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.
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