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

The quality-complementarity hypothesis: theory and evidence from Colombia

This paper presents a tractable formalization and an empirical investigation of the quality-complementarity hypothesis, the hypothesis that input quality and plant productivity are complementary in generating output quality. We embed this complementarity in a general-equilibrium trade model with heterogeneous, monopolistically competitive firms, extending Melitz (2003), and show that it generates distinctive implications for two simple, observable within-sector correlations - between output prices and plant size and between input prices and plant size - and for how those correlations vary across sectors. Using uniquely rich and representative data on the unit values of outputs and inputs of Colombian manufacturing plants, we then document three 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. industries. The predicted and observed correlations between export status and input and output prices are similar to those for plant size. We present additional evidence that market power of either final-good producers or input suppliers does not fully explain the empirical patterns we observe. These findings are consistent with the predictions of our model and difficult to reconcile with alternative models that impose symmetry or homogeneity of either inputs or outputs. We interpret the results as broadly supportive of the quality-complementarity hypothesis

Comparing Students to Workers : The Effects of Social Framing on Behavior in Distribution Games

To investigate the external validity of Ultimatum and Dictator game behavior we conduct experiments in field settings with naturally occurring variation in "social framing." Our participants are students at Middlebury College, non-traditional students at Kansas City Kansas Community College (KCKCC), and employees at a Kansas City distribution center. Ultimatum game offers are ordered: KCKCC > employee > Middlebury. In the Dictator game employees are more generous than students in either location. This indicates that workers behaved distinctly from both student groups because their allocations do not decrease between games, an effect we attribute to the social framing of the workplace

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

Enlisting Employees in Improving Payroll-Tax Compliance: Evidence from Mexico

Non-compliance of firms with tax regulations is a major constraint on state capacity in developing countries. We focus on an arguably under-appreciated dimension of non-compliance: under-reporting of wages by formal firms to evade payroll taxes. We develop a simple partial-equilibrium model of endogenous compliance by heterogeneous firms to guide the empirical investigation. We then compare two independent sources of individual-level wage information from Mexico--firms' wage reports to the Mexican social security agency and workers' responses to a household labor-force survey--to investigate the extent of wage under-reporting and how it responded to an important change in the social security system. We document that under-reporting by formal firms is extensive, and that compliance is better in larger firms. Using a difference-in-differences strategy based on the 1997 Mexican pension reform, which effectively tied pension benefits more closely to reported wages for younger workers than for older workers, we show that the reform led to a relative decline in under-reporting for younger workers. Within metro area/sector/firm size cells, the decline in under-reporting was greater in cells initially employing a younger workforce on average. The empirical patterns are consistent with our theoretical model and suggest that giving employees incentives and information to improve the accuracy of employer reports can be an effective way to improve payroll-tax compliance

Enlisting Workers in Monitoring Firms: Payroll Tax Compliance in Mexico

Non-compliance of firms with tax regulations is a major constraint on state capacity in developing countries. We focus on an arguably under-appreciated dimension of non-compliance: under-reporting of wages by formal firms to evade payroll taxes. Comparing wage distributions for similar sets of workers in the administrative records of the Mexican social security agency and a household labor-force survey, we document extensive under-reporting of wages. We further argue that the 1997 Mexican pension reform had a differential effect by age on the incentives of workers to ensure that their wages were reported accurately. Using a difference-in-differences strategy, we present evidence that the increase in the incentive for workers to ensure accurate reports led to a significant decline in under-reporting. The results suggest that enlisting workers in monitoring their employers is an effective way to increase payroll tax compliance

Exports and Within-Plant Wage Distributions: Evidence from Mexico

In many developing countries, increasing international integration has been accompanied by rising wage inequality, and traditional Heckscher-Ohlin models, which rely on between-sector reallocations to link trade and labor-market outcomes, are difficult to reconcile with this pattern (Goldberg and Pavcnik 2007). Recently, researchers have proposed a number of potential within-sector explanations based on the behavior of heterogeneous firms, involving technology choice, quality upgrading, search and bargaining, or fair wages, among other mechanisms. There is evidence at the plant level to support a within-sector link between trade and inequality. For instance, Verhoogen (2008) finds that initially larger, higher-productivity Mexican plants had higher export propensity and wages in cross-section in 1993 and that they were more likely to increase exports and wages in response to the late-1994 devaluation of the peso. The shock to exporting thus arguably increased dispersion in wages between plants within sectors. At the plant level, however, many of the proposed within-sector mechanisms carry similar observable implications. Distinguishing among the various mechanisms will require moving to a lower level of disaggregation, and exploiting information at the level of individual workers within plants. In this short article and the longer article to which it is a companion (Frías, Kaplan, and Verhoogen 2011), we use employer-employee data from Mexico and an identification strategy from Verhoogen (2008) to examine the effects of exporting on wage outcomes that are not available in standard plant-level datasets. In Frías, Kaplan, and Verhoogen (2011), we estimate the effect of exporting on wage premia, defined as wages above what individual workers would expect to earn elsewhere in the labor market. Wage premia are estimated as plant effects, controlling flexibly for individual heterogeneity (and allowing the return to worker ability to vary over time), implicitly assuming that the plant effect is the same for all employed workers. In this short article, by contrast, we do not attempt to control for worker heterogeneity, but instead focus on the effect of exporting on the shape of within-plant wage distributions. As we show in more detail below, we find that exporting has little effect on wages at the low end of the wage spectrum within plants, and that it raises within-plant wage dispersion, but not uniformly between all quantiles. The results are consistent with, but add important qualifications to, the finding of Verhoogen (2008) in plant-level data that exporting raised the ratio of white-collar to blue-collar average wages. This article is related to an active theory literature on trade, matching, and organizations which has proposed a variety of mechanisms linking trade and wage distributions within firms. Recent papers using employer-employee data to investigate the consequences of trade for labor-market outcomes (without focusing on the overall within-plant distributions) include Krishna, Poole, and Senses (2011); Hummels et al. (2011); and Davidson et al. (2011); see Frías, Kaplan, and Verhoogen (2011) for a fuller literature review

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