Product quality at the plant level: Plant size, exports, output prices and input prices in Colombia

This paper uses uniquely rich and representative data on the unit values of "outputs" (products) and inputs of Colombian manufacturing plants to draw inferences about the extent of quality differentiation at the plant level. We extend the Melitz (2003) framework to include heterogeneity of inputs and a complementarity between plant productivity and input quality in producing output quality and we show that the resulting model carries distinctive implications for two simple reduced-form correlations - between output prices and plant size and between input prices and plant size - and for how those correlations vary across sectors. We then document three plant level facts: (1) output prices are positively correlated with plant size within industries, on average; (2) input prices are positively correlated with plant size within industries, on average; and (3) both correlations are more positive in industries with more scope for quality differentiation, as measured by the advertising and R&D intensity of U.S. firms. The correlations between export status and input and output prices are similar to those for plant size. These facts are consistent with our model of quality differentiation of both outputs and inputs, and difficult to reconcile with models that assume homogeneity or symmetry of either set of goods. Beyond recommending an amendment of the Melitz (2003) model, the results highlight shortcomings of standard methods of productivity estimation, generalize and provide an explanation for the well-known employer size-wage effect, and suggest new channels through which liberalization of trade in output markets may affect input markets and vice-versa

Plants and Imported Inputs: New Facts and an Interpretation

Beginning with Wilfred J. Ethier (1979, 1982), an important current of research has emphasized gains to trade from the greater availability of intermediate inputs, as opposed to the greater availability of consumption goods emphasized by Paul R. Krugman (1979) and others. It has been standard in this literature to model input varieties as symmetric, differentiated horizontally but not vertically. In contrast, anecdotal accounts, especially from developing countries, often stress the importance of gaining access to high-quality inputs on the import market. In theoretical discussions, the need to distinguish between the number of inputs and the quality of those inputs can be avoided by treating different qualities of a good as distinct varieties (see, e.g., Paul Romer 1994) or by redefining units of measurement. But in empirical work, one inherits the product categories and units in the data, and typically one must specify whether the availability-of-inputs mechanism is expected to operate through an increase in the number of input categories or through an increase in the quality of inputs within categories. Because of data constraints—in particular because of a lack of information on input and output prices in standard plant-level datasets—it has been difficult to investigate the role of input-quality differences, and recent empirical work, notably by Christian Broda, Joshua Greenfield, and David Weinstein (2006) and Pinelopi K. Goldberg et al. (2008), has tended to focus more on changes in the number of input categories than on quality differences within those categories. In this short paper, we draw on rich product level information from the Colombian manufacturing census to present a new set of facts about importing plants and input prices. The dataset is unique in that it contains detailed, representative, consistently measured information on the unit values of all inputs and outputs of plants. For the 1982–1988 period, the dataset also contains unit values separately for domestic and imported purchases of each input. As we discuss in more detail below, we interpret the new facts as suggesting that Colombian plants purchase higher-quality inputs on the import market than on the domestic market, within narrow product categories. Our empirical work has been guided in part by a theoretical framework from a related paper, Kugler and Verhoogen (2008). In that paper, we hypothesize a complementarity between input quality and plant productivity in generating output quality, and extend the model of Marc J. Melitz (2003) to accommodate it. The model predicts that, in equilibrium, more-productive plants are larger, use higher-quality inputs, produce higher-quality outputs, and are more likely to enter the export market than less-productive plants in the same industry. Using the Colombian plant census, we show that the cross-sectional correlations between a number of observable variables—output prices, input prices, plant size, and export status—as well as differences in those correlations across sectors,—are consistent with our theoretical framework and difficult to reconcile with alternative models that impose symmetry of either inputs or outputs. The distinctive aspect of the current paper is the focus on the distinction between imported and domestic inputs

Class-Size Caps, Sorting, and the Regression-Discontinuity Design

This paper examines how schools’ choices of class size and households’ choices of schools affect regression-discontinuity-based estimates of the effect of class size on student outcomes. We build a model in which schools are subject to a class-size cap and an integer constraint on the number of classrooms, and higher-income households sort into higher-quality schools. The key prediction, borne out in data from Chile’s liberalized education market, is that schools at the class-size cap adjust prices (or enrollments) to avoid adding an additional classroom, which generates discontinuities in the relationship between enrollment and household characteristics, violating the assumptions underlying regression-discontinuity research designs

Fairness and Freight-Handlers: Local Labor-Market Conditions and Wage-Fairness Perceptions in a Trucking Firm

This paper draws on evidence from an internal attitude survey in the freight-handling terminals of a unionized trucking firm to investigate the effect of local labor market conditions on employee wage-fairness perceptions. The key element of our research design is that local managers have no discretion to vary wage rates in response to local labor market conditions; local economic shocks thus generate exogenous variation in the attractiveness of the wage paid by the firm relative to employees’ options in the outside labor market. We find robust associations between two indicators of local conditions – the rate of unemployment and the wages of similar workers in the outside market – and the wage-fairness perceptions of employees in the firm, which we argue reflects a causal relationship. As an extension, we relate the changes in local conditions and fairness perceptions to changes in employee performance, as measured by the rate of disciplinary dismissals. We find suggestive evidence that increased local unemployment leads to improved employee performance, and, conditional on a particular assumption about the mechanism through which local conditions affect performance, that increases in wage-fairness perceptions lead employees to supply more effort

Organizational Barriers to Technology Adoption: Evidence from Soccer-Ball Producers in Pakistan

This paper studies technology adoption in a cluster of soccer-ball producers in Sialkot, Pakistan. Our research team invented a new cutting technology that reduces waste of the primary raw material. We allocated the technology to a random subset of producers. Despite the arguably unambiguous net benefits of the technology for nearly all firms, after 15 months take-up remained puzzlingly low. We hypothesize that an important reason for the lack of adoption is a misalignment of incentives within firms: the key employees (cutters and printers) are typically paid piece rates, with no incentive to reduce waste, and the new technology slows them down, at least initially. Fearing reductions in their effective wage, employees resist adoption in various ways, including by misinforming owners about the value of the technology. To investigate this hypothesis, we implemented a second experiment among the firms to which we originally gave the technology: we offered one cutter and one printer per firm a lump-sum payment, approximately equal to a monthly wage, that was conditional on them demonstrating competence in using the technology in the presence of the owner. This incentive payment, small from the point of view of the firm, had a significant positive effect on adoption. We interpret the results as supportive of the hypothesis that misalignment of incentives within firms is an important barrier to technology adoption in our setting

Spatial Competition in Quality

Abstract The well-studied formalism of Hotelling's classic location paradigm does not apply to the case of good quality, which by its very definition requires that all individuals agree on the ranking of goods; therefore, the notion that goods are differentiated by a 'transportation cost' is inept in vertically differentiated markets. Motivated by this observation, we analyze the determinants of product differentiation in a general equilibrium model of monopolistic competition in good quality. The model features many firms, which each hold the monopoly to produce a unique quality level of an otherwise homogenous good, as well as consumers who are heterogeneous in their valuation for quality. We document that the analogue to the transportation cost in the Hotelling model arises if the marginal cost of production is convex with respect to quality. Firms' optimal prices depend on the latter convexity and on the prices of the competitors that are adjacent in the quality space. For given firm entry, average equilibrium markups are decreasing in the density of quality-competition, but are unaffected by average productivity. Endogenizing firm's entry decision, we demonstrate that the density of competition is increasing in the market size and decreasing in average productivity. Last, we apply these insights to analyze the effect of inter-and intra-industry trade on the toughness of quality-competition, firm entry and welfare. * We would like to than