Tax Law Changes, Income Shifting and Measured Wage Inequality: Evidence from India

We use a large dataset covering all registered plants in the manufacturing sector in India over the period 1986 to 1995 to examine the effects of a 1992 income tax law change that eliminated the double taxation of wages paid to partners in partnership firms. This tax law change provides a unique opportunity to identify the effects of tax policy changes on firm behavior in a developing country context. Since the change provided incentives for shifting income from wages to profits, it also has important implications for certain measures of wage inequality. We find an immediate and pervasive response by partnership firms to the tax law change, reflected in a significant shifting of income from profits to managerial wages. Since about 50 percent of registered manufacturing plants are incorporated in the form of partnerships (including most family-run businesses), income shifting by these firms could have a significant impact on measured wage inequality. We find a sizeable jump in the mean and median relative wage of skilled workers (which includes managers and partners) following the tax law change in 1992. This sudden increase in measured wage inequality follows major trade liberalization and deregulation reforms announced earlier (in July 1991). We find that the income shifting induced by the tax law change explains almost all of the observed increase in measured wage inequality following these reforms. This finding is robust to inclusion of controls for a number of other potential sources of post-liberalization increases in wage inequality. Our results show that firms respond strongly to tax incentives for income shifting, and highlight the need to control for the potential effects of tax incentives in studies of wage inequality.

Estimating Lost Output from Allocative Inefficiency, with an Application to Chile and Firing Costs

We propose a new measure of allocative efficiency based on unrealized increases in aggregate productivity growth. We show that the difference in the value of the marginal product of an input and its marginal cost at any plant - the plant-input "gap" - is exactly equal to the change in aggregate output that would occur if that plant changed that input's use by one unit. The mean absolute gap across plants for any input can then be interpreted as an approximation to the gain to society that would occur if every plant had a one-unit change in that input in the efficient direction, holding everything else constant. We show how to estimate this average gap using plant-level data for 1982-1994 from Chilean manufacturing, a sector largely viewed as being one of South America's least distorted. We find the gaps for blue and white collar labor are quite large in absolute value and imply that a one-unit move in the correct direction for blue collar would increase aggregate value added by almost 0.5%. We also find that the gaps for blue and white collar workers are increasing over time while the gaps for materials and electricity are not. The timing of the two separate increases in firing costs and the sharpest increases in the labor gaps is suggestive that the increases in average within-firm labor gaps may be related to the increases in severance pay.

The effect of financial development on the investment cash flow relationship: cross-country evidence from Europe

We investigate financing constraints in a large cross-country data set covering most of the European economy. Firm level investment sensitivity to cash flow is used to identify financing constraints. We find that the sensitivities are significantly positive on average, controlling for country and industry fixed effects, as well as firm level controls. Most importantly, the cash flow sensitivity of investment is lower in countries with better-developed financial markets. This suggests that financial development may mitigate financial constraints. This effect is weaker in conglomerate subsidiaries, which are likely to have access to internal capital markets and depend less on the outside financial environment, and possibly for firms in industries with highly liquid assets as well. This result sheds light on the link between financial and economic development. JEL Classification: , E44, G31, L10Europe, financial constraints, Financial Development, Investment

Job Security Does Affect Economic Efficiency: Theory, A New Statistic, and Evidence from Chile

The extensive empirical macro- and micro-level evidence on the impact of job security provisions is largely inconclusive. We argue that the weak evidence is a consequence of the weak power of statistics used, which is suggested by a dynamic theory of plant-level labor demand that we develop. This model speaks clearly on one issue: firing costs drive a wedge between the marginal revenue product of labor and its marginal cost. We examine changes in this gap as our test statistic. It is easy to compute and has a welfare interpretation. We use census data of Chilean manufacturing firms for the years 1979-1996 to look for real effects induced by two significant increases in the costs of dismissing employees. Similar to previous findings in other data, the traditional labor demand statistics provide little evidence of a negative impact from increases in firing costs. While we find no evidence that gaps increase for inputs that are not directly affected by firing costs, we find large and statistically significant increases in the mean and variance of the within-firm gap between the marginal revenue product of labor and the wage for both blue and white collar workers.

Productivity, quality and exporting behavior under minimum quality constraints

We develop a model of international trade with two sources of firm heterogeneity: "productivity" and "caliber". Productivity is modeled as is standard in the literature. Caliber is the ability to produce quality using few fixed inputs. While there is no quality restriction to sell domestically, exporting requires the attainment of minimum quality levels. Compared to single-attribute models of firm heterogeneity emphasizing either productivity or the ability to produce quality, our model provides a more nuanced characterization of firms' export behavior. In particular, it explains the empirical fact that firm size is not monotonically related with export status; there are small firms that export while there are large firms that only operate in the domestic market. The model also delivers novel testable predictions. Conditional on size, exporters sell products of higher quality and at higher prices, they pay higher wages and use capital more intensively. We test these predictions using data on manufacturing establishments in India, the U.S., Chile, and Colombia. The empirical findings confirm the theoretical predictions.Productivity; quality; exports; firm heterogeneity

Barriers to Entry and Competitive Behavior: Evidence from Reforms of Cable Franchising Regulations

Between 2005 and 2008, nineteen of the fifty states of the U.S. reformed the franchising process for cable television, significantly easing entry into local markets. Using a difference‐in‐differences approach that exploits the staggered introduction of reforms, we find that prices for ‘Basic’ service declined systematically by about 5.5 to 6.8 per cent following the reforms, but we find no statistically significant effect on average price for the more popular ‘Expanded Basic’ service. We also find that the reforms led to increased actual entry in reformed states, by about 11.6% relative to non‐reformed states. Our analysis shows that the decline in price for ‘Basic’ service holds for markets that did not experience actual entry, consistent with limit pricing by incumbents. To control for potential state‐level shocks correlated with the reforms, we undertake a sample‐split test that finds larger declines in prices for both ‘Basic’ and ‘Expanded Basic’ services in local markets which faced a greater threat of entry (because they were close to a prominent second entrant). Our results are consistent with limit pricing models that predict incumbents respond to increased threat of entry, and suggest that the reforms facilitated entry and modestly benefited consumers in reformed states.Peer Reviewedhttps://deepblue.lib.umich.edu/bitstream/2027.42/139114/1/joie12152_am.pdfhttps://deepblue.lib.umich.edu/bitstream/2027.42/139114/2/joie12152.pd

Deadlines, Work Flows, Task Sorting, and Work Quality

We examine deadlines-induced behavior using large-scale, high frequency data on about 5 million U.S. patents and published applications. We motivate the study with a model of rational agents facing discontinuous incentives around deadline thresholds, without using time-inconsistent preferences invoked in behavioral economics models of deadline-related behavior. Consistent with our model predictions, we find notable clustering of more complex patent applications around potential deadlines at month-, quarter- and year-ends, along with a small to moderate decline in work quality around those periods.http://deepblue.lib.umich.edu/bitstream/2027.42/99757/1/1199_Sivadasan.pd

Productivity Consequences of Product Market Liberalization: Micro-evidence from Indian Manufacturing Sector Reforms

We use a new plant-level dataset to study the effect of two reforms aimed at increasing product market competition in India -- liberalization of foreign direct investment (FDI) and reduction in tariff rates. First, we examine the effect of the liberalization policies on mean plant-level productivity in the liberalized industries. We find a 23% increase in productivity level following the FDI liberalization and a 33% increase following tariff liberalization (comparing mean value added log productivity levels in 1994-95 to the pre-reform 1987-90 period). We check the robustness of these results to: (a) using alternative measures of productivity; (b) using alternative definitions of the liberalization variable; and (c) inclusion of controls to address possible bias from the selection of industries into liberalization regimes. The tariff liberalization effect is generally robust; the FDI liberalization effect is 14%-16% when controlling for non-random selection. Next, we examine aggregate productivity growth in liberalized industries; we find a 16% (15.6%) increase following FDI (tariff) liberalization. This increase appears to be driven by improvement in intra-plant productivity growth, with a small role for re-allocation. Finally, we examine who benefited from the productivity gains; we find that the major beneficiaries were wholesale consumers (in the form of relatively lower wholesale output prices in the liberalized sectors).http://deepblue.lib.umich.edu/bitstream/2027.42/49240/1/1062-Sivadasan.pd

Locked in? The Enforceability of Covenants Not to Compete and the Careers of High-Tech Workers

We examine how the enforceability of covenants not to compete (CNCs) affects employee mobility and wages of high-tech workers. We expect CNC enforceability to lengthen job spells and constrain mobility, but its impact on wages is ambiguous. Using a matched employer-employee dataset covering the universe of jobs in thirty U.S states, we find that higher CNC enforceability is associated with longer job spells (fewer jobs over time), and a greater chance of leaving the state for technology workers. Consistent with a “lock-in” effect of CNCs, we find persistent wage-suppressing effects that last throughout a worker’s job and employment history.http://deepblue.lib.umich.edu/bitstream/2027.42/136096/1/1339_Chang.pd