Real Estate Booms and Endogenous Productivity Growth (Job Market Paper)
Abstract: This paper argues that real estate booms negatively affect productivity growth through an inefficient allocation of entrepreneurial talent across sectors. Using matched firm-to-firm shareholding and balance sheet data, I document that the recent real estate boom in China attracted more talented manufacturing entrepreneurs to the real estate sector. These entrepreneurs diverted their resources to real estate and away from manufacturing, resulting in lower investments, R&D expenditures, and productivity growth in their manufacturing businesses. I find empirical evidence that the observed allocation of entrepreneurial talent is driven by more talented manufacturing entrepreneurs being less financially constrained, and thus able to overcome the entry barrier. I then model the business choices of entrepreneurs with heterogeneous talent in an environment where the financial market is imperfect and the real estate sector faces a costly barrier to entry. In my model, more talented manufacturers accumulate more wealth through self-financing, and they are therefore less constrained by the cost of entering the real estate sector in the event of a real estate boom. Inefficient talent allocation arises if more talented manufacturing entrepreneurs do not have a comparative advantage in real estate. A structural estimation of the model confirms the existence of an inefficient allocation of entrepreneurial talent during the Chinese real estate boom.
Imperfect Competition and the Network Origin of Aggregate Fluctuation (with Kai Yan)
Abstract: This paper studies how imperfect competition can transmit and amplify sectoral shocks within an input-output network. We introduce a model with variable markups and input-output linkages to show that the degree of competitiveness in individual industries and the input-output network structure jointly determine how sectoral shocks are transmitted. A negative shock to any sector of the economy will cause firms to exit, which leads to both an increase in markup and a loss of variety. The negative shock travels through the input-output network due to decreasing demand and increasing real prices, generating a rich pattern of amplifications. We then use a detailed firm-level data set from China and the exogenous exchange rate regime switch in 2005 to test our model's predictions empirically. We find evidence that a downstream industry is affected by a demand shock to another downstream industry that shares common upstream suppliers with them. Industries that suffered from a larger negative demand shock experienced more exit and also had higher increases in the markup.
Research in Progress
The Transmission of Liquidity Shocks Through Firm-to-Firm Shareholding Network (with Robert Townsend and Wu Zhu)
Abstract: In both developing and developed economies, it has become a common phenomenon that non-financial firms borrow from banks to invest in financial assets. In this paper, we focus on non-financial corporate borrowers holding equity shares of their subsidiaries and study how that structure affects transmission of liquidity shocks. We first document the existence of an extensive firm-to-firm shareholding network with a proprietary data set from China. Using the 2006 urban bank deregulation as an exogenous shock to firm liquidity, we find that the subsidiaries with no bank loans are significantly affected by the urban bank deregulation: their profit margins decline with the credit outflow from local banks and increase with the credit inflow from banks locating in other cities. We then show that a model with heterogeneous borrowing constraints can rationalize the findings in the data. Non-financial corporate borrowers use the equity shares of other companies as a buffer for their liquidity shocks. We argue that the firm-to-firm shareholding network can amplify liquidity shocks from the banking sector by transmitting the shocks from non-financial firms to their subsidiaries.
Non-financial Firms as Financial Intermediaries: Evidence from a Real Estate Boom