Intellectual Property Rights Protection and Self-Selection into Entreneuership: Evidence from China
(March, 2024) - with Ruiyang Hu, Mingqin Wu, and Yibai Yang.
Abstract. This study explores the impact of intellectual property rights (IPR) protection on entrepreneurial decisions. Leveraging household survey data and the staggered rollout of Intellectual Property Rights Demonstration Cities (IPRDCs) program in China, we identify a robust, positive impact of strengthened IPR protection on the probability of individuals pursuing self-employment. In addition, we uncover that stronger IPR protection is associated with a lower threshold of individual attributes necessary for venturing into entrepreneurship. These entrepreneurial attributes include age, education, social status, and access to social networks. This study primarily investigates two plausible mechanisms that may propagate the IPRDC policy shock. First, we demonstrate that IPRDC policy leads to an improved legal environment, which can reduce the risk of intellectual property infringements, thereby shielding the profit flows accruing to ordinary business proprietors. Second, while enhanced IPR protection may not ease the financial constraints for aspiring entrepreneurs, it fosters technology progress, which in turn may reduce the barriers for business start-ups. These findings indicate that the mechanisms through which IPR protection stimulates entrepreneurial activities are substantially distinct from those of land and broader property rights protection.
Effects of Monetary and Fiscal Policies on Firm Size distribution and Economic Growth
(December, 2023) - with Ruiyang Hu.
Abstract. This study develops an endogenous growth model featuring heterogeneous firms, financial constraints, and government spending on productive infrastructure development and non-productive public goods. We reveal distinct effects of monetary and fiscal policies on firm size distribution. Our analytical results suggest that higher interest and corporate income tax rates favor incumbent firms, whereas their impact on the entry rate is ambiguous. Numerical simulations using US data indicate that increased interest or tax rates can promote growth if innovative firms sufficiently benefit from infrastructure development. However, the impact of tax rate on market entry is inverted U-shaped.
Inflation and Income Inequality in an Open Economy Model with Liquidity Constraints on R&D
(October, 2023) - with Ruiyang Hu, Jian Wang and Yibai Yang.
Abstract. This study explores the long-run effects of inflation on income inequality in an open-economy Schumpeterian growth model with heterogeneous households, firm-level innovation, and cash-in-advance constraints on R&D investment. We find that the relation between domestic inflation and income inequality depends on the global real interest rate. Specifically, income inequality monotonically increases with domestic inflation if the influence of a country’s technology growth on the global real interest rate is low, whereas it displays a U-shaped pattern when the influence is sufficiently high. In contrast, foreign inflation always reduces domestic income inequality by stifling domestic economic growth. These predictions are supported by our quantitative model calibrated to the US and eurozone economies and empirical results using cross-country data.
Unlocking Innovation: The Impact of Free Trade Zone on Corporate Innovation in China
(July, 2023) - with Ruiyang Hu, Chen Yin and Sili Zhou.
Abstract. If the domestic market operates under an inefficient economic structure and policies, access to foreign markets can lead to long-term benefits. In this paper, we examine the effect of Free Trade Zones (FTZs), a progressive trade liberalization program, on corporate innovation. Using difference-in-differences and regression discontinuity design, we find that firms operating in FTZs experience significant increases in their innovation output. These positive effects are attributed to the easing of financial constraints, increased market competition, and exposure to foreign markets. Our empirical findings are rationalized by a simple Schumpeterian model with endogenous quality improvement, and provide implications for policymakers to promote domestic firm growth in the global marketplace.
The Unintended Consequences of Relaxing Birth-Quotas: Theory and Evidence
(February, 2023) - with Zhangfeng Jin and Shiyuan Pan
Abstract. This study examines the impact of easing birth quotas on fertility transition, considering both extensive and intensive margins. Employing an extended Barro-Becker model, we anticipate asymmetric effects on fertility rate based on household preferences. Utilizing a distinctive two-child policy in China that allowed eligible couples to have a second child, combined with a difference-in-differences framework, our analysis reveals a notable increase in second-child births following the relaxation of birth quotas. However, this positive outcome is counterbalanced by a discernible reduction in first-child births. The observed decline or postponement in first childbearing is linked, in part, to the rising costs associated with child rearing, aligning with our theoretical predictions. Consequently, our findings advocate for a nuanced policy approach. Instead of universally relaxing or abolishing birth quotas, policymakers should prioritize initiatives that address the financial burdens of child rearing faced by prospective parents. This targeted strategy is posited to more effectively enhance overall fertility rate.
Optimal R&D Subsidies in a Two-Sector Quality-Ladder Growth Model
(April, 2020) - with Dilip Datta, Tapas Mishra and Yibai Yang.
Abstract. This study develops a two-sector quality-ladder model with semi-endogenous growth to analyze the welfare comparison between a policy regime in which R&D subsidies are differentiated across sectors and another policy regime in which R&D subsidies are uniformly implemented. The findings of this study are as follows. First, sector-specific optimal R&D subsidies are decreasing in both the markup of firms and the degree of R&D duplication externality. Second, general optimal R&D subsidies are a weighted average of sector-specific optimal R&D subsidies and also depend on the market sizes of the sectors, which is in contrast to the sector-specific policy design. Finally, sector-specific optimal R&D subsidies can be more welfare-enhancing than general optimal R&D subsidies only if the sector that grows fast (slowly) possesses a smaller (larger) market size. The model is calibrated to the US economy and the numerical investigation confirms our theoretical results on the welfare difference between the two regimes. Moreover, our empirical investigation for the case of US 3-digit manufacturing industry broadly supports our claims.