Within-Firm Reallocation and the Impacts of Trade under Factor Market Imperfection (job market paper)


Factor market imperfections cause misallocation of inputs across heterogeneous firms. Factor markets inside a firm can substitute the markets outside by equalizing marginal revenues from the products within the firm, but not from products at different firms. I first show that the sales of a product at a firm rises when the tariffs on the other products of the firm fall, and a firm tends to add a product when the sales of its incumbent products fall. These facts suggest that firms' internal factor markets work just as the external ones. I measure the shadow prices of inputs and show that lower shadow prices at a firm imply higher survival probabilities of products of the firm. Then, I compare the price levels and their changes in two economies with and without internal factor markets. From Indian data under the trade liberalization in the 1990s, I find that within-firm reallocation accelerated reduction in price levels by 0.8\% each year. I also develop a new methodology to estimate production functions with a series of bias corrections in situations in which a firm faces a vector of shocks unobservable to econometricians, and the proxy-variable approach requires some tweak.

Dynamic Gains from Trade with Internal Factor Markets (in progress)