Estimating Production Functions in Differentiated-Product Industries with Quantity Information and External Instruments, with Nicolás de Roux, Marcela Eslava, and Eric Verhoogen
R&R, Journal of the European Economic Association. Online Appendix, Supplementary Materials. NBER working paper 28323.
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.
Learning Segmentation and Economic Development, with Jose M. Quintero.
How does learning from others shape economic development? We answer this question with a quantitative model of multiple labor markets and modern and traditional sectors, capturing key features of dual economies in developing countries. Workers sort across sectors and labor markets and accumulate human capital by learning from peers. Learning opportunities are sector-specific and depend on peer composition within the labor market. The model makes one main prediction: more skilled workers sort into the modern sector and, as a consequence, workers in this sector experience faster wage growth because they are exposed to higher-skilled peers. We test this prediction using longitudinal worker data from Chile and find empirical support for it. Finally, we estimate the model and use it to quantify the aggregate consequences of improving learning opportunities for traditional-sector workers. We find that improving learning opportunities generates meaningful welfare gains, but raises income per capita substantially only when it also increases the returns to human capital, encouraging workers to enter the modern sector.
Output Market Power and Spatial Misallocation.
U.S. Census working paper CES-23-57. Media: Marginal Revolution.
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%.
Climate Risk in Dynamic Spatial Equilibrium, with Adrien Bilal and Esteban Rossi-Hansberg.
Green Buildings: Aggregate Effects of Housing Carbon Policies, with Olivia Bordeu and Alvaro Contreras Mellado.
