Agency Problems, Trade Liberalization, and Within-Firm Productivity Gains: Theory and Evidence

Abstract

Ample empirical findings show that trade liberalization mitigates the agency problem inside the firm and improves firm productivity, which does not square well with the existing literature. I propose a general equilibrium model highlighting the agency problem to explain this finding. When an economy opens up to trade, managers of unproductive surviving non-exporters are incentivized to exert more effort, which leads to a within-firm productivity improvement. Importantly, this effect only applies to unproductive firms that are subject to the agency problem. Finally, using Colombian plant-level data, I present evidence to support the model's unique empirical predictions.