This paper studies how upstream market concentration and demand risk affect downstream firms’ outsourcing decisions. I formulate a structural model in which outsourcing allows the downstream firms to hedge the uncertain in-house production cost and upstream firms exploit downstream’s insurance motive by exerting market power. The model delivers equilibrium outsourcing patterns, as well as equilibrium upstream prices. I estimate the model using data on the vehicle manufacturers and upstream transmission firms in the automobile industry. Facing a negative demand shock equivalent to the recent pandemic, outsourcing from upstream firms mitigates the rise in transmissions’ production cost by 48%. However, endogenizing upstream’s price response to downstream’s outsourcing incentives offsets the mitigation by 12%. Next, I evaluate the potential impact of the United States-Mexico-Canada Agreement. When the upstream market is more concentrated under the protectionist trade policy, the upstream’s price response to the same pandemic demand shock is more significant. It further amplifies the negative impact on consumer welfare and manufacturers’ profit.
This paper studies whether exporters are of higher productivity in the footwear industry in China and whether trade liberalization leads to within-firm productivity increases. I construct a demand system with the production function to deliver valid physical productivity estimates following De Loecker (2011). After purging out the price effect, I find pure exporters have higher physical productivity than non-exporters in the footwear industry. However, the pure processing trade firms, which imported duty-free intermediate input from abroad but are forced to reexport all its final products, have substantially lower productivity than other exporters and lower productivity gains from trade liberalization.
Input Market, Partnership and Heterogeneous Innovations (with Bin Zhao)
This paper studies the relationship between partnership and a firm’s innovation strategies and its implications for industrial growth. We empirically document that forming partnerships across firms is associated with more exploitative (incremental) innovations and less exploratory (radical) innovations. Guided by the result, we propose a tractable growth framework where multi-product firms optimally implement either exploitative or exploratory innovations upon their product lines, given their partnership status. Although partnership mitigates misallocation by reducing frictions in the input market, it dilutes the overall input market ‘vintages’ by introducing too many over-developed inputs with limited productivity enhancement. Our framework permits analysis on how partnership can affect a firm’s innovation strategies and overall industrial growth.
Works in Progress
Protectionist Trade Policies and the College Gender Gap: Evidence from the US Labor Market (In Preparation)
Vintage Capital and Venture Capital Investment Concentration (with Kyle Kuang and Bin Zhao)