Essays on institutions and economic performance

This dissertation consists of three essays in the intersection of macroeconomics and international trade. The first essay studies the causes and consequences of the differences in the use of outsourcing across countries. I start by observing that there is considerable variation in outsourcing intensity across countries. I then show that this pattern can be rationalized in a theoretical framework that combines a Coase-Williamson view of the firm with Kiyotaki-Moore-Manova view of financial friction. The model pins down the intensity of outsourcing and shows how it varies with the financial characteristics of the suppliers. Econometric evidence reveals that the model is consistent with the features of both sectorallevel and firm-level data. The model also clarifies two conflicting mechanisms of outsourcing on productivity. Quantitative analysis reveals that both mechanisms are quantitatively significant so that the net effect on aggregate productivity is modest. My study implies that outsourcing is unlikely a significant source of cross-country differences in productivity. In the second essay, I examine how heterogeneous market power affects the quantification of resources misallocation within sector. I extend the Hsieh-Klenow framework of misallocation to allow for heterogeneous market power and use the model to study the impact of resources misallocation on India’s aggregate productivity. Quantitative results show that heterogeneous market power has a large impact on the quantification of misallocation. In particular, in the presence of heterogeneous market power, the impact of tax-related distortions on aggregate productivity is about one-seventh of the effect found by previous literature. My study implies that increasing market competition is an effective way to reduce market power and enhance aggregate productivity. The third essay studies how factors of different quality are allocated to the production chain. The essay starts by unveiling two systematic patterns in factor inputs and factor rewards along production chains. I then show that these patterns can be rationalized in a theoretical framework with heterogeneous factors. In the model, products become increasingly complex as they move along the production chain. Downstream firms hire skilled workers to process complex products. To the extent that skill is strongly complementary to the quality of physical capital, downstream firms also employ high quality capital goods. The analysis sheds light on the organization of factors along production chains