Trade liberalization, agency problem and aggregate productivity
European Economic Review, 2019, vol. 111, issue C, 421-442
Evidence shows that trade liberalization mitigates the agency problem inside firms that have production inefficiencies and incentivizes these firms to improve management quality. In order to strengthen our understanding of this phenomenon, I propose an industry equilibrium trade model with heterogeneous firms. When an economy opens up to trade, managers of the least productive surviving firms are incentivized to exert more effort, although they face shrinking market size in the open economy. This leads to improved productivity within these firms. I then show that managerial incentives have a non-monotonic impact on the aggregate productivity gains from an episode of trade liberalization. Finally, I calibrate the model using plant-level data from Colombia, and find that the interaction between managerial incentives and trade liberalization has a quantitatively sizable effect on the productivity gains from trade.
Keywords: Trade liberalization; Firm productivity; Separation of ownership and control; Managerial incentives (search for similar items in EconPapers)
JEL-codes: L22 L23 D23 F12 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:111:y:2019:i:c:p:421-442
Access Statistics for this article
European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer
More articles in European Economic Review from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().