Firm productivity and trade are well established indicators of economic growth and development. Despite this, there remain significant questions around which elements of firm organisation and market structures are the most conducive to encouraging scale and integration of firms into high-value global supply chains. Understanding the conditions that support productivity and trade will allow the forces of globalisation to be more effectively harnessed for growth in emerging markets. Today’s blog looks at three innovative studies presented at Stanford University that offer insights into the effects of tourism, managerial trust, and perceptions of pay inequality on firm productivity

Jinhage, Amanda

LSE Research Online

20/06/2017 Tourism, trust and unequal pay: Recapping the IGC-SCID conference on 'Firms, trade and development' - IGChttp://www.theigc.org/blog/tourism-trust-and-unequal-pay-recapping-the-igc-scid-conference-on-firms-trade-and-development/ 1/5Authors Amanda JinhagePolicy EconomistIGC London Hub,Research Programme,ResearcherPublished on: 14 Jan 2016Countries: InternationalResearch themes: Firms, Trade Tourism, trust and unequal pay:Recapping the IGC-SCIDconference on ‘Firms, trade anddevelopment’Firm productivity and trade are wellestablished indicators of economic growthand development. Despite this, there remainsigniﬁcant questions around which elementsof ﬁrm organisation and market structures arethe most conducive to encouraging scaleand integration of ﬁrms into high-value globalsupply chains. Understanding the conditionsthat support productivity and trade willallow the forces of globalisation tobe more effectively harnessed for growth inemerging markets. Today’s blog looks atthree innovative studies presentedat Stanford University that offer insights intothe effects of tourism, managerial trust, andperceptions of pay inequality on ﬁrmproductivity.Together with Stanford Center for International Development(SCID), the IGC hosted a two-day conference on trade anddevelopment in November 2015. Topics covered ranged fromcredit access for small firms and farms, to trade innovations andthe role of regulatory policy in promoting sustainable andinclusive growth. With a focus on increasing the capabilities offirms and scaling up small enterprises, the conference broughtforward new perspectives and thought-provoking ideas.Below is a highlight of three of the main new facts presentedduring the conference.#Key fact 1:  Tourism can cause signiﬁcant long-termeconomic gains, beyond the immediate effects on theservice sector.Tourism is a particular form of market integration, by whichconsumers instead of goods are shipped around. With the valueof tourism exports amounting to almost as much as that ofagriculture exports in many developing countries, tourism hasgrown to become one of the most visible and fastest growingforms of globalisation for these countries.20/06/2017 Tourism, trust and unequal pay: Recapping the IGC-SCID conference on 'Firms, trade and development' - IGChttp://www.theigc.org/blog/tourism-trust-and-unequal-pay-recapping-the-igc-scid-conference-on-firms-trade-and-development/ 2/5“Despite widespread policy interest and a large scope forintervention however, the attention to the topic in the trade anddevelopment literature has been limited. Cecile Gaubert soughtto fill that gap, with her co-author Ben Faber, as she examinedthe impact of Mexico’s beach-tourism on local as well asaggregate national economic outcomes. By using high-resolution satellite data they captured variations in beachquality, such as shown in the picture below, which could beused as an instrument to measure levels of tourism. To estimatelocal economic effects, Gaubert and Faber compared theeconomic activity in areas with high levels of tourism (i.e. nicerbeaches) to areas with less or no tourism.  FIGURE 1: MAPPING BEACH QUALITYNote: Authors used satellite imagery to assess beach qualityalong the coastline. High-quality beaches (denoted by stars onthe map on the right) were used as instrumentsmeasuring tourism levels in the surrounding areas. The authors found that tourism causes large and significantlong-run local economic gains in Mexico. More specifically, a10% increase in tourism revenues led to a 2.8% increase inemployment and a 4.3% increase in nominal GDP locally.Moreover, in contrast to the existing literature on tourism anddevelopment, the authors find sizable long-run multiplier effectson manufacturing production. This meant that a 10% increasein tourism led to revenues increasing in local manufacturingGDP by 3.2%. They then interpreted these local effects throughthe lens of a quantitative economic geography model and foundthat tourism leads to significant aggregate gains in Mexican realincome per capita that are in the order of 2-3 percent.a 10% increase in tourism revenues led to a 2.8%increase in employment and a 4.3% increase in nominalGDP locally ”#Key fact 2: Low willingness to delegate and lack of trustwithin firms may explain why some firms do not grow.Empirical analysis of the US and other developed economiessupports the idea that on average, as firms mature, they tend toincrease in size and scale. This relationship is a reflection of thebasic principles of efficient markets where less productive orinefficient firms, those that fail to achieve scale, will exit themarket.20/06/2017 Tourism, trust and unequal pay: Recapping the IGC-SCID conference on 'Firms, trade and development' - IGChttp://www.theigc.org/blog/tourism-trust-and-unequal-pay-recapping-the-igc-scid-conference-on-firms-trade-and-development/ 3/5““Strikingly, this relationships is absent in firm data gathered inIndia. The majority of Indian firms remain small as they age.On average, micro-enterprises and small firms (less than 10employees) do not seem to grow substantially even after beingoperational for 10, 20 or 30 years.The lack of delegations of Indian firms can thenexplain as much as 30-40% of the observed gap in firmsize between the US and India. ”Figure 2: Plant employment by age in the cross-sectionSource: Hsieh and Klenow, 2014Ufuk Akcigit, together with his colleagues Harun Alp andMichael Peters, began looking for explanations of thisbehaviour and wondered whether such stagnant firm behaviorcould be related to the fact that few Indian firms hire outsidemanagers. Could this lack of delegation explain the slowgrowth of Indian firms?To study this behaviour, the authors model the effect of failureto delegate work to other managers which limits their ability toexpand operations, and hence limits firm sizes in the long-run.The model is based on the idea that the average entrepreneurwill have a limited amount of time at their disposal, delegationand cultivation of more managers is a means of allowingentrepreneurs to expand the amount of operations that a firmcan handle and grow. If the owner chooses not to do this, thefirm will remain small. Akcigit showed that the value of a firmdecreased with size if there is no delegation, but could continueto grow if the owner delegated some responsibilities to othermanagers. Importantly for Indian firms, willingness to delegateis low, in general, due to lack of trust in regional authoritiesand constraints from managerial human capital, rule of law andcontractual systems.the value of a firm decreased with size if there is nodelegation ”As a conclusion, Akcigit showed how this type of behaviourwould generate a very low average firm size in India at large.20/06/2017 Tourism, trust and unequal pay: Recapping the IGC-SCID conference on 'Firms, trade and development' - IGChttp://www.theigc.org/blog/tourism-trust-and-unequal-pay-recapping-the-igc-scid-conference-on-firms-trade-and-development/ 4/5“would generate a very low average firm size in India at large.Firms in the US on the other hand, which does not show anysuch lack of willingness to delegate, would theoretically able togrow with age even if they were operating in an Indian setting. The lack of delegations of Indian firms can then explain asmuch as 30-40% of the observed gap in firm size between theUS and India.#Key fact 3: Perceptions of pay inequality can reduceworker motivation and productivityA question that Supreet Kaur posed to the audience at theconference was whether workers care not only about their ownpay, but also about their pay relative to that of their co-workers. Further, if workers do indeed care about relative pay,does it affect worker effort and labor supply? Together with herco-authors Emily Breza and Yogita Shamdasani, Kaur soughtevidence on morale effects of pay inequality using a fieldexperiment with workers in low-skill manufacturing firms.Relative pay has long been an important topic in the socialsciences  as it has potentially broad implications –  for HRpolicies, for how workers sort into different firms as well as forhow flexible wage setting policies should be, to name a few.Kaur and co-authors set up a field experiment in Orissa, Indiato causally identify how workers respond to being paiddifferently from their peers. Male workers were hired toparticipate in low-skilled manufacturing tasks for a one monthperiod. Workers were sorted into groups of 3, with each groupperforming a unique production task. After a short trainingperiod, during which each workers’ baseline productivity wasmeasured, groups were randomized into two different paystructures. In some groups, all workers were paid the samewage regardless of their baseline productivity, whilst in othergroups, workers were paid differentially based on their baselineproductivity. This allowed for a comparison across groups ofworkers of the same productivity level who both earned thesame absolute wage, but differed in whether their peers werepaid differently from them.For a given absolute pay level, they found that a worker exertedless effort – his output declined by 29% – when he was paid lessthan both of his co-workers. This was also accompanied by a9% decline in attendance. These negative effects persisted overthe duration of the employment period. In contrast, they foundlittle evidence that performance improved if a worker was paidmore than both his peers.a worker exerted less effort – his output declined by29% – when he was paid less than both of his co-workers ”Finally, they showed that perceived justifications play animportant role in mitigating these negative morale effects of lowrelative pay. Within a group, when workers’ baselineproductivity levels were farther apart, they found no evidencefor negative effects of being paid less than one’s peers. The samepattern held for production tasks where peer output was moreobservable—so that workers could easily observe that their20/06/2017 Tourism, trust and unequal pay: Recapping the IGC-SCID conference on 'Firms, trade and development' - IGChttp://www.theigc.org/blog/tourism-trust-and-unequal-pay-recapping-the-igc-scid-conference-on-firms-trade-and-development/ 5/5observable—so that workers could easily observe that theirhigher paid peers were producing more output than themselves.Figure 3: Average worker production, before and after treatmentNotes: This plots the average production on each day for thelow productivity worker across both groups. The red lineindicates the treatment group where workers are paiddifferently, accordingly to baseline productivity(Heterogeneous), the blue line indicates the treatment groupwhere all workers are paid the same (Compressed). In the post-treatment period (after Day 0), we observe workers in theHeterogeneous treatment group reducing output relative to theCompressed treatment group.

Tourism, trust and unequal pay: recapping the IGC-SCID conference on ‘firms, trade and development’

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