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Productivity as if space mattered: an application to factor markets across China

Cheng, Wenya, Morrow, John and Tacharoen, Kitjawat (2012) Productivity as if space mattered: an application to factor markets across China. CEP Discussion Papers (CEPDP1181). Centre for Economic Performance, London School of Economics and Political Science, London, UK.

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Abstract

Optimal production decisions depend on local market characteristics. This paper develops a model to explain firm labor demand and firm density across regions. Firms vary in their technology to combine imperfectly substitutable worker types, and locate across regions with distinct distributions of workers and wages. Firm technologies which best match regional labor markets explain both productivity differences and firm density. Estimating structural model parameters is simple and relies on a two stage OLS procedure. The first stage estimates local market conditions using firm employment and regional data, while the second incorporates regional costs into production function estimation. The method is applied to Chinese manufacturing, population census and geographic data to estimate local market costs and production technologies. In line with the model, we find that labor markets which provide cost advantages explain substantial differences in firm productivity. Furthermore, regions which have lower optimal hiring costs attract more firms per capita.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk/_new/publications/series.asp?...
Additional Information: © 2012 The Authors
Divisions: Centre for Economic Performance
Subjects: H Social Sciences > HF Commerce
JEL classification: D - Microeconomics > D2 - Production and Organizations > D24 - Production; Cost; Capital and Total Factor Productivity; Capacity
J - Labor and Demographic Economics > J2 - Time Allocation, Work Behavior, and Employment Determination and Creation; Human Capital; Retirement > J24 - Human Capital; Skills; Occupational Choice; Labor Productivity
J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J30 - General
O - Economic Development, Technological Change, and Growth > O1 - Economic Development > O15 - Human Resources; Human Development; Income Distribution; Migration
R - Urban, Rural, and Regional Economics > R1 - General Regional Economics > R11 - Regional Economic Activity: Growth, Development, and Changes
Sets: Research centres and groups > Centre for Economic Performance (CEP)
Date Deposited: 01 Mar 2013 14:19
Last Modified: 16 Apr 2019 23:03
URI: http://eprints.lse.ac.uk/id/eprint/48930

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