Qiao Liu's Homepage

My Must-Read List*

Ferreting out tunnneling: an application to Indian business group (Marianne Bertrand, Paras Mehta, Sendhil Mullainathan), The Quarterly Journal of Economics, 2002, 121-148.

Almost every economist studying corporate governance issues in emerging markets believes that tunnelling has been, actually is still, outrageously pervasive. However, due to its very nature, the evidence of tunneling has been extremely difficult to identify. The authors of the paper suggest a very innovation way - they study the propagation of earnings shocks across firms within a group and use it to trace out the extent of tunnelling. For example, if a firm's fundamental earnings increase by $100 but it only reports $70, then we can conclude that $30 worth of wealth has been stolen. Very clever! It is a very interesting piece of empirical work, containing insights that can been applied to other contexts as well.

By the way, Bertrand and Mullainathan have teamed up and produced several very cute empirical pieces. Their success proves that good economics paper should first of all have a good story. Complicated model and sophisticated empirical techniques only have secondary value if they fail to serve a good story. (June 4, 2004)

Financial development and intersectoral allocation: a new approach (Raymond Fisman and Inessa Love), The Journal of Finance, forthcoming.

Again, I was quite impressed by the empirical design. The authors assume that there exist common global shocks to growth opportunities and financial markets promote responsiveness to those shocks. Thus, if two countries are similar in their financial development level, they should have highly correlated growth rates across sectors. Using a country pair as the unit of observation, the authors examine how correlation of sector- level growth rates between two countries is determined by their corresponding financial development levels. The conclusion, of course, is - finance matters!

La Porta et al. have inspired numerous cross-country studies - including this one. Frankly speaking, I am a bit tired of seeing so many 'La Porta et al' type of articles on top economics and finance journals. Nevertheless, I have to admit that this piece, even though it follows the same vein, has something cuter and deeper. Job well done! (June 4, 2004)
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Market liquidity and performance monitoring (Bengt Holmstrom and Jean Tirole), The Journal of Political Economy. 1993, 678-708.

I did not like the paper when I first read it. The model is quite messy and the authors pretty much put together something they need in order to make a point. Since I was working on a similar model and the referee insisted that our model could hardly be distinguished from the Holmstrom and Tirole one (HT hereafter), I spent lots of time reading reading and reading. It turned out the model, more important, the interpretations of the modeling results, are not that bad at all. This paper, arguably, is the first one that explores the impact of stock market on corporate behavior (incentive contract designing in this paper). If you are doing pioneering work, you are legitimately allowed to be naive - because your followers will try to help tie in the loose ends. This is exactly what happens in this paper: some assumptions are quite naive (i.e., the market liquidity depends on how much ownership the original owner retains etc.) However, I would say if you want to know how to bridge the gap between two fields in economics, especially, how to borrow insights from one field and apply it to another field, you can refer to this article. At least, it sold! It was published in JPE. (July 27, 2004)

Selling China - Foreign direct investment during the reform era (Yasheng Huang), Cambridge University Press, 2003

While almost everyone in the world, including especially those government officials in China, applauds large scale of foreign direct investment (FDI) flowing into China, Huang Yasheng delivers an awaking call. FDI might be a bad thing, if it suppresses the emergence and development of China's private sector. Using detailed statistical evidence and evidence from field studies, Huang demonstrates that it is exactly the case in China. The pattern and trend of FDIs in China clearly shows that FDIs are mainly driven by local governments, which dates its origin to a very weak institutional infrastructure in China. When people laud FDT as one of the engines of China's economic growth, they should start computing the damages brought out by such an engine and if possible, dig deeper and start to change the institutional components that make FDI an engine.

I like this book mainly because it is one of very few books that talk sense out of China's economic miracle. Although I have many reservations about some conclusive remarks made in this book, I would say that the author has been very sharp in rooting things in China's lack of strong institutional infrastructure. If the government does not work hard to fill up these missing institutional gap (clear property rights, rigorous law enforcement, effective financial intermediaries, and so on), China's economic miracle can hardly sustain. (Nov. 6, 2004)

A theory of prostitution (Lena Edlund and Evelyn Korn) The Journal of Political Economy. 2002, 181 - 214.

" I wander thro' each charter'd street, Near where the charter'd Thames does flow, And mark in every face I meet, Marks of weakness, marks of woe. But more thro' midnight streets I hear, How the youthful Harlot's curse, Blasts the new born infant's tear, And blights with plagues the marriage hearse."

Yes. It is a paper about prostitution, one of the oldest professions in the world. Prostitution is a topic economists seldom work on, maybe due to the fact that it is a provocative issue. But I guess the primary reason probably is that as economists, we do not know much about prostitution. Using our own language, we do not have 'comparative advantages'. Nevertheless, Edlund and Korn pick up this provocative topic and deliver a quite interesting piece. They build up a marriage market explanation to tackle puzzles related to prostitution. Their model is motivated by two facts about prostitution -- poor countries tend to have more prostitutes; and areas with high migration tend to have more prostitutes. They argue that wives and prostitutes are substitutes (note: a very provocative argument) and prostitution is inferior good. Therefore, when income goes up, the demand for prostitutes goes down; when the opportunity cost of prostitution goes up, the supply of prostitutes will decrease (in areas with high migration, the opportunity cost of prostitution tend to be low).

I find this paper very interesting. But I don't completely buy the story. First of all, I am not sure whether prostitution is an inferior good. In other words, I don't believe rich people are more disciplined in their family lives than poor people do. Second, using a marriage market explanation might be too single-minded. For example, in China, when some poor girls jump into this business, they are probably facing a "do it or die" situation. I am not sure when marriage prospect will be a parameter in their thinking process. Plus, for some village girls, prostitution may actually improve their marriage prospects - by moving to big cities and making some money, they might be able to enlarge their choice set.

Well, I have to admit I have made enough outrageous remarks on prostitution. It is not an area I should talk too much. Having said so, I have to say that I admire the two authors. Their work reminds people that economists do care about the real world. (Oct. 6, 2005).

* It lists the academic papers /books I have been reading and have found resourceful. It is never meant to be comprehensive and authoritative. Apology in advance for any "offending" remarks - I do not mean them at all...