My research interests cover Empirical IO, International Trade, and Applied Microeconomics, with a special focus on demand, productivity, and firm endogenous demand/productivity-enhancing decisions. I use large-scale firm-level data sets and structural IO techniques to model, estimate, and evaluate how domestic or international policies/shocks affect the decisions and performance of heterogeneous firms and their aggregate impact on the economy. Most of my research projects combine the estimation of structural models with reduced-form analysis based on quasi-experimental policy variations.
Working Papers:
1. "Tax Policy, Selling Expenses, and Growth of Young Manufacturing Firms: Evidence from a Tax Incentive Policy",
with Hongsong Zhang, November 2022. Job Market Paper. (Paper available upon request)
Abstract: The life cycle of firms features that young firms are smaller and have lower profitability than mature ones, yet the growth of young firms is imperative for the dynamic growth of industries. Using a pretax deduction policy reform in China that reduces the costs of selling expenses of qualified young firms, this paper investigates the effect of selling expenses and tax incentives on the growth of young manufacturing firms. The findings show that the reform incentivized qualified young firms to invest substantially more in selling expenses, which improved their output demand and profitability. The increased demand also induced greater investment in R&D due to complementarity. A counterfactual based on a structural model of the effects of firms' dynamic decisions on their selling expenses and R&D decisions demonstrates that the impact is quantitatively substantial. The pretax deduction policy increases the selling expenses ratio of qualified young firms by 1.75 percentage points (a 46 percent increase) on average. This results in an increase in their demand factor, productivity, and profitability by 22, 0.4, and 16 percent, respectively, in the long run. Overall, the paper finds that the age-based performance gap between young and mature firms is mainly driven by demand-side differences, rather than productivity as premised in the literature. Young firms have lower demand but similar or even higher productivity relative to mature ones and their demand grows gradually as they invest more in selling expenses.
with Hongsong Zhang, November 2022. Job Market Paper. (Paper available upon request)
Abstract: The life cycle of firms features that young firms are smaller and have lower profitability than mature ones, yet the growth of young firms is imperative for the dynamic growth of industries. Using a pretax deduction policy reform in China that reduces the costs of selling expenses of qualified young firms, this paper investigates the effect of selling expenses and tax incentives on the growth of young manufacturing firms. The findings show that the reform incentivized qualified young firms to invest substantially more in selling expenses, which improved their output demand and profitability. The increased demand also induced greater investment in R&D due to complementarity. A counterfactual based on a structural model of the effects of firms' dynamic decisions on their selling expenses and R&D decisions demonstrates that the impact is quantitatively substantial. The pretax deduction policy increases the selling expenses ratio of qualified young firms by 1.75 percentage points (a 46 percent increase) on average. This results in an increase in their demand factor, productivity, and profitability by 22, 0.4, and 16 percent, respectively, in the long run. Overall, the paper finds that the age-based performance gap between young and mature firms is mainly driven by demand-side differences, rather than productivity as premised in the literature. Young firms have lower demand but similar or even higher productivity relative to mature ones and their demand grows gradually as they invest more in selling expenses.
2. "How Do Large Epidemics Redistribute Market Power? Evidence from the 2003 SARS Shock in China",
with Hongsong Zhang, May 2022. Conditionally accepted at The Review of Economics and Statistics. PDF
(An old version was circulated as "Epidemics, Inventory, and Markup: Evidence from the 2003 SARS Shock in China")
Abstract: Market power is costly to build and, once established, it is typically persistent and difficult to change. This paper investigates the impact of large economic shocks (serious epidemics) on the redistribution of market power in manufacturing industries. Based on a stylized model of firms' dynamic decisions on production, pricing, and inventory, the analysis demonstrates the necessity of accounting for firm heterogeneity in inventory stock and demand uncertainty to understand market power, because large epidemics affect both. The model provides a straightforward measure of market power in the presence of uncertain demand and endogenous inventory stock. Using the 2003 SARS shock in China as a natural experiment, the paper finds that the epidemic significantly reduced the market power of firms in the SARS-impacted areas, relative to those in unaffected areas. The effect is long lasting. SARS also substantially increased firms' inventory and demand uncertainty in the SARS-affected areas, which may be an important channel that explains part of the redistribution of market power.
with Hongsong Zhang, May 2022. Conditionally accepted at The Review of Economics and Statistics. PDF
(An old version was circulated as "Epidemics, Inventory, and Markup: Evidence from the 2003 SARS Shock in China")
Abstract: Market power is costly to build and, once established, it is typically persistent and difficult to change. This paper investigates the impact of large economic shocks (serious epidemics) on the redistribution of market power in manufacturing industries. Based on a stylized model of firms' dynamic decisions on production, pricing, and inventory, the analysis demonstrates the necessity of accounting for firm heterogeneity in inventory stock and demand uncertainty to understand market power, because large epidemics affect both. The model provides a straightforward measure of market power in the presence of uncertain demand and endogenous inventory stock. Using the 2003 SARS shock in China as a natural experiment, the paper finds that the epidemic significantly reduced the market power of firms in the SARS-impacted areas, relative to those in unaffected areas. The effect is long lasting. SARS also substantially increased firms' inventory and demand uncertainty in the SARS-affected areas, which may be an important channel that explains part of the redistribution of market power.
3. "Markup, Productivity, and Returns to Scale: Revisit the Export Premium",
with Xing Hu, and Hongsong Zhang, September 2022. (Paper available upon request)
Abstract: The productivity effect of export has been the foundation for many trade policies. However, empirical studies typically detected limited productivity effect of export using revenue productivity. We argue that this may be because export not only increases productivity, but may also increase markup. In markets with monopolistic competition, the positive effects of export on productivity and markup may offset each other in the revenue productivity measure, leading to the no-result outcome. We develop a new method to estimate the firm-level markup and productivity jointly, using revenue and widely available variable inputs expenditure. We find that export increases markup and productivity substantially. As expected, export shows no effect on revenue productivity, which contains the offsetting effects of markup and productivity.
Furthermore, after controlling for markup differences, production shows significant increasing returns to scale, providing another source of gains from export corroborating the key hypothesis of the new trade theory. Our results shows that the gains from export may be much larger than we previously thought, taking together the gains from export via markup, productivity, and increasing returns to scale.
with Xing Hu, and Hongsong Zhang, September 2022. (Paper available upon request)
Abstract: The productivity effect of export has been the foundation for many trade policies. However, empirical studies typically detected limited productivity effect of export using revenue productivity. We argue that this may be because export not only increases productivity, but may also increase markup. In markets with monopolistic competition, the positive effects of export on productivity and markup may offset each other in the revenue productivity measure, leading to the no-result outcome. We develop a new method to estimate the firm-level markup and productivity jointly, using revenue and widely available variable inputs expenditure. We find that export increases markup and productivity substantially. As expected, export shows no effect on revenue productivity, which contains the offsetting effects of markup and productivity.
Furthermore, after controlling for markup differences, production shows significant increasing returns to scale, providing another source of gains from export corroborating the key hypothesis of the new trade theory. Our results shows that the gains from export may be much larger than we previously thought, taking together the gains from export via markup, productivity, and increasing returns to scale.
4. "Road Infrastructure, Inventory and Markup: Evidence from Chinese Manufacturing Firms",
with Jiawei Mo and Hongsong Zhang, April 2021. (Draft available upon request)
with Jiawei Mo and Hongsong Zhang, April 2021. (Draft available upon request)
Selected Work in Progress
- "Firm Heterogeneity and Dynamics: A New Perspective from Firm Organization", with Mark Roberts and Hongsong Zhang.
- "Export Decision, Demand Competitiveness, and Selling Expenses", with Hongsong Zhang.
- "Trade Liberalization, Inventory, and Markup", with Heiwai Tang and Hongsong Zhang.