Hongbin Cai's research while affiliated with Peking University and other places

Publications (46)

Article
We develop a theory of stock-price-based incentives even when the stock price does not contain information unknown to the firm. In our model, a manager must search for and decide on new investment projects when the market may have a difference of opinion about the quality of the firm’s investment opportunities. The firm optimally provides incentive...
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This paper studies how the pollution reduction mandates imposed by China's central government in 2001 triggered unanticipated responses from its provinces. We apply the difference-in-differences-in-differences (DDD) method to a unique dataset on industry-level activities in counties along 24 major rivers in China from 1998 through 2008. We find tha...
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We report results from a large, randomized field to study how access to formal microinsurance affects production and economic development. We induce exogenous variation in insurance coverage at the village level by randomly assigning performance incentives to the village animal husbandry worker who is responsible for signing farmers up for the insu...
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Trust is vital for market development, but how can trust be enhanced in a marketplace? A common view is that more trusting may help to build trust, especially in less developed economies. In this paper, we argue that more trusting may lead to less trust. We set up a rational expectation model in which a marketplace uses buyer protection to promote...
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This paper develops a fairly general empirical procedure to trace out the extent of profit disguising and examine the motives behind it. Applying the methodology to the National Bureau of Statistics of China (NBS) database which covers more than 20,000 large-and medium-sized industrial firms in China for 1995-2002, we find (i) there is a profit-dis...
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Many political economists believe that competition among countries—or regions within them—to attract mobile capital should discipline their governments, rendering them less corrupt and more friendly toward business. This argument surfaces repeatedly in debates over both political decentralization and globalization. We argue that it is based on an a...
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In this paper we study equilibrium refinement in signaling models. By allowing for deviations by a pool of "nearby" types, we propose a Local Credibility Test (LCT) which gives consistent solutions for any positive, though not necessarily perfect correlation between the signal sender's true types (e.g., signaling cost) and the value to the signal r...
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Analyzing data from a unique survey of managers of Chinese private firms, we investigate how family ties with firm heads affect managerial compensation and job assignment. We find that family managers earn higher salaries and receive more bonuses, hold higher positions, and are given more decision rights and job responsibilities than non-family man...
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Using the nationally representative Urban Household Income and Expenditure Survey (UHIES) conducted by the National Bureau of Statistics (NBS) of China, we document a steadily rising trend in income and consumption inequality during the period from 1992 to 2003 in urban China. Despite the rising urban inequality over time, the social welfare of urb...
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Renegotiation plays an important role in contract theory, but the empirical study of renegotiation is almost non-existent in the literature. Using a unique dataset from the Chinese banking industry, we find that the large majority of managerial incentive contracts are renegotiated after performances are realized. We develop a model of contract rene...
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We report results from a large randomized natural field experiment conducted in southwestern China in the context of insurance for sows. Our study sheds light on two important questions about microinsurance. First, how does access to formal insurance affect farmers' production decisions? Second, what explains the low takeup rate of formal insurance...
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This paper studies the urban land market in China in 2003--2007. In China, all urban land is owned by the state. Leasehold use rights for land for (re)development are sold by city governments and are a key source of city revenue. Leasehold sales are viewed as a major venue for corruption, prompting a number of reforms over the years. Reforms now re...
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We report results from a randomized natural field experiment conducted in a restaurant dining setting to distinguish the observational learning effect from the saliency effect. We find that, when customers are given ranking information of the five most popular dishes, the demand for those dishes increases by 13 to 20 percent. We do not find a signi...
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This paper develops a real options model of capital structure to understand two distinct roles played by intellectual capital in corporate financing decisions. First, intellectual capital limits a firm's debt capacity because of its low liquidation value. Second, intellec-tual capital enhances a firm's debt capacity through its positive impact on t...
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This article investigates whether market competition enhances the incentives of Chinese industrial firms to avoid corporate income tax. We estimate the effects of competition on the relationship between firms' reported accounting profits and their imputed profits based on the national income account. To cope with measurement errors and potential en...
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We examine the problem of motivating privately informed managers to engage in entrepreneurial activity to improve the quality of the firm's investment opportunities. The firm's investment and compensation policy must balance the manager's incentives to provide entrepreneurial effort and to report private information truthfully. The optimal policy i...
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Informational committees are groups of people who are designated to gather information. This article develops a simple model of committee size based on costly participation and preference heterogeneity. In a setting in which the information structure and policy preferences are both represented by normal random variables, I characterize an equilibri...
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Using a unique firm-level dataset from China's "Silicon Valley," we investigate how multinational enterprises (MNEs) affect local entrepreneurship and R&D activities upon entry. We find that R&D activities of MNEs in an industry stimulate entry of domestic firms into the same industry and enhance R&D activities of newly entering domestic firms. By...
Article
In a general auction model in which bidders’ signals are affiliated, we characterize the unique separating equilibrium in which the seller can use reserve prices to credibly signal her private information. When the buyers’ signals are independent, the optimal reserve price is shown to be increasing in the number of bidders under certain conditions....
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What determines the enforcement of deregulation reform of business activities? What are the outcomes of deregulation? We adress these questions using an episode of a drastic reform in Russia between 2001 and 2004 which liberalized registration, licensing, and inspections. Based on the analysis of micro-level panel data on regulatory burden, we find...
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We study effects of horizontal integration on firm reputation in an environment where customers observe only imperfect signals about firms' effort/quality choices. Horizontal integration leads to a larger market base for the merged firm, and thus helps reputation building with more effective punishments and better monitoring by eliminating idiosync...
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Many scholars attribute China's market reforms and the remarkable economic performance they have fostered in part to the country's political and fiscal decentralization. Political decentralization is said to have stimulated local policy experiments and restrained predatory central interventions. Fiscal decentralization is thought to have motivated...
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Entertainment and Travel Costs (ETC) is a standard expenditure item for Chinese firms with an annual amount equal to about 20 percent of total wage bills. We use this objective accounting measure as a basis to analyze the composition of ETC and the effect of ETC on firm performance. We rely on the predictions from a simple but plausible model of ma...
Article
This paper investigates whether market competition enhances firms' incentives to hide profits. We develop a theoretical model of firms' profit hiding behavior in competitive envi-ronments and derive several testable hypotheses. We then test the model using a database that covers more than 20,000 large-and-medium-sized industrial firms in China duri...
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Full-text available
Competition among countries—or regions within them—to attract mobile capital is often thought to discipline their governments, motivating them to invest more in infrastructure, reduce waste and corruption, and spend less on non-productive public goods. The result should be convergence on business-friendly policies. We argue that this requires an as...
Article
This paper examines whether competition pressures enhance firms' incentives to hide profits. By developing a novel empirical procedure to trace out the extent of profit hiding at firm level and applying it to a database that covers more than 20,000 large-and-medium-sized industrial firms in China for the 1995-2002 period, we find that competition i...
Article
We consider the problem of motivating privately informed managers to engage in entrepreneurial activity to improve the quality of the firm's investment opportunities. The firm's investment and compensation policy must balance the manager's incentives to provide entrepreneurial effort and to report her private information truthfully. The optimal pol...
Article
Full-text available
We compare the law governing business organizational forms in France and the United States during the nineteenth century and find that, contrary to the conventional wisdom, the contracting environment in the U.S. was neither freer nor more flexible than in France. U.S. businesses had a more limited menu of organizational choices and also much less...
Article
In the context of (one-sided) delegated bargaining, we analyze how a principal (a seller) should design the delegation contract in order to provide proper incentives for her delegate (an intermediary) and gain strategic advantage against a third party (a buyer). We consider situations in which there are both moral hazard and adverse selection probl...
Article
Entertainment and Travel Costs (ETC), an expenditure item in standard accounting books of firms in China, amount to about 20% of total wage bills in a sample of 3470 Chinese firms. Using a detailed dataset of these firms, we analyze the composition of ETC and effects of ETC on firm performance. We develop a simple model of managerial decisions on t...
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Competition among local governments in a decentralized political system is often thought to discipline lazy or corrupt officials, improving public good provision and increasing welfare. Some scholars note possible distortions due to spillovers or a ‘race-to-the-bottom’, but suggest that central transfers or regulations can remedy these. Both argume...
Article
We study effects of horizontal integration on firm reputation. In an environment where customers observe only imperfect signals about firms' effort/quality choices, firms cannot maintain reputations of high quality and earn quality premium forever. Even when firms are choosing high quality/effort, there is always a possibility that a bad signal is...
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We study a complete-information alternating-offer bargaining game in which one “active” player bargains with each of a number of other “passive” players one at a time. In contrast to most existing models, the order of reaching agreements is endogenously determined, hence the active player can “play off” some passive players against others by m ovin...
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I offer a theory of joint ownership by extending the standard property right theory of the firm to situations where parties can endogenously choose the degree of specificity of their investments (i.e., both the type of investment--specific and general--and the level of each). When specific and general investments are complements, the standard GHM r...
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OF THE DISSERTATION Three Essays on Repeated Games by Pedro Dal B Doctor of Philosophy in Economics University of California, Los Angeles, 2002 Professor David K. Levine, Chair This thesis consists of three chapters. The ...rst chapter analyzes the outcomes that can be supported in a society through reward and punishment schemes that operate throug...
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We consider a firm with two investment projects (divisions) each run by a manager who can provide (i) (unverifiable) information about the quality of either or both projects and (ii) (unverifiable) access to valuable resources that can enhance the cash flows of either or both projects. We then examine the extent to which capital allocation and mana...
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This paper extends the principal-agent model to determine the size of the firm as measured by the number of agent hired. Hiring more agents results in benefits and costs to the principal. The benefits are gains from specialization: higher productivity can be achieved if, as the number of agents increases, their task assignments become more speciali...
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We consider optimal capital allocation and managerial compensation mechanisms for decentralized firms when division managers have an incentive to misrepresent project quality and to minimize privately costly but value-enhancing effort. We show that in the optimal mechanism firms always underinvest in capital relative to a naive application of the n...
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We consider optimal capital allocation and managerial compensation mechanisms fordecentralized #rms when division managers have an incentive to misrepresent project qualityand to minimize privately costly but value-enhancing eort. We #nd that in the optimalmechanism #rms always underinvest in capital relative to a naive application ofthe net presen...
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Abstract Economists have long recognized the importance of trust in economic development, but few empirical studies address how the equilibrium level of trust arises endogenously. Using transaction-level data from Eachnet.com (an eBay equivalence of China), we show that male buyers are more trusting, male sellers are less trustworthy (especially fa...
Article
This paper investigates whether market competition enhances firms' incentives to hide profits. We develop a theoretical model of firms' profit hiding behavior in competitive envi-ronments and derive several testable hypotheses. We then test the model using a database that covers more than 20,000 large-and-medium-sized industrial firms in China duri...
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Using a simple game-theoretical model, this paper develops a theory of the size of the informal sector in a developing economy and uses it to study various policy issues. The model shows that large rms can strategically create barriers of entrance to the modern sector by high wage rates. The model has three basic elements: (1) a relative wage theor...
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We document that credit rating changes significantly affect chief executive officer's (CEO's) incentives. Modeling both credit rating changes and CEO incentive changes as two jointly endogenous processes, we present strong evidence that CEO incentives increase subsequent to credit downgrades and, to a much weaker extent, decrease after credit upgra...

Citations

... Estimation of the (mean) housing production function has enjoyed a recent renaissance (e.g., Albouy and Ehrlich, 2018;Brueckner et al., 2017;Cai et al., 2017;Combes et al., 2021;Epple et al., 2010) but it deals mostly with single family housing. We are aware of only a few papers that deal with building height. ...
... Tarun et al. (2000) investigated the cross-autocorrelation between trading volume and returns based on daily stock-market data, and explored the extent to which information is priced. Studies such as those of Chen et al. (2014) and Lee and Swaminathan (2000), on the one hand, explored the effect of trading volume on stock return prediction; on the other, Bernardo et al. (2016) and Milton and Artur (1993), examined the cross-sectional time-series relationship between volatility and trading volume. Ekholm and Pasternack (2008) applied a vector autoregressive (VAR) model to the monthly data of the US stock market to scrutinize the relationship between investor overconfidence and market trading volume; they argued that large returns make investors overconfident, which amps up trading volume, and then examined and tested this hypothesis empirically. ...
... A beneficial outcome of hiring more agents is an increased productivity since the assignment of managers is becoming more specialized as the number of managers increases. However, the downside of this increased task specialization is that the overall monitoring becomes more difficult and costly for the owners or shareholders of the firm (Cho, 2002). This default in control provides opportunities for managers to pursue self-serving behavior (Borghesi & Chang, 2015). ...
... Index insurance is a cost-effective alternative to traditional insurance . Index insurance helps households to reduce their reliance on unfavourable coping strategies and to increase investments in riskier production (Cai et al. 2015); thus, it helps them to improve their ability to enhance farm revenue (Karlan et al. 2014). In developing countries, index insurance offers rural agricultural households social protection and improves their standard of living (Jensen and Barrett 2016). ...
... Based on the comparison of the total factor productivity of the industrial environment in different periods, Chen (2010b) found the positive effect of the environmental policies implemented by the government during the "Ninth Five-Year Plan" period on improving the industrial green productivity. In contrast, many studies argue that the compliance cost effect of environmental regulation reduces industrial green total factor productivity (Baghdadi et al., 2013;Cai et al., 2016). Other researchers claim a non-linear relationship between environmental regulation and industrial green total factor productivity. ...
... Domestic firms under pressure may also demand lower taxes and social security contributions, which both make the production factor labor more costly, thus lowering their international competitiveness (see similarly, Blank and Freeman, 1994). Indeed, the model by Cai and Treisman, (2005) predicts that, under capital mobility, countries with an initially rich endowment in one production factor will have, in equilibrium, generated an attractive business environment with low tax levels and less government spending. In turn, a shrinking tax base, however, exerts pressure on governments to reduce their absolute and relative spending levels (Garett and Mitchell, 2001; Hines and Summers, 2009). ...
... Some platforms offer workers the opportunity to undergo certain tests before being awarded work, examples are general tests (e.g., language tests) and subject-specific tests (e.g., software testing and content creation tests) (Vakharia and Lease 2015). Irrespective of the method used, the underlying aim of the rating and reputation system is to indicate the workers' level of expertise and task-proficiency to potential employers (Woods et al. ; Vakharia and Lease 2015;Cai et al. 2014). On some platforms, workers with the highest score are given a label that identifies them as proven experts. ...
... While competition is argued to be good in the long run (Shleifer, 2004), various studies have documented the effects of competition or rivalry on unethical behaviors (e.g. Cai et al., 2009;Kilduff et al., 2016;Pierce et al., 2013;Rigdon & D'Esterre, 2015;Schwieren & Weichselbaumer, 2010). In the midst of the growing Laptop industry, especially the high tier laptop industry, it makes sense to think that the competitive environment may force manufacturers to create the best laptops possible to compete with other brands and communicate their products, including through deceptive practices (Aditya, 2001;Kaptein, 2008). ...
... moderators) may affect the reputation effect. For example, in the study byCai et al. (2013), the second model reported in table 6 includes seller reputation and an interaction of seller reputation and a dummy variable indicating if it is before or after a "buyer protection system" is implemented in the online market. The result shows that there is a significant interaction effect of seller reputation and the introduction of a "buyer protection system", which indicates that the reputation effect varies between two subsamples. ...
... For a model that combines education as a test and job assignment as a a signal, see Perri (1993). 4 Among the large literature on existence of equilibrium in signaling games are Riley (1975Riley ( , 1979Riley ( , and 2002, Cho and Kreps (1987), Mailath et al. (1993), andCai et al. (2007). 5 Spence (1974b) considered a model of job allocation in which individuals are continuously distributed with respect to ability. ...