Download or read book Essays on Firms in Developing Countries written by Jie Bai (Ph. D.) and published by . This book was released on 2016 with total page 231 pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis consists of three chapters on microeconomic issues of firms in developing countries and the impact of government policies on business growth. The first chapter examines firms' incentive to establish a reputation for quality. A key problem in developing countries is the lack of reliable provision of high quality goods and services. I designed an experiment to understand this phenomenon in a setting that features typical market conditions in a developing country: the retail watermelon market in a major Chinese city. I begin by demonstrating empirically that there is substantial asymmetric information between sellers and buyers on sweetness, the key indicator of quality for watermelons, yet sellers do not sort and price watermelons by quality. I then randomly introduce one of two branding technologies into 40 out of 60 markets-one sticker label that is widely used and often counterfeited and one novel laser-cut label. I track sellers' quality, pricing and sales over an entire season and collect household panel purchasing data to examine the demand side's response. I find that laser branding induced sellers to provide higher quality and led to higher sales profits, establishing that reputational incentives are present and can be made to pay. However, after the intervention was withdrawn, all markets reverted back to baseline. To rationalize the experimental findings, I build an empirical model of consumer learning and seller reputation. The results indicate that information frictions and fragmented markets lead to significant under-provision of quality in this setting. Though there is a high demand for quality, trust could take a long time to establish under the existing branding technology, which makes reputation building a low return investment. While the new branding technology enhances consumer learning, small individual sellers do not have the incentive to invest in this technology due to their small market size and market competition. The second chapter (co-authored with Seema Jayachandran, Edmund J. Malesky and Benjamin Olken) considers how local governments' bribe extraction could interact with firms' growth. We propose a model in which government officials' choice of how much bribe money to extract from firms is modulated by inter-jurisdictional competition. The model predicts that economic growth decreases the rate of bribe extraction under plausible assumptions, with the benefit to officials of demanding a given share of revenue as bribes outweighed by the increased risk that firms will move elsewhere. A second prediction is that the negative effect of growth on bribery is larger if firms are more mobile. We find empirical support for these predictions. In particular, we employ two instrumental variables strategies-one based on growth in a firm's industry in other provinces within Vietnam and another based on industry growth in neighboring China and find that growth causes a decrease in bribe extraction. Our results suggest that as poor countries grow, corruption could subside on "its own." Consistent with the model's predictions, we find that the effect is for firms whose property rights to their land are transferable and who have operations in multiple provinces, two proxies for geographic mobility. The third chapter examines the impact of internal trade barriers on firms' performance and export activities. It is well known that various forms of non-tariff barriers exist among Chinese provinces. However, empirically, it is difficult to measure these barriers because they can take many forms. I take advantage of an export VAT rebate policy reform in 2004 as a natural experiment to identify the existence of internal trade barriers and study the impact on TFP and resource allocation. In particular, as a result of shifting tax rebate burdens, the 2004 reform leads to a greater incentive for the provincial governments to block the domestic flow of non-local goods related to exporting. I find that foreign trade companies in the coastal region become more "inward-looking" in the years after the reform, consistent with rising local trade barriers. The value of exports through intermediaries grows less in the inland region relative to the coastal region, and the negative effect is larger in inland provinces with greater exposure to the reform, measured using baseline reliance on trade through intermediaries. I extend the standard open-economy heterogeneous firm model by adding an intermediary sector as in Ahn, Khandelwal and Wei (2011) but with a new focus on the intermediary's role of domestic sourcing. The model can be used to analyze general equilibrium effects, examine firms' entry and exit into exporting, and quantify the distortion on TFP.