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Journal article
Firm Productivity Differences From Factor Markets
Wenya Cheng and John Morrow
March 2018

Journal of Industrial Economics 66(1), 2018
DOI: 10.1111/joie.12165

We model firm adaptation to local factor markets in which firms care about both the price and availability of inputs. The model is estimated by combining firm and population census data, and quantifies the role of factor markets in input use, productivity and welfare. Considering China's diverse factor markets, we find that within an industry interquartile labor costs vary by 30–80%, leading to 3–12% interquartile differences in TFP. In general equilibrium, homogenization of labor markets would increase real income by 1.33%. Favorably endowed regions attract more economic activity, providing new insights into within‐country comparative advantage and specialization.

DOI: 10.1111/joie.12165