Efficiency Gains from Information and Communication Technology: A Spatial Analysis of Firm Geographic Expansion, November 2022
Previously circulated under the title "Information and Communication Technology and Firm Geographic Expansion"
Urban Economics Association Student Prize (Honorable Mention)
This paper studies a novel source of efficiency gains from information and communication technology (ICT): ICT widens firms’ geographic span of control by reducing their internal communication costs. Using confidential US Census data, I document that firms with more advanced technology have both higher within-firm communication and larger geographic coverage. Using a quantitative spatial equilibrium model in which firms endogenously adopt ICT, choose multiple production locations, and trade domestically, I illustrate that multi-unit production is crucial in shaping the geographic distribution of efficiency gains from ICT improvement. I validate the model by exploiting natural experimental variation from the Internet privatization of the early 1990s. I estimate that privatization led to an 8.5% increase in the number of establishments per firm. Accounting for the effects of ICT on within-firm communication and establishment location, the model quantifies that privatization led to an overall efficiency gain of 1.3%. Finally, due to spillovers through multi-unit firms, the model shows that coordinated policies across locations have larger effects on local efficiency than uncoordinated policies.
Tax Policy and Lumpy Investment: Evidence from China VAT Reform
(with Zhao Chen, Zhikuo Liu, Juan Carlos Suarez-Serrato and Daniel Yi Xu), Accepted, Review of Economic Studies
A universal fact of firm-level data is that investment is lumpy: firms either replace a considerable fraction of their existing capital (spike) or do not invest at all (inaction). This paper incorporates the lumpy nature of investment into the study of how tax policy affects investment behavior. We show that tax policy can directly impact the lumpiness of investment and that the effectiveness of tax incentives in stimulating investment depends crucially on interactions with investment frictions. We illustrate these results by studying one of the largest tax incentives for investment in recent history: China's 2009 VAT reform. Using administrative tax data and a difference-in-differences design, we document that the reform increased investment by 36% and that this effect is driven by additional investment spikes. We then simulate the fiscal cost of stimulating investment through different tax policies using a dynamic investment model that is consistent with the reduced-form effects of the reform. Policies that directly reduce the likelihood of firm inaction (e.g., investment tax credits) are more effective at stimulating investment than policies that only reduce the tax cost of investment (e.g., corporate income tax cuts).