Many industrial policies were enacted by local governments. Decentralizing government intervention can undermine industrial policies if the local and aggregate welfares are misaligned. In this paper, Chen, Liu, and Song extend the closed-economy analysis in Liu (2019) to a multi-region setting with inter-regional trade and input-output linkages. The researchers derive sufficient statistics for the regional and aggregate welfare impacts of industrial policy. Using China’s cross-province input-output table, Chen, Liu, and Song show there is significant divergence between the incentives of the central and a provincial government: while the nation may benefit from promoting upstream sectors, regional economies benefit from “import substitution” policies that improve terms-of-trade but may harm the nation. Their central and local sufficient statistics predict policies enacted by the respective governments. The predictive power for local industrial policies improves in the regions with more fiscal autonomy. Adopting industrial policies aligned with central sufficient statistics can double the aggregate welfare gain by industrial policies aligned with local sufficient statistics.
How does energy regulation affect production and energy use within conglomerates? Chen, Chen, Liu, Suárez Serrato, and Xu study the effects of a prominent program aimed at reducing the energy use of large Chinese companies. Difference-in-differences analyses show that regulated firms significantly reduced their energy consumption and output but did not increase their energy efficiency. Using detailed business registration data, the researchers link regulated firms to non-regulated firms that are part of the same conglomerate. Chen, Chen, Liu, Suárez Serrato, and Xu estimate large spillovers on cross-owned nonregulated firms, which increased both output and energy use. The researchers then specify and estimate a model of conglomerate production that fits their setting and the estimated effects of the regulation. The model quantifies the importance of conglomerate reallocation for aggregate outcomes, the shadow cost of the regulation, and the efficiency gains from using public information on business networks to improve the design of energy regulation.
Intellectual property (IP) institutions have been a salient topic of economic research and a prime cause of political disputes, including the latest U.S.-China trade war. In this paper, Alfaro, Bao, Chen, Hong, and Steinwender investigate the effects of trademark protection, an under-examined form of IP protection, by exploring a historical precedent: China's trademark law of 1923--a law enacted not to protect the domestic economy; but an unanticipated, disapproved response to end conflicts between foreign powers. Exploiting a unique, newly digitized firm-level dataset from Shanghai in 1870-1941 and bilateral product-level data on Chinese imports in 19201928, Alfaro, Bao, Chen, Hong, and Steinwender show that the trademark law spurred employment growth, organizational change, and rising imports for Western firms with greater dependence on trademark protection. In contrast, Japanese businesses, who had frequently been accused of counterfeiting, experienced employment contractions. Finally, the researchers show that previous attempts by foreign powers to strengthen trademark protection -- such as extraterritoriality rights, bilateral commercial treaties, and an unenforced legal trademark code -- were ultimately unsuccessful.
Using a randomized experiment with an automobile manufacturing firm in China, Cai and Wang measure the effects of letting workers evaluate their managers on worker and firm outcomes. In the treatment teams, workers evaluate their supervisors monthly. The researchers find that providing feedback leads to significant reductions in worker turnover and increases in team-level productivity. In addition, workers report higher levels of happiness and positive mood. The evidence suggests that these results are driven by changes in the behavior of managers and an overall better relationship between managers and workers.
Entry regulation is prevalent across countries, yet there is limited evidence of its implications on industrial dynamics and aggregate efficiency. Leveraging the staggered implementation of the Business Registration Reform in China, Barwick, Chen, Li, and Zhang examine the impact of entry deregulation on firm entry, exit, size and productivity in the manufacturing sector. Based on the administrative firm registration data and annual reports, their difference-in-differences analysis shows that the reform increases firm entry by 25% and firm exit by 8.7%, resulting in higher market turnover. The reform reduces the size of new entrants and raises the size of exiting firms relative to continuing incumbents. Furthermore, entry deregulation improves the efficiency of new entrants mainly through relaxing financial constraints. A decomposition analysis reveals that the reform helps reverse the decreasing trend of average productivity for new entrants.
This paper investigates a worldwide phenomenon of "political divergence" among the East and the West. During the 8th to 10th century, both Western Europe and China achieved political stability but through dramatically different routes. Western Europe developed parliamentary representation on the basis of a power balance between the aristocracy and the crown, whereas China consolidated absolutism with the help of state bureaucracy and exam-based meritocracy. This paper provides empirical evidence to document this great political divergence, and proposes a unified theory to understand the relationship between institutions and monarchy-aristocracy power balance and its implication on political stability and long-run political development.
Miao, Ponticelli, and Shao study the historical roots of social unrest in China. In particular, they investigate whether the incidence of social unrest against local government officials under the Qing dynasty period (1644-1912) has a persistent effect on the incidence of anti-government protests in present-day China. To generate plausibly exogenous variation in the incidence of past protests, Miao, Ponticelli, and Shao exploit differences in the visibility and magnitude of solar eclipses across Chinese counties during the Qing dynasty period. In the Confucianism tradition, solar eclipses are considered a negative divine signal on the legitimacy of the ruler, and can thus facilitate the coordination of protest actions. Miao, Ponticelli, and Shao test this hypothesis using detailed data on the timing and location of anti-government rebellions extracted from local chronicles. They show that counties within the totality zone of an eclipse were significantly more likely to experience a rebellion in the eclipse year. Miao, Ponticelli, and Shao find that plausibly exogenous variation in past rebellions generated by the incidence of solar eclipses has a positive effect on the incidence of social protests in present-day China. Leaders of early anti-Qing rebellions were recorded in popular culture and celebrated in temples, favoring the transmission of the memory of their actions across generations. The persistent effect of past protests is concentrated in counties with such temples and memorials, consistent with a long-term memory of revolutions.
This paper was distributed as Working Paper 29182, where an updated version may be available.
Amiti, Kong, and Weinstein show that the specific factors model can be used to derive a rigorous link between movements in stock prices and productivity, wages, employment, output, and welfare. The researchers also prove that the commonly used measure of effective rate of protection equals the dual measure of revenue TFP, providing a theoretical foundation for why many studies have found that trade liberalization significantly increases firm-level productivity growth. Their method enables us to trace a tariff announcement's effect on TFP through its impact on macro variables (e.g., exchange rates) and through its effect on the relative prices of imports. Amiti, Kong, and Weinstein apply this framework to understanding the implications of the U.S.-China trade war. Their results show that the trade-war announcements caused large declines in U.S. stock prices, expected TFP, and expected inflation largely by moving macro variables, but also by causing declines in the returns of firms trading with China. Amiti, Kong, and Weinstein find that markets expect the trade war to lower U.S. welfare by 7.8 percentage points over the long run.
This paper was distributed as Working Paper 28758, where an updated version may be available.
He, Liao, and Wang study how managerial incentives affect firm behavior by studying a staggered reform in the Chinese state-owned enterprise (SOE) performance evaluation policy. To improve capital allocation efficiency, starting in 2010, Chinese regulators switched from using the return on equity (ROE) to economic value added (EVA) when evaluating SOE performance. This EVA policy adopts a one-size-fits-all approach by stipulating a fixed cost of capital for virtually all SOEs. The researchers show that SOEs did respond to the performance evaluation reform by altering their investment decisions, more so when the actual borrowing rate was further away from the stipulated cost of capital. Their paper provides causal evidence on the impact of incentive schemes on real investment and sheds new light on challenges faced by economic reforms in China.
This paper studies the economic consequences of the West's foray into China after the Opium War (1840-42), when Western colonial institutions were introduced in dozens of so-called treaty ports. These institutions came in two forms, trade institutions centered on the Maritime Customs Service, and legal institutions associated with consular courts in China. The paper finds, first, that Western countries had a positive impact on China's economy over the 19th century. Regions with Western influence exhibited a higher rate of growth of modern firms and more investment into advanced machinery; moreover, Western influence brought down local interest rates by almost a quarter, with much of this due to Western institutions providing enhanced security and lower risk as opposed to additional capital. Second, both legal and trade institutions contributed to this; firm growth, investment, and technology adoption were closely affected by trade institutions while legal institutions played a stronger role for capital market performance. Keller and Shiue also assess individual elements of extraterritorialty in China such as the scope of jurisdiction, appeal process, court proceedings, and sentencing. Third, the researchers demonstrate that the geographic scope of influence went far beyond the immediate vicinity of treaty ports, customs houses, and consulates. With Western institutions affecting Chinese areas up to 400 kilometers away, they influenced during this period a large part, perhaps even the majority, of China.
Chen and Kung show that the Chinese Communist Party (CCP) experienced significantly faster growth in counties occupied by the Japanese Army than those garrisoned by the Kuomingtang (KMT) during the Sino-Japanese War (c. 1940-45), using the density of middle-to-upper rank Communist cadres (5.4%) and the size of the guerilla base (10.3%) as proxies. The struggle for survival and humiliation caused by wartime sex crimes are the channels through which the CCP ascended to power. The researchers also find that people who live in former Japanese occupied counties today are significantly more nationalistic and exhibit greater trust in the government than those who reside elsewhere.