October 4-5, 2013
Shang-Jin Wei of Columbia University's Graduate School of Business and Hanming Fang of the University of Pennsylvania's Wharton School of Business, Organizers
Emi Nakamura and Jón Steinsson, Columbia University and NBER, and Miao Liu, Columbia University
Are Chinese Growth and Inflation Too Smooth? Evidence from Engel Curves
China has experienced remarkably stable growth and inflation in recent years, according to official statistics. Nakamura, Steinsson, and Liu construct alternative estimates using detailed information on Chinese household purchasing patterns. As households become richer, a smaller fraction of total expenditures are spent on necessities such as grain, and a larger fraction on luxuries such as eating out. The authors use systematic discrepancies between cross-sectional and time-series Engel curves to construct alternative estimates of Chinese growth and inflation. Their estimates suggest that official statistics present a smoothed version of reality. Official inflation rose in the 2000s, but estimates indicate that true inflation was still higher and consumption growth was overstated over this period. In contrast, inflation was overstated and growth understated during the low-inflation 1990s. Similar patterns emerge from the data whether the authors base their estimates on major categories such as food or clothing as a fraction of total expenditures, or subcategories such as grain as a fraction of food expenditures, or garments as a fraction of clothing expenditures.
Chunxin Jia and Yaping Wang, Peking University, and Wei Xiong, Princeton University and NBER
How Local and Foreign Investors React to Public News
Jia, Wang, and Xiong use the segmented dual-class shares of Chinese firmsA shares traded inside mainland China by local investors and H shares traded in Hong Kong by foreign investors - to analyze how local and foreign investors react to public news about the same firms. The authors find significant heterogeneity in investors' reactions. First, foreign investors react more strongly to earnings announcements. Second, foreign investors react more strongly to earnings forecast revisions made by foreign analysts, while local investors react more strongly to forecast revisions by local analysts. The first finding supports the argument that local investors are more informed about local firms, while the latter reveals that local and foreign investors agree to disagree about their interpretations of the same news, and each group favors information from sources it trusts.
Erwin Bulte, Wageningen University; Lihe Xu, Southwestern University of Finance and Economics, China; and Xiaobo Zhang, International Food Policy Research Institute
Does Aid Promote or Hinder Industrial Development? "Quake" Lessons from China
Bulte, Xu, and Zhang adopt a disaggregated approach to study the effectiveness of aid. Specifically, the authors examine whether post-disaster aid provided to a sub-sample of Chinese counties affected by a devastating earthquake in 2008 affects the sectoral composition of local economies. The authors find that, consistent with the Dutch disease hypothesis, counties receiving more aid - even nearby counties not damaged by the earthquake - tend to experience a contraction of the manufacturing sector. This effect can be measured in terms of income earned and employment. Innovative features of the paper include its regional perspective, its identification strategy which rests on a special provision in Chinese policy - pairwise aid provision, and its focus on Dutch disease effects in the context of post-disaster aid.
Lin Ji, Tsinghua University, and Shang-Jin Wei
Learning from an Apparent Puzzle: When Can Stronger Labor Protection Improve Productivity?
Ji and Wei provide some novel insights on the effect of stronger regulation on firm profits and aggregate productivity. While a majority of existing empirical studies suggests that stronger labor protection raises labor costs and reduces firm profits, the authors start with an apparent puzzle: the adoption of the 2007 Chinese Labor Contract Law appears to have raised the stock prices of more labor intensive firms relative to those of less labor intensive firms. The authors consider two possible explanations: 1, stronger enforcement provides firms with a commitment device to treat workers well, which can induce the latter to make more firm-specific investments that are beneficial to firms; 2, if non-compliance of labor protection in a weak enforcement environment is prevalent and especially more likely by smaller and less efficient firms, stronger enforcement may benefit larger and more efficient firms. The authors' evidence supports the second explanation. One implication is that, conditional on having the legal/regulatory requirement, strong and uniform enforcement can raise overall productivity.
Jing Cai, University of Michigan, and Changcheng Song, National University of Singapore
Do Hypothetical Experiences Affect Real Financial Decisions? Evidence from Insurance Take-Up
Cai and Song use a novel experimental design to study the effect of hypothetical personal experience on the adoption of a new insurance product in rural China. Specifically, the authors conduct a set of insurance games with a random subset of farmers. The authors' findings show that playing insurance games increases insurance take-up in real life by 48 percent. Exploring the mechanism behind this effect, the authors show that the effect is not driven by changes in risk attitudes, changes in perceived probability of disasters, or learning of insurance benefits, but is driven mainly by the experience acquired in playing the insurance games. Moreover, compared with experience with real disasters in the previous year, the hypothetical experience gained with the insurance games has a stronger effect on insurance take-up, implying that the impact of personal experience displays a strong recency effect.
Ying Fan, University of Michigan; Jiandong Ju, University of Oklahoma; and Mo Xiao, University of Arizona
Losing to Win: Reputation Management of Online Sellers
Reputation is generally considered an asset, especially in e-commerce markets. Any reputation system, however, elicits strategic responses from the sellers. Using panel data on a large random sample of online sellers from China's largest e-commerce platform, Taobao.com, Fan, Ju, and Xiao study how reputation affects revenue, prices, transaction volume, and survival likelihood as well as how sellers manage their reputation. The authors find that seller reputation has a substantial positive impact on established sellers, but new sellers fail to reap such benefits. Pursuing the long-run returns to reputation, new sellers actively manage their reputation by engaging in expensive activities such as sales and switching product categories. In this "losing to win" process, new sellers may spend too much of their resources to survive to the next stage. The authors' results provide empirical support for the theory of career concern and reputation dynamics.
Kyle Handley, University of Michigan, and Nuno Limão, University of Maryland and NBER
Policy Uncertainty, Trade and Welfare: Theory and Evidence for China and the U.S.
Handley and Limão assess the impact of U.S. trade policy uncertainty (TPU) toward China in a tractable general equilibrium framework with heterogeneous firms. The authors show that increased TPU reduces investment in export entry and technology upgrading, which in turn reduces trade flows and real income for consumers. They apply the model to analyze China's export boom around its World Trade Organization (WTO) accession and argue that in the case of the U.S., the most important policy effect was a reduction in TPU, granting permanent normal trade relationship status and thus ending the annual threat to revert to Smoot-Hawley tariff levels. The authors construct a theory-consistent measure of TPU and estimate that it can explain between 22 and 30 percent of Chinese exports to the U.S. after WTO accession. They also estimate a welfare gain of removing this TPU for U.S. consumers and find it is of similar magnitude to the U.S. gain from new imported varieties from 1990 to 2001.
Raymond Fisman, Columbia University and NBER, and Yongxiang Wang, University of Southern California
The Mortality Cost of Political Connections
Fisman and Wang study the relationship between the political connections of Chinese firms and workplace fatalities. The worker death rate for connected companies is five times that of unconnected firms; this result also holds when the authors exploit executive turnover to generate within-firm estimates. The connections-mortality relationship is attenuated in provinces where officials' promotion is contingent on meeting safety quotas. Fatal accidents produce negative returns at connected companies and are associated with the subsequent departure of well-connected executives. The authors' findings emphasize the social costs, as well as the firm-level benefits, of political connections.
Di Guo, Kun Jiang, and Chenggang Xu, University of Hong Kong, and Byung-Yeon Kim, Seoul National University
The Political Economy of Private Firms in China
The sweeping change in political economy associated with the spectacular growth of the private sector in China is rarely studied in the economics literature. This paper fills this gap. The central subject of this paper is the nature of the political economy of the Chinese private sector and of the Communist Party of China. Guo, Jiang, Kim, and Xu examine empirically the dynamics of rent creation from the Party membership and other political connections when the regime changes from anti-capitalistic to pro-capitalistic. Endogeneity problems are addressed. The authors identify the causality of rents and the political connections of private entrepreneurs, and explore the implications of these political elites' rents on social welfare in terms of productivity.
Chang-Tai Hsieh, University of Chicago and NBER, and Zheng Michael Song, University of Chicago
Grasp the Large, Let Go of the Small: The Transformation of the State Sector in China
Starting in the late 1990s, China undertook a dramatic transformation of the large number of firms under state control. Most small state-owned firms were privatized or closed. In contrast, large state-owned firms were corporatized and merged into large industrial groups under the control of the Chinese state. Detailed firm level data show that from 1998 to 2007, labor productivity of state-owned firms converged with that of privately owned firms, total factor productivity (TFP) growth of state-owned firms was more than double that of private firms, and capital productivity of state-owned firms continued to be lower than that of private firms (and did not change.) Hsieh and Song find suggestive evidence that competition within state-owned firms and the reduction of redundant workers are important for the convergence of TFP and labor productivity. Counterfactual experiments suggest that "grasping the large" and "letting go of the small" increase Chinese industrial output by about a quarter.