Working Papers

Misallocation under Heterogeneous Markups and

Non-Constant Returns to Scale

Joint work with Junjie Xia

Predicted TFP gains under Hsieh and Klenow (2009)’s framework are sensitive to demand elasticities and returns to scale, but simultaneously estimating them is difficult. We solve this problem by developing a framework allowing for an arbitrary distribution of firm-level markups and use microdata to estimate industry-specific production elasticities, within-industry type-specific demand elasticities when types are not observed, and firm-specific distortions. We apply our model to 2005 Chinese firm-level data and find that the predicted Total Factor Productivity (TFP) gains are 44% which is half of the previous findings. While the variation in markups does not affect predicted TFP gains, it lowers the predicted increase in labor income share by one-third, suggesting lower gains to average workers due to heterogeneous markups.

Draft available here.

Work in Progress

Optimal Subsidies for the Technology Catch-Up of Electric Vehicles in China

We build a dynamic structural model of firms' investment choices taking into account consumers' heterogeneous tastes for price and quality. The model is then applied to rich microdata on Chinese automobiles to study whether the generous product subsidies on electric vehicles in China attract consumers who are more sensitive about prices but less sensitive about quality and whether this disincentivizes firms to engage in risky investment for improving product quality.

Varying Markups under Capital and Labor Distortions

Literature on the incomplete passthrough of markups believes that as firms grow bigger, markups increase. However, we find a negative correlation between market shares and markups among Chinese firms. This paper investigates whether Chinese firms have a different passthrough pattern and whether the missing positive correlation results from capital and labor distortions. If high-markup firms tend to have higher capital and labor distortions which makes them too small, the correlation will turn negative even if in a distortion-free economy there is a positive correlation. 

Industrial Policies against Star Suppliers

When a supply chain has star suppliers that have disproportionally large market power, industrial policies that incubate potential rivals to the stars can reduce deadweight loss and misallocation. This is an important motivation for industrial policies in practice but is criticized for supporting less inefficient firms and distorting the economy. We develop a model where firms' productivity increases via learning by doing in an endogenous network and offer a framework to compare the inefficiency loss today of subsidizing smaller, younger, less efficient firms and the long-term benefits of creating new rivals to exisiting star suppliers.