Exit Friction, Firm Selection and Trade Reform

Topic:

Exit Friction, Firm Selection and Trade Reform

Time&Date: 

15:00-16:15 pm, 2019/4/19 (Friday)

Venue:

Room 619, Teaching A

Speaker:

 Prof. Jiandong Ju (Tsinghua University)

This paper highlights the importance of incorporating exit friction, i.e. cost upon firm closure, into the analysis of firm dynamics and trade reform. Selection of firms through entry and exit is crucial for aggregate efficiency and benefits from trade. The exit friction, however, hampers firm selection by preventing unproductive yet large firms from exiting, meanwhile, discouraging small and productive firms out from increasing size. In this paper, we build a dynamic model with heterogeneous firms and exit cost related with firm size in an open economy. Exit cost reduces firm turn rate and weakens the correlation between firm size and productivity. We estimate the model to Chinese manufacturing firm data, and find the exit cost is around 30% of annual wage per employee. Counterfactual analysis shows that if exit was frictionless, the increase in average productivity would become four times larger during the trade reform. Using Chinese manufacturing firm data, we show reduced form patterns consistent with the model predictions.