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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

Although firms may face radically different production conditions, this dimension of firm heterogeneity is often overlooked. We model input demand across local factor markets, explicitly considering search costs which explain why firms care about both the price and availability of inputs. The model is estimated by combining firm and population census data. The results quantify the role of regional factor markets in firm productivity and location. Considering modern China as a large country with substantial regional variation, we find within industry interquartile labor costs vary by 30-80%, leading to 2-17% interquartile differences in TFP. These estimates imply that in general equilibrium, homogenization of labor markets would lead to a 1.63% increase in real income. Furthermore, favorably endowed regions attract more economic activity, providing new insights into within-country comparative advantage and specialization.

Suggested Citation

  • Wenya Cheng & John Morrow & Kitjawat Tacharoen, 2013. "Productivity as if Space Mattered: An Application to Factor Markets Across China," CESifo Working Paper Series 4494, CESifo.
    • Handle: RePEc:ces:ceswps:_4494
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    1. Fabrice Defever & Alejandro Riaño, 2012. "China's Pure Exporter Subsidies," Discussion Papers 12/11, University of Nottingham, GEP.
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    3. 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.

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    More about this item

    Keywords

    general equilibrium; factor endowments; structural estimation; productivity;
    All these keywords.

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • F10 - International Economics - - Trade - - - General
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General

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