Chang-Tai Hsieh

Misallocation and Manufacturing TFP in China and India

Resource misallocation can lower aggregate total factor productivity (TFP). We use micro data on manufacturing establishments to quantify the potential extent of misallocation in China and India compared to the U.S. Compared to the U.S., we measure sizable gaps in marginal products of labor and capital across plants within narrowly-defined industries in China and India. When capital and labor are hypothetically reallocated to equalize marginal products to the extent observed in the U.S., we calculate manufacturing TFP gains of 30-50% in China and 40-60% in India.

The Return to Capital in China

Chinas investment rate is one of the highest in the world, which naturally leads one to suspect that the return to capital in China must be quite low. Using the data from Chinas national accounts, we estimate the rate of return to capital in China. We find that the aggregate rate of return to capital averaged 25% during 1978-1993, fell during 1993-1998, and has become flat at roughly 20% since 1998. This evidence suggests that the aggregate return to capital in China does not appear to be significantly lower than the return to capital in the rest of the world. We also find that the standard deviation of the rate of return to capital across Chinese provinces has fallen since 1978.

What Explains the Industrial Revolution in East Asia? Evidence From the Factor Markets

A front jaw for a ski binding having a base plate fixedly secured to the ski and on which two pivot axes are positioned which are perpendicular with respect thereto. A two-arm lever is pivotally supported on each of the pivot axes and one arm thereof is adapted to move into and out of engagement with the toe of the ski boot. The other arm of each two-arm lever cooperates with a pull rod resiliently urged to the initial position by an adjustable spring operated mechanism to resiliently hold the toe of the ski boot in the clamped position on the ski. Each of the two-arm levers cooperates with an intermediate structure to effectively control the spring force urging the two-arm levers to the clamping position holding the ski boot onto the ski. In one embodiment, this intermediate structure is a plate resiliently held perpendicular to the longitudinal axis of the pull rod and is moved to a position out of perpendicular relationship against the spring force by a pivoting of one of the two-arm levers. Another embodiment includes a guide for effecting a movement of the plate while maintaining the perpendicular relationship with the axis of the pull rod. A still further embodiment utilizes control linkages and structure for adjusting the effective length of the control linkages to thereby control the resilient force urging the two-arm levers to the clamping position.

Do Consumers React to Anticipated Income Changes? Evidence from the Alaska Permanent Fund

A central implication of the life-cycle/permanentincome hypothesis (LC/PIH) is that consumers should not respond to predictable changes in their income. To test this hypothesis, a number of recent papers have exploited natural experiments to identify anticipated income changes. In particular, recent work by Parker (1999) uses the change in after-tax income due to the cap on earnings subject to the Social Security tax, and a related paper by Souleles (1999) examines the response of consumption to income tax refunds. Surprisingly, Parker and Souleles find that even when income is expected to change within the year, expenditure is excessively sensitive to the timing of the income change. While their results can be interpreted as evidence that our canonical model of consumption is inadequate, an alternative explanation is that the anticipated income changes they exploit are small and irregular, and that households will not bother to change their consumption paths when the computational costs involved are large relative to the utility gains. In support of this interpretation, Browning and Collado (2001) find that the seasonal consumption patterns of Spanish households that work in sectors that provide regular bonus payments do not differ from those of households that do not receive bonus payments. This paper adds to this evidence by exploiting a natural experiment provided by annual payments from the state of Alaska’s Permanent Fund to every resident in the state of Alaska that should yield an unusually powerful test of the LC/PIH. These payments are large and clearly anticipated by Alaskan residents. Using the variation in the size of the payments over time and in the amount received by families of different sizes to identify the response of consumption to payments from the Permanent Fund, I find no evidence that the consumption of Alaskan households reacts to these payments. In addition, I find no evidence that the seasonal pattern of consumption in Alaska differs from that in the other 49 states or that households in Alaska are subject to fewer liquidity constraints, engage in less buffer-stock saving, or spend a smaller fraction of their income on semidurable goods than households in the rest of the United States. However, although households in Alaska do not overreact to payments from the Permanent Fund, I find that the consumption of the very same households is excessively sensitive to their income tax refunds. This evidence suggest that households will take anticipated income changes into account in their consumption decisions when the income changes are large, regular, and easy to predict, but will not do so when they are small and irregular. The paper proceeds as follows. The next section of the paper presents details on the * Department of Economics, Princeton University, Princeton, NJ 08544, and National Bureau of Economic Research (e-mail: chsieh@princeton.edu). I am very grateful to the Bureau of Labor Statistics (BLS) for providing access to the data from the Consumer Expenditure Survey and to its staff, particularly Steven Henderson, Walter VandeHeide, and Wolf Weber, for their generous assistance during my visits to the BLS. I also thank Nanci Jones for providing data and patiently answering questions on the operation of the Alaska Permanent Fund. Anne Case, Angus Deaton, Jonathan Parker, and two referees provided useful comments. The views expressed in this paper are personal and should not be attributed to the BLS. 1 I refer to the certainty-equivalent version of the LC/ PIH, or one in which the expected variance of consumption is constant. As is well known, without these assumptions, the LC/PIH only implies smoothing of marginal utility, not necessarily of consumption. 2 See Christina H. Paxson (1992); John Shea (1995); Jonathan A. Parker (1999); Nicholas S. Souleles (1999); Martin Browning and M. Dolores Collado (2001). Also see Ronald A. Bodkin (1959) for an early example of the use of a natural experiment to test for excess sensitivity. For comprehensive reviews of the large literature on empirical tests of the LC/PIH, see Angus Deaton (1992), Browning and Annamaria Lusardi (1996), and Browning and Thomas F. Crossley (2001). 3 In 1998, for example, the Permanent Fund paid

Grasp the Large, Let Go of the Small: The Transformation of the State Sector in China

1,541 to every resident of the state of Alaska.

Bargaining over reform

In the late 1990s, China’s industrial sector was dominated by state-owned firms. We document how this changed after 1998. More than 80 percent of the state-owned firms in 1998 were shut down or privatized by 2007. Among firms we classify as state-controlled in 2007, many were restructured and registered as private firms with a controlling share held by a state-owned conglomerate or were new firms established after 1998. In 2007, almost half of the state-controlled firms were registered as private firms, and about 40 percent were new firms established after 1998. The privatization and convergence in labor productivity decelerated after 2007, but the establishment of new state-owned firms continued at roughly the same rate. When we interpret these facts through the lens of an equilibrium model of heterogeneous firms, we find that the transformation of firms that remained under state control and the creation of new state-controlled firms together account for 21 percent of China’s growth from 1998 to 2007 and 18 percent of its growth from 2007 to 2012. However, the exit and privatization of state-owned firms had a negligible effect on aggregate growth.

Estimating the Border Effect: Some New Evidence

Abstract This paper models the delay in a macroeconomic stabilization as the outcome of a bargaining game between two parties who must reach an agreement over how the stabilization cost is to be shared. The paper modifies Alesina and Drazens (1991, American Economic Review 81, 1170–1189) war of attrition model by endogenizing the distribution of the stabilization costs through a bargaining game. Using this bargaining framework, the paper analyzes the role of crises and foreign assistance in bringing about a settlement to the distributional conflict. In the bargaining game, a crisis that increases the welfare loss from not stabilizing the economy will lower the probability of delay. In contrast, foreign aid that is used to reduce the stabilization costs will further increase the delay in reaching an agreement between the two parties.

Why Do Cities Matter? Local Growth and Aggregate Growth

To what extent do national borders and national currencies impose costs that segment markets across countries? To answer this question the authors use a dataset with product-level retail prices and wholesale costs for a large grocery chain with stores in the United States and Canada. They develop a model of pricing by location and employ a regression discontinuity approach to estimate and interpret the border effect. They report three main facts: One, the median absolute retail price and wholesale cost discontinuities between adjacent stores on either side of the U.S.-Canadian border are as high as 21 percent. In contrast, within-country border discontinuity is close to 0 percent. Two, the variation in the retail price gap at the border is almost entirely driven by variation in wholesale costs, not by variation in markups. Three, the border gaps in prices and costs co-move almost one-to-one with changes in the U.S.-Canadian nominal exchange rate. They show these facts suggest that the price gaps they estimate provide only a lower bound on border costs.

Relative Prices and Relative Prosperity

We study how growth of cities determines the growth of nations. Using a spatial equilibrium model and data on 220 US metropolitan areas from 1964 to 2009, we first estimate the contribution of each U.S. city to national GDP growth. We show that the contribution of a city to aggregate growth can differ significantly from what one might naively infer from the growth of the city’s GDP. Despite some of the strongest rate of local growth, New York, San Francisco and San Jose were only responsible for a small fraction of U.S. growth in this period. By contrast, almost half of aggregate US growth was driven by growth of cities in the South. We then provide a normative analysis of potential growth. We show that the dispersion of the conditional average nominal wage across US cities doubled, indicating that worker productivity is increasingly different across cities. We calculate that this increased wage dispersion lowered aggregate U.S. GDP by 13.5%. Most of the loss was likely caused by increased constraints to housing supply in high productivity cities like New York, San Francisco and San Jose. Lowering regulatory constraints in these cities to the level of the median city would expand their work force and increase U.S. GDP by 9.5%. We conclude that the aggregate gains in output and welfare from spatial reallocation of labor are likely to be substantial in the U.S., and that a major impediment to a more efficient spatial allocation of labor are housing supply constraints. These constraints limit the number of US workers who have access to the most productive of American cities. In general equilibrium, this lowers income and welfare of all US workers.