Working Papers

Returns to Scale, Productivity Measurement, and Trends in U.S. Manufacturing Misallocation

with Sui-Jade Ho, October 2017

Aggregate productivity suffers when workers and machines are not matched with their most productive uses. This paper builds a model that features industry-specific markups, industry-specific returns to scale, and establishment-specific distortions, and uses it to measure the extent of this misallocation in the economy. Applying the model to restricted U.S. census microdata on the manufacturing sector suggests that misallocation declined by 13% between 1982 and 2007. The jointly-estimated markup and returns to scale parameters vary substantially across industries. Furthermore, while the average markup has been relatively constant, the average returns to scale declined over this period. The finding of declining misallocation starkly contrasts the 29% increase implied by the widely used Hsieh & Klenow (2009) model, which assumes that all establishments charge the same markup and have constant returns to scale. Accounting for the variation in markups and returns to scale leads to the divergence of misallocation estimates in this paper from those implied by the Hsieh-Klenow model.

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Globalization and Top Income Shares

with Lin Ma, May 2018

This paper documents empirically that access to global markets is associated with a higher executive-to-worker pay ratio within the firm. It then uses China’s 2001 accession to the World Trade Organization as a trade shock to show that firms that exported to China prior to 2001 subsequently exported more, grew larger, and grew more unequal in terms of executive-to-worker pay. To analytically and quantitatively evaluate the impacts of globalization on top income inequality, this paper builds a model with heterogeneous firms, occupational choice, and executive compensation. In the model, executive compensation grows with the size of the firm, while the wage paid to ordinary workers is determined in a country-wide labor market. As a result, the extra profits earned in the foreign markets benefit the executives more than the average workers. We calibrate the model to the U.S. economy and match the income distribution closely in the data. Counterfactual exercises suggest that trade and FDI liberalizations can explain around 52 percent of the surge in top 0.1 percent income shares in the data between 1988 and 2008.

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Firms and Collective Reputation: The Volkswagen Emissions Scandal as a Case Study

with Rüdiger Bachmann and Gabriel Ehrlich, December 2017

This paper uses the 2015 Volkswagen emissions scandal as a natural experiment to provide causal evidence that group reputation externalities matter for firms. Our estimates show statistically and economically significant declines in the U.S. sales and stock returns of, as well as public sentiment towards, BMW, Mercedes-Benz, and Smart as a result of the Volkswagen scandal. In particular, the scandal reduced the sales of these non-Volkswagen German manufacturers by approximately 76,000 vehicles over the following year, leading to a loss of approximately $3.7 billion of revenue. Volkswagen’s malfeasance materially harmed the group reputation of “German car engineering” in the United States.

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