecting occupational choices that worsen average ability in agriculture.

We document strong skill matching in Turkish firms’ production networks. Additionally, in the data, export demand shocks from rich countries increase firms’ skill intensity and their trade with skill-intensive domestic partners. We explain these patterns using a quantitative model with heterogeneous firms, quality choices, and endogenous networks. A counterfactual economy-wide export demand shock of 5% leads both exporters and nonexporters to upgrade quality, raising the average wage by 1.2%. This effect is nine times the effect in a scenario without interconnected quality choices. We use the model to study the conditions for the success of export promotion policies.

China’s rapid export growth has spurred extensive research investigating its effects on other economies. The exact causes of the boom as well as the slowdown in Chinese exporting after 2007 are less well-understood. We quantify the drivers of Chinese export growth using a general equilibrium model estimated with detailed trade and production data that capture rich heterogeneity across destinations, firm ownership types, production locations, and sectors. We find that the three key drivers of Chinese export growth overall are rising foreign demand, improvements in access to imported intermediates, and factor productivity growth within China. Weakening foreign demand and a lack of further improvements in imported inputs access largely explain the slowdown in exporting after 2007. Furthermore, important differences especially across sectors and firms of different ownership types caution against any single narrative.

Unobserved output quality complicates productivity and demand measurement because it both raises costs and increases consumer value. Using firm-level panel data, this paper shows that revenue variation is driven mainly by fundamental demand, and that quality moved differently from productivity and demand during the 2008 financial crisis.

We study a prominent energy regulation affecting large Chinese manufacturers that are part of broader conglomerates. Using detailed firm-level data and difference-in-differences research designs, we show that regulated firms cut output and shifted some production to unregulated firms within their conglomerate instead of improving their energy efficiency. To account for conglomerate and market spillovers, we interpret these results through the lens of an industry equilibrium model featuring conglomerate production. The policy raises welfare if the per ton benefits of carbon reduction exceed $161. Alternative policies that exploit public information on business networks can increase aggregate energy savings by 10 percent.

We incorporate the lumpy nature of firm-level investment into the study of how tax policy affects investment behaviour. We show that tax policies can directly impact the lumpiness of investment. Extensive-margin responses to tax policy are key to understanding the effects of different tax reforms and to designing effective stimulus policies. We illustrate these results by studying China’s 2009 VAT reform, which lowered the tax cost of investment and reduced partial irreversibility—the price gap between new and used capital. Using comprehensive tax survey data and a difference-in-differences design, we estimate a 36% relative investment increase that is driven by investment spikes. Using a dynamic investment model that fits the reduced-form effects of the reform, we show that policies that directly reduce the likelihood of firm inaction are more effective at stimulating investment.

This paper highlights the criminogenic consequence of the remarkable slowdown in China’s exports in recent years. By applying textual analysis to millions of judgement documents from all levels of courts in China, we construct measures of crime rates that vary across cities over time. Our estimations, using a shift-share instrumental variable, reveal a higher increase in crime rates in cities that experience a more severe export slowdown. The effects are more pronounced in the manufacturing-specialising regions, where there is a higher concentration of young people, migrants and school dropouts. Negative export shocks also lead to reduced job opportunities, decreased labour earnings for migrants and worsened psychological health. Alternative mechanisms, such as spending on social stability, appear to play a minor role. A back-of-the-envelope calculation based on our baseline estimation suggests that approximately 13.1% of the interquartile difference in crime rates across cities can be explained by differences in their exposure to the export slowdown.

We construct measures of industry performance and welfare in the U.S. automobile market from 1980 to 2018. We estimate a demand model using product-level data on market shares, prices, and attributes, and consumer-level data on demographics, purchases, and stated second choices. We estimate marginal costs assuming Nash-Bertrand pricing. We relate trends in consumer welfare and markups to trends in market structure and the composition of products. Although real prices rose, we find that markups decreased substantially, and the fraction of total surplus accruing to consumers increased. Consumer welfare increased over time due to improved product quality and improved production technology.

Changes in Value-Added Tax (VAT) rebate rates affect exports. This paper shows, when financially strapped, the timely and efficient allocation of rebates becomes essential. Using a unique panel of Chinese firms with export and rebates information, we show that delay in rebates has negative but unequal effects on firm exports. Delays in rebates also cause more exit and reduce the product scope. Furthermore, we find a “Matthew effect” in allocating rebates: exporters with tighter financial constraints respond more elastically to a delay in rebates, yet they are also more likely to have a higher delay ratio. Thus, reducing rebates delay to the most constrained firms is more effective than a similar reduction to the least constrained firms. In partial equilibrium, correcting the misallocation in rebates would increase Chinese exports by 35%, while eliminating rebates delay would increase exports by 52%.

In this paper, we study the impact of labor mobility on the welfare cost of a currency union in an open economy New Keynesian model. We find that the relationship between labor mobility and exchange rate flexibility depends on the source of asymmetric regional shocks. With demand shocks, labor mobility reduces the welfare cost of a union by reducing the cost of shifting labor to concentrated areas of high demand. With supply shocks, flexible exchange rates can work in conjunction with higher labor mobility to reallocate the factors of production to higher productivity regions of potential currency areas. Therefore, higher labor mobility can widen the welfare gap between fixed and flexible exchange rate regimes, implying areas with high inter-regional labor mobility may benefit more from exchange rate flexibility.

We investigate how international patent activity enables firms from emerging economies to thrive in the global marketplace. We match Chinese customs data to US patent records, and leverage the quasi-random assignment of USPTO patent examiners to identify the causal effect of a US patent grant on the subsequent export performance of Chinese firms. Successful first-time patent applicants achieve significantly higher export growth, compared to otherwise similar first-time applicants that failed. This effect operates only in small part through market protection for technologically patent-related products in the US, and is largely driven by expansion in other markets. The response across destinations and products reveals that a US patent award signals the Chinese firm’s capacity to produce high-quality products and credibility to honor contracts, mitigating information frictions in international trade. There is little evidence for the relaxation of financial constraints or the promotion of follow-on innovation.

We document that larger input tariff reductions were associated with lower labor markdowns in China, especially for skill-intensive firms. Guided by a stylized model of equilibrium labor market power, we leverage differences in the aggregate labor supply dynamics across labor markets – such as regional variations in China’s contemporaneous college expansion reforms – to that show trade-induced labor markdown decreased more in labor markets with more labor supply growth. Our estimates suggest that lower labor markdowns due to input trade liberalization offset China’s aggregate labor share decline by almost one-half percentage point in the early 2000s.

We study the financial implications of the 2018–2019 U.S.-China trade war for global supply chains. Around the dates when higher tariffs are announced, U.S. firms that depend more on exports to and imports from China experience larger declines in market value, with the negative effect spilling over to the affected firms' suppliers and customers through production networks. The trade war effect is mainly concentrated among U.S. firms that sell to Chinese customers with low R&D intensity or outsource to Chinese differentiated input suppliers. We also exploit the within-firm variation in tariff exposure according to the detailed product lists and conduct a reverse experiment based on the 2019 trade talks. To explain the findings, we propose a theoretical model that highlights how complex trade structures shape shareholder wealth.

China’s manufacturing sector has been a key source of the economy’s dynamism. Analysis after 2007 however is hampered by problems in the key data source for empirical analysis, the National Bureau of Statistics’ (NBS) annual survey of industrial firms. Issues include missing information on value added and intermediate inputs, and concerns of over-reporting. The annual survey of firms conducted by China’s State Taxation Administration (STA) provides a reliable, alternative source of firm-level data for the years 2007 to 2013. Since the sample is not representative and the precise sampling scheme is not known, the data cannot be used directly to draw inferences on China’s manufacturing sector. By comparing the joint distribution of key variables for which both surveys provide reasonably reliable information, we recover the sampling scheme of the STA survey and use it to simulate samples for 2007 to 2013 that are comparable to the NBS sample in earlier years. Our estimates reveal a marked slowdown in revenue-based total factor productivity growth that cuts across all industries, ownership types, and regions. The loss of dynamism in the private sector, and the reduced contribution of firm entry to aggregate productivity growth are especially prominent.