Marketization，Community Networks in Labor Market and Resource Misallocation within Cities

Abstract

The growth of aggregate TFP depends not only on technological progress but also on the optimal allocation of production factors. Hsieh and Klenow（2009）developed a monopolistic competition framework, and found out that there would exist large dispersion of firms’ TFPR when resources could not be reallocated from low-productivity plants to high-productivity plants due to price distortion. Using the data of Chinese manufacturing firms to estimate this model, they found that if the allocation efficiency of capital and labor in China was the same as in the US, aggregate TFP would be boosted by 30%–50%.Based on this groundbreaking paper, a large number of literatures have studied resource misallocation in China from the perspective of factor market distortions and government interventions, while little attention has been paid to the role of informal institution. However, community networks based on strong interpersonal ties such as kinship, geographical proximity, common educational or vocational experiences play an important role in the labor market, which have a profound effect on labor resource allocation. Traditionally, those networks are linked to nepotism, rent-seeking, corruption and market-segmentation. However, recent Development Economics views them as a supplement for market imperfection: People connected with strong ties can share recruiting information, and multilateral reputation can make commitments credible, which alleviates market failure such as adverse selection, moral hazard and incomplete contract.Zuo and Li（2017）estimated the city-level index of community networks, and examined its effect on firms’ TFP with various degrees of marketization, which to some extent involve resource misallocation within cities. However, we find that resource misallocation within cities may be more serious than inter-cities by decomposing all the variance of industry-level TFPR. And this paper gives it an explanation from the combination of community networks and marketization. The research shows that community networks mitigate resource misallocation in areas with low degree of marketization. However, in areas with high degree of marketization, community networks reduce the efficiency of resource allocation. By substituting the marketization index for its sub-indexes, the coefficient estimation is consistent with the theoretical hypothesis; and the heterogeneity test shows that these effects are more significant in industries with high barriers to entry and exit, capital-intensive industries and technology-intensive industries.The possible contributions of this paper are as follows: （1）The combination of community networks and marketization provides a new explanation for resource misallocation within cities in China.（2）New Institutional Economics emphasizes the interaction and common role of formal and informal institutions in the process of economic transformation and development. This paper studies the problem of resource misallocation in China from this perspective, which not only enriches the literature of resource misallocation, but also provides new evidence for the theory of Institutional Economics and Development Economics.