Do Subsidies Matter in Productivity and Profitability Changes?

with S. C. Kumbhakar and G. Lien, Economic Modelling, 2023, 123, 106264

Why should the producers be subsidized? What are the contributions and channels of subsidies in total factor productivity (TFP) and profitability changes? We address these in a novel way by decomposing TFP and profitability changes into technical change, scale economies, subsidies, input and output misallocations, and inefficiency. A battery of models is deployed to answer these questions, instead of using a single model as done in past studies. First, we use both parametric and nonparametric approaches and estimate them treating subsidies as either exogenous or endogenous. Second, we reexamine both approaches with and without inefficiency. Third, we check the robustness of results across different models using a panel of Norwegian farms. The empirical results show an overall increase of 2.3% per annum in profitability in which the subsidy, scale, and inefficiency components contributed, on average, positively. It is important to note that the magnitude of these components varies across models.

Do Institutions Matter for Economic Growth?

with S. C. Kumbhakar, International Review of Economics, 2022, 69, 465-485

Using a unique data set assembled from several sources, we examine the effects of democracy, corruption, and economic freedom on economic growth for over one hundred countries. To allow for heterogeneous effects, we use a quantile regression approach. Our results support some findings in the literature, but also provide some new conclusions. In many cases, quantile regression estimates are quite different from those from GMM. We find that the positive effect of democracy is lower for the countries with a higher growth rate of GDP per capita, which may sound counter-intuitive to conventional wisdom. Likewise, we find that corruption "sands the wheels" ("greases the wheels") for the lowest (highest) GDP per capita growth countries. Economic freedom shows a positive effect on GDP per capita growth rate. Our results suggest that since democratic status is hard to change in the short run, certain current corruption control measures as well as economic freedom adjustment policies may be reconsidered, especially among the fastest and slowest growing countries.

Do Subsidies Increase Firm Productivity? Evidence from Chinese Manufacturing Enterprises 

with M. Jin and S. C. Kumbhakar, European Journal of Operational Research, 2022, 303(1), 388-400

This paper examines the effect of government subsidies on firm-level productivity. The subsidy-promoting policies are oftentimes justified on the ground that subsidies increase the recipient firms' innovation and productivity. We develop a novel (semiparametric) method to structurally identify the firm-level productivity in the presence of subsidies. Unlike previous studies, we assume that subsidies are endogeneous. To correct for the endogeneity problem we use a switching regression in our semiparametric production function. Our method provides an improved framework for estimating the production function with endogenous and/or censored variables. We apply our method to study the effect of subsidies on firm-level productivity in Chinese machinery industry, using a panel data from 1998 to 2007. We find strong empirical evidence that subsidies have a positive effect on firms' persistent productivity. Subsidies may allow firms to invest more on research and development (R&D) and thus improve productivity. Using the available R&D data, we find evidence to support this explanation that more subsidies are associated with higher R&D investment. We also carry out a decomposition analysis to separately examine the subsidy effect on output via the input channel and the persistent productivity channel. Opposite effects are found from the two channels and overall subsidies have a positive effect on a firm's output.

Estimation of Technical Change: Direct Semi/nonparametric Approaches

with S. C. Kumbhakar and S. Zhao, Economics Letters, 2021, 199, 109734

This paper introduces some novel approaches to formulate and estimate technical change nonparametrically in a variety of cases without estimating the underlying production technology usually specified by a production, cost, revenue or transformation function. The binding theme in all these formulations of technical change is the use of first-order conditions of profit maximization and cost minimization. The technical change measures are observation-specific due to their nonparametric nature.

Working Papers

Is Output Growth of Chinese Manufacturing Input-Driven? 

with S. C. Kumbhakar, revise and resubmit at Empirical Economics

Production function is estimated not only in economics but also in many other fields such as management, operations research, and engineering. In this paper, we focus on the components of output growth to examine whether output growth is primarily input driven or attributed to productivity change which results from random persistent shocks that are either known or predictable to only the producers. More specifically, we examine growth components based on quasi-fixed and variable inputs and productivity change, treating variable inputs as endogenous. If output growth is input driven, then one can argue that investment in the use of more inputs is beneficial. On the other hand, if the main driver is productivity, then more resources may be devoted to employee training, education, R&D, etc. Instead of applying a Cobb-Douglas production function that is predominantly used in the literature, we employ a translog production function to add flexibility. We showcase our theoretical framework with Chinese manufacturing as an empirical exercise.

Trade and Productivity in the Presence of Subsidy: A Firm Level Analysis

This paper investigates the relationship between trade status and productivity with consideration of governmental subsidies at the firm level. The previous literature has documented that international trade does affect a firm's productivity in different ways. Firms which import tend to have a higher productivity than those who only use inputs produced domestically. Export behavior also benefits firms in terms of producing more efficiently. Two-way traders who both import and export typically enjoy a trading premium when generating a higher level of output. In addition to reexamining the trade-production linkage, we involve governmental subsidies into the analysis because subsidies are important in a firm's production process. Using a combined data set of computer and peripheral industry from China, we find that on average trading is beneficial to the production outcome of manufacturing firms. However, the effect of subsidies within this association depends on the subsidized amount and an extremely high subsidy might harm a firm's trade-production premium.

Export and Productivity: A Semiparametric Smooth Coefficient Approach

with S. C. Kumbhakar

To a large extent, productivity drives economic well-being of a society. The major literature shares a common perspective that there exists a positive linkage between firm's export behavior and productivity level for most countries. However, researchers have found that firms in China show a negative export premium of productivity. In this project, we revisit the the export-productivity puzzle in the Chinese manufacturing sectors. We use firm age, size, location and ownership as factors affecting export assignment. The potential endogeneity of export is formally tested and confirmed with a testing device. This endogeneity is therefore taken care of using a recently proposed estimation procedure. We utilize the Chinese Industrial Enterprises Database which is an unbalanced panel data spanning from 1998 to 2007 to carry out our analysis. In this paper, we limit the discussion to manufacturing firms only since they are most relevant to productivity study. We find that exports decrease output/productivity in the Chinese manufacturing industries, which echoes with the previous studies.

Heterogeneous Effects of Income on Democracy under Different Colonizers - Comment on Income and Democracy: Comment

with S. C. Kumbhakar

This paper undertakes both a narrow and wide replication of the heterogeneity in effects of income on democracy considered by Cervallati et al. (2014). By further dividing the sample, we show that within colonies, the effects of income on democracy vary: statistically negative for the former French, British, German, and Danish colonies, but statistically insignificant for the other colonies. Contrary to their conclusion, there is no statistical evidence that the heterogeneous effects are related to colonial history and early institutions. Our findings are robust to the use of estimation techniques.

Work in Progress

Firm Subsidies and Factor Use

with K. Sun and T. B. Triebs

Analyzing Firm Level Manufacturing Performance in U.S. Agricultural and Food Industries

with S. Steinbach