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Productivity As If Space Mattered: An Application to Factor Markets Across China

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  • Wenya Cheng
  • John Morrow
  • Kitjawat Tacharoen

Abstract

Optimal production decisions depend on local market characteristics. This paper develops a model to explain firm labor demand and firm density across regions. Firms vary in their technology to combine imperfectly substitutable worker types, and locate across regions with distinct distributions of workers and wages. Firm technologies which best match regional labor markets explain both productivity differences and firm density. Estimating structural model parameters is simple and relies on a two stage OLS procedure. The first stage estimates local market conditions using firm employment and regional data, while the second incorporates regional costs into production function estimation. The method is applied to Chinese manufacturing, population census and geographic data to estimate local market costs and production technologies. In line with the model, we find that labor markets which provide cost advantages explain substantial differences in firm productivity. Furthermore, regions which have lower optimal hiring costs attract more firms per capita.

Suggested Citation

  • Wenya Cheng & John Morrow & Kitjawat Tacharoen, 2012. "Productivity As If Space Mattered: An Application to Factor Markets Across China," CEP Discussion Papers dp1181, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp1181
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    Cited by:

    1. Timo Mitze & Teemu Makkonen, 2020. "When interaction matters: the contingent effects of spatial knowledge spillovers and internal R&I on firm productivity," The Journal of Technology Transfer, Springer, vol. 45(4), pages 1088-1120, August.
    2. repec:wsr:wpaper:y:2013:i:121 is not listed on IDEAS
    3. Defever, Fabrice & Riaño, Alejandro, 2012. "China's pure exporter subsidies," LSE Research Online Documents on Economics 48929, London School of Economics and Political Science, LSE Library.
    4. Fabrice Defever & Alejandro Riaño, 2017. "China’s Dual Export Sector," Discussion Papers 2017-01, University of Nottingham, GEP.

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    More about this item

    Keywords

    Structural estimation; productivity; firm location; China;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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