Working Papers

Output Market Power and Spatial Misallocation. 

U.S. Census working paper CES-23-57. Media: Marginal Revolution.

Abstract: Most product industries are local. In the U.S., firms selling goods and services to local consumers account for half of the economy's sales and create over sixty percent of jobs. Competition in these industries occurs in local product markets. I propose a theory of such competition in which firms have output market power and choose where to operate. Spatial differences in local competition arise endogenously due to the spatial sorting of heterogeneous firms. The ability of more productive firms to charge higher markups induces them to overvalue locating in larger markets, leading to firm misallocation across space. The optimal policy is a location-specific output subsidy that eliminates markups, providing a rationale for place-based policies. Moreover, the optimal policy incentivizes productive firms to relocate to smaller markets by eliminating markup dispersion. I use U.S. Census micro-data to estimate the model's parameters and find significant heterogeneity in markups across U.S. markets. Producers in markets in the top decile of the market-size distribution have a fifty percent lower markup than those in the bottom decile. Using the estimated model, I quantify the general equilibrium effects of implementing the optimal policy and find that welfare losses due to output market power are 2.4%. Additionally, this policy increases local productivity in smaller markets by 14%, but decreases local productivity in larger markets by 5%.

Estimating Production Functions in Differentiated-Product Industries with Quantity Information and External Instruments. (with Nicolás de Roux, Marcela Eslava, and Eric Verhoogen) Online Appendix, Supplementary Materials. NBER working paper 28323.

Abstract: This paper highlights shortcomings of standard methods of production-function estimation when quality or variety vary at the firm level and develops a new approach that can be applied in such contexts. We take advantage of input and output quantity data from Colombian producers of rubber and plastic products. Using constant-elasticity-of-substitution aggregators of outputs and material inputs at the firm level, we derive a simple expression showing how quality and variety choices may bias standard estimators. Using real exchange rates and variation in the “bite” of the national minimum wage, we construct external instruments for materials and labor choices to supplement standard internal instruments. We implement a two-step instrumental-variables method, estimating a difference equation to recover the materials and labor coefficients and then a levels equation to recover the capital coefficient. A simple Monte-Carlo simulation illustrates the advantages of our method in a setting with firm-level input-quality differences.

(In)formal Growth: Wage Dynamics in Developing Economies. (with Jose M. Quintero) (revised draft coming soon)

Abstract: Labor informality is pervasive in developing economies. In this paper, we investigate the interconnection between informal labor, human capital accumulation, and economic growth. How do informal labor markets affect human capital accumulation, and vice versa? What are the aggregate effects of this interaction on growth and welfare? Using panel data from Chile and Colombia, we explore the dynamics of the formal and informal sectors by documenting two new empirical facts. First, wages for formal workers increase significantly more over the life cycle than wages for informal workers. Second, a substantial portion of this formal wage premium is attributable to workers' skill-based sorting. To rationalize these patterns, we build an endogenous growth model where heterogeneous workers sort into formal and informal labor markets based on their potential earnings. Worker's human capital increases over their life cycle through interactions with other workers. In equilibrium, more knowledgeable workers sort into the formal sector, and the growth rate of the economy is determined by the rate at which all workers meet more knowledgeable formal workers. We structurally estimate the parameters of the model and use it to quantify the effect of formalization policies. We find that policies that decrease the cost of operating formally are more effective in reducing the size of the informal sector compared to policies that increase the cost of producing informally. However, both types of policies have adverse effects on economic growth by lowering the quality of interactions of more skilled workers.

Work in Progress

Aggregate TFP Growth and Quality Change: Evidence from Colombian Manufacturing. (with Danial Lashkari and Eric Verhoogen)

Copycats or Pioneers? Firm Dynamics in an Informal Economy. (with Jose M. Quintero)