Job Market Paper:
- Management Quality, Firm Organization and International Trade (Best Paper Award at the Penn State Job Market Preparation Conference)
Abstract: The quality of the management technology to monitor and incentivize workers varies substantially across countries. To understand the impact of this on economic activities, I develop a two-sector model in which firms facing heterogeneous demands set up hierarchies to manage the production processes. Entrepreneurs decide the number of hierarchical layers, the effort level of each worker, and the span of control of supervisors. I then use the theory to explain two empirical findings established in the literature. A common improvement in the management technology across all firms intensifies competition in the monopolistically competitive sector. As a result, the smallest firms are forced to leave the market; the most efficient firms thrive; and the average firm size increases. Moreover, firms are less decentralized in economies with bad management technology. In an extended two-country model incorporating international trade, I show that firms facing increasing import competition flatten their hierarchies and use more incentive-based pay. Furthermore, I find that countries with superior management technology experience larger welfare gains from opening up to trade.
- Information, Incentives and Multinational Firms
Jounrnal of International Economics 85: 147-158, 2011.
Abstract: I present a model that explains a multinational firm's choice of organizational form. If a firm in the developed country outsources the production of its intermediate goods to a supplier in the developing country, it faces an adverse selection problem. If it chooses to produce the intermediate goods in its own subsidiary in the developing country, it faces an inefficient monitoring problem. My analysis of this tradeoff provides a new explanation for the observation that FDI is concentrated in capital intensive industries and yields two empirical hypotheses: more firms should adopt outsourcing instead of FDI after trade liberalization; the share of intra-firm trade in total trade should be increasing in the degree of productivity dispersion across intermediate goods suppliers in the developing country.
- Heterogenous Firms with Agency Problem
- Bank Deregulation and Political Contribution (with Liang Dai)
Abstract: I develop a model featuring agency problem inside firms and heterogeneous responses of managers' effort choice after trade liberalization. In equilibrium, managers' effort decreases first and increases afterwards with their ability levels. This non-monotonicity comes from the result that the manager is incentivized to exert more effort when the firm is facing an exit-threat, since losing the job results in a discontinuous decrease in the manager's payoff. After trade liberalization, managers working in surviving non-exporters with the lowest productivities and new exporters exert more effort, while those working in other surviving non-exporters decrease their effort levels. Managers of continuing exporters increase their effort levels only when variable trade cost decreases. In the empirical part of the paper, I use Colombian plant-level data to test the model's key prediction for the change of firm productivity after trade liberalization. Among surviving non-exporting firms that are subject to agency problem, less productive ones increase productivities more than more productive ones. The empirical results support this theoretical prediction.
Abstract: The last thirty years of the 20th. century have witnessed branching deregulation of the U.S. banking industry in most states. One striking feature is that branching deregulation usually happened in those states in recessions. We present a model featuring the tradeoff between social welfare and political contribution faced by the government to justify this finding. When a state is in recession, the banking sector's profit, a part of which is extracted by the government through contribution, shrinks more than the decrease of non-financial firms' profit. As a result, the government gains less from entry restriction of the banking industry and accordingly has a greater incentive to deregulate it to achieve a higher social welfare. Although we do not have data on state-level contribution from the banking industry, all the indirect tests support the basic premise and the main result of the paper..