Essays on Imperfect Information in Trade and Labor

Abstract

This dissertation comprises three essays that explore how imperfect information affects international trade and labor markets. In the first chapter, I study the economic consequences of dishonesty in international trade. I develop a quantifiable export model in which firms with heterogeneous productivity signal unobserved quality choices through prices. As consumers might have difficulty distinguishing whether a low price is due to dishonesty or high productivity, prices become less effective at signaling product quality. I show that the model's predictions match patterns found using the FDA Import Refusal Report. Then, I exploit the relative export volume and export price growth between high and low-productivity firms to structurally estimate the model for Chinese exporters. I find the potential for dishonesty leads to 22% fewer exports and a 28% reduction in export profits. The second chapter provides the theoretical background for the first chapter. I relax functional form assumptions and build a parsimonious model of quality choice and signaling where firms have flexible production costs and reputation payments. When the support of the productivity distribution is large, I show that a pooling equilibrium, where both honest and dishonest firms coexist, may lead to an outcome with higher payoffs for all firms. On the other hand, when the support is small, only the separating equilibrium in which all firms are honest survives. I also study the role of bond posting and quality standards to combat firm dishonesty. In the third chapter, I ask whether there is a policy that can address statistical discrimination. When employers observe human capital investments imperfectly, distinct groups of workers with identical investment costs may achieve different equilibrium outcomes. I study a novel policy: wage bill equality, which commits firms to equate the total wages paid to each group relative to its population size. In the short run, I show that wage bill equality decreases the black-white wage gap compared to affirmative action. In the long run, it is the unique policy that always achieves equality by eliminating all discriminatory equilibria.