nep-bec New Economics Papers
on Business Economics
Issue of 2017‒02‒26
seventeen papers chosen by
Vasileios Bougioukos
Bangor University

  1. Growth and survival of the `fitter'? Evidence from US new-born firms By Giovanni Dosi; Emanuele Pugliese; Pietro Santoleri
  2. Learning Capitalism the Hard Way—Evidence from Germany’s Reunification By Triebs, Thomas; Tumlinson, Justin
  3. Employment Effects of Innovations over the Business Cycle: Firm-Level Evidence from European Countries By Bernhard Dachs; Martin Hud; Christian Koehler; Bettina Peters
  4. Offshoring and firm overlap By Capuano, Stella; Egger, Hartmut; Koch, Michael; Schmerer, Hans-Jörg
  5. Firm Growth Dynamics and Financial Constraints: Evidence from Serbian Firms By Milos Markovic; Michael A. Stemmer
  6. How large is the Financial Accelerator? Some Evidence from Firm-level Data By Lein, Sarah Marit; Bäurle, Gregor; Lein, Sarah M.; Steiner, Elizabeth
  7. International trade and domestic competition: Evidence from Belgium By Bramati, Maria Caterina; Gaggero, Alberto A.; Solomon, Edna
  8. Offshoring, Firm Selection, and Job Polarisation in General Equilibrium By Egger, Hartmut; Udo, Kreickemeier; Jens, Wrona
  9. Inter-firm Relationships and Asset Prices By Carlos Ramirez
  10. Consumer Rating Dynamics By Stenzel, André; Wolf, Christoph
  11. Working Time Accounts and Turnover By Launov, Andrey; Wälde, Klaus
  12. Multi-Product Firms and Product Quality By Kalina Manova; Zhihong Yu
  13. The political economy of interregional competition for firms By Hopp, Daniel; Kriebel, Michael
  14. Morale, Relationships, and Wages: An Experimental Study By Englmaier, Florian; Segal, Carmit
  15. Spatial Price Discrimination and Privatization on Vertically Related Markets By Eleftheriou, Konstantinos; Michelacakis, Nickolas
  16. Assessing the Efficiency Costs of Vietnam's ‘Missing’ Small and Medium Sized Enterprises: A Panel Data Investigation By Trung Dang Le and Paul Shaffer
  17. Market-specific trade costs and firm dynamics in Pakistan: Evaluating the US integrated cargo containers control programme By Salamat Ali; Richard Kneller; Chris Milner

  1. By: Giovanni Dosi; Emanuele Pugliese; Pietro Santoleri
    Abstract: We examine market selection mechanisms and their strength for a representative cohort of US new independent firms. In particular, we explore whether and how effectively markets reward newly-born firms according to their `fitness' in terms of both labour productivity and profitability. Our analysis yields puzzling results in contrast with canonical industry dynamics models. First, we find that selection on differential growth is mainly related to productivity while profitability plays a negligible role. Second, in contrast with the growth of the fitter principle, selection appears to be driven by changes in firms' relative productivity. Third, we explore how new firms' relative fitness affects their growth performance in different sectors. Our results reveal that market selection operates quite differently across them with higher incidence for new-born firms in services, low-tech and less concentrated sectors. Fourth, concerning selection via exit, our results support the survival of the fitter principle with respect to productivity, while relative profitability does not seem to exert any significant effect on survival probabilities. However, the contribution of firm relative `fitness' to the total firm exit rates variation appears to be modest.
    Keywords: market selection, replicator dynamics, new firm growth, survival, Shapley decomposition
    Date: 2017–02–21
  2. By: Triebs, Thomas; Tumlinson, Justin
    Abstract: In a world where the future is uncertain and firms do not know the model, forecast ability matters. We ask whether, as predicted by rational expectations, forecast ability is uniform. And if not, whether firms learn. Firm level forecast ability is measured as forecast error based on the Ifo Institute’s Business Climate Survey. We find that contrary to the prediction of rational expectations, forecast errors are persistent but we do not find any evidence that firms learn with age only. Then, we exploit German reunification, as a natural experiment where firms in the East are treated with ignorance about the state of the market. As predicted by our formal model of learning, firms in the East make larger forecast errors relative to the West. And over time this gap decreases. We argue that the initially higher forecast errors in the East are due to ignorance and not different market conditions. And, convergence is due to learning in the East, rather than convergence in market conditions.
    JEL: B21 D21 D22
    Date: 2016
  3. By: Bernhard Dachs (AIT Austrian Institute of Technology GmbH); Martin Hud (Centre for European Economic Research (ZEW)); Christian Koehler (Centre for European Economic Research (ZEW)); Bettina Peters (Centre for European Economic Research (ZEW) - Industrial Economics and International Management Research)
    Abstract: A growing literature investigates how firms’ innovation input reacts to changes in the business cycle. However, so far there is no evidence whether there is cyclicality in the effects of innovation on firm performance as well. In this paper, we investigate the employment effects of innovations over the business cycle. Our analysis employs a large data set of manufacturing firms from 26 European countries over the period from 1998 to 2010. Using the structural model of Harrison et al. (2014), our empirical analysis reveals four important findings: First, the net effect of product innovation on employment growth is pro-cyclical. It turns out to be positive in all business cycle phases except for the recession. Second, product innovators are more resilient to recessions than non-product innovators. Even during recessions they are able to substitute demand losses from old products by demand gains of new products to a substantial degree. As a result their net employment losses are significantly lower in recessions than those of non-product innovators. Third, we only find resilience for SMEs but not for large firms. Fourth, process and organizational innovations displace labor primarily during upturn and downturn periods.
    Keywords: Innovation, employment, business cycle, resilience, Europe
    JEL: O33 J23 C26 D2
    Date: 2017–02
  4. By: Capuano, Stella (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany]); Egger, Hartmut; Koch, Michael; Schmerer, Hans-Jörg (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany])
    Abstract: "We set up a model of offshoring with heterogeneous producers that captures two empirical regularities of German offshoring firms. There is selection of larger, more productive firms into offshoring. However, the selection is not sharp, and offshoring and non-offshoring firms coexist over a wide range of the revenue distribution. An overlap of offshoring and nonoffshoring firms emerges in our model because, in contrast to textbook models of trade with heterogeneous producers, we allow firms to differ in two technology parameters thereby decoupling the offshoring status of a firm from its revenues. In an empirical analysis, we employ firm-level data from Germany to estimate key parameters of the model and show that ignoring the overlap lowers the estimated gains from offshoring by more than 50 percent and, at the same time, exaggerates substantially the importance of the extensive margin for explaining the evolution of German offshoring over the last 25 years." (Author's abstract, IAB-Doku) ((en))
    JEL: F12 F14 L11
    Date: 2017–02–21
  5. By: Milos Markovic (Centre d'Economie de la Sorbonne); Michael A. Stemmer (Centre d'Economie de la Sorbonne)
    Abstract: Using a unique dataset of unlisted Serbian firms during the period between 2005 and 2012, we analyze the impact of internal financial constraints on firm growth with respect to several firm-level characteristics. We also assess potential effects created by the 2008-2009 Global Financial Crisis. To do so, we rely on panel data models, which estimate via GMM cash flow sensitivities of firm growth, following the dynamic specification of Guariglia et al. (2011). Controlling for investment opportunities, our results show that Serbian firms face high financial constraints and exhibit generally a high reliance on retained earnings for firm growth. We do not find evidence for a crisis effect, potentially due to ex ante accumulated internal funds. Conventional firm characteristics such as age, size or overall performance largely determine the dependency on cash for firm growth. Moreover, foreign-owned companies seem to escape the financing gap by tapping other resources. A comparison with Belgian firms contrasts our results with an advanced country setting
    Keywords: Financial constraints; firm growth; transition countries; dynamic panel data; GMM
    JEL: C23 D92 E44 G32 L25 O16
    Date: 2017–02
  6. By: Lein, Sarah Marit; Bäurle, Gregor; Lein, Sarah M.; Steiner, Elizabeth
    Abstract: This paper analyzes how the size and composition of the balance sheet affects firms financing cost within a large panel of Swiss firms in the non-financial sector from 1998 to 2011. The data includes a large number of small firms, which makes the data representative. We use an instrumental variables approach to identify the investment finance supply curve. Our finding that financing cost increase with exogenous changes in leverage supports the financial accelerator mechanism a la Bernanke, Gertler and Gilchrist. We quantitatively evaluate the implications of our findings for the aggregate business cycle and find that the amplification mechanism of the financial accelerator is economically significant: the volatility of the business cycle is amplified by a factor of 2.25 due to the presence of the financial accelerator channel.
    JEL: E32 E22 E44
    Date: 2016
  7. By: Bramati, Maria Caterina; Gaggero, Alberto A.; Solomon, Edna
    Abstract: We investigate the effect of domestic market competition on firm-level export intensity. We employ a comprehensive dataset of Belgian firms from 2005–2008, when the fall in the number of firms engaged in trade was accompanied by a growing amount of transactions. The resulting increase in the domestic concentration of Belgian firms has sparked numerous debates, since the direction of causality between domestic market structure and export performance is unclear. We apply the fractional logit estimator and control for both self-selection and simultaneity bias. We find that a positive linkage exists between the level of competition and export intensity.
    Keywords: Competition; Domestic rivalry; Exports; National champion
    Date: 2015–06
  8. By: Egger, Hartmut; Udo, Kreickemeier; Jens, Wrona
    Abstract: We set up a general equilibrium model, in which offshoring to a low-income country can lead to job polarisation in the high-income country, with the number of jobs paying either very high or very low wages increasing, and jobs in the middle of the wage distribution disappearing. The firm population is heterogenous with respect to firm productivity, and rent sharing leads to a positive link between wages and productivity at the firm level. Offshoring involves fixed and task-specific variable costs, and as a consequence it is chosen only by the most productive firms, and only for those tasks carrying the lowest variable offshoring costs. A reduction in those variable costs increases offshoring at the intensive and at the extensive margin, with domestic employment shifted from the newly offshoring firms in the middle of the productivity distribution to firms at the tails of this distribution, paying either very low or very high wages.
    JEL: F12 F16 F23
    Date: 2016
  9. By: Carlos Ramirez
    Abstract: This paper proposes a novel link between the propagation of shocks within production networks and asset prices. It develops a dynamic network model in which the propagation of firm cash-flow shocks via inter-firm relationships affects the economy's equilibrium asset prices. When calibrated to match key features of customer-supplier networks in the United States, the model generates long-run risks, high and volatile risk premia, and a low and stable risk-free rate. Consistent with data from firms in manufacturing and service industries, the model predicts that central firms in the network command lower risk premiums than peripheral firms, and that firm-level return volatilities exhibit a high degree of co-movement.
    Keywords: Equilibrium asset prices ; Inter-firm relationships ; Networks ; Shock propagation
    JEL: G12 E32 L10
    Date: 2017–01
  10. By: Stenzel, André; Wolf, Christoph
    Abstract: We consider dynamic price-setting by firms in the presence of rating systems and asymmetric information about product quality. The current price determines the set of purchasing consumers and thereby affects future ratings and continuation profits. We outline the effects of prices on consumers' beliefs about quality as well as their review upon purchase. We provide a characterization of the firm's pricing decision in the presence of naive consumers who infer quality based on the observed aggregate rating, which reflects past consumers' gross utility, and price. We show that the firm charges a mark-up compared to the myopically optimal price: It restricts purchase to those consumers with a high degree of horizontal taste for the product which boosts reviews and hence future ratings and profits. Moreover, we show that if the firm takes the price's effect on reviews into account, the rating will not perfectly reveal the product's quality. If consumers hold a correct belief in the current period, future consumers will overestimate the product's quality.
    JEL: L00 D21 D83
    Date: 2016
  11. By: Launov, Andrey (University of Kent); Wälde, Klaus (University of Mainz)
    Abstract: Working time accounts allow firms to smooth their demand for hours employed. Descriptive literature suggests that this reduces turnover and inhibits increase in unemployment during recessions. We model theoretically the optimal choice of hours by a firm with a working time account. We show that working time accounts do not necessarily guarantee lower turnover. Turnover may be inhibited or catalyzed depending on whether a firm meets economic downturn with surplus or deficit of hours and on how productive this firm is. Adjustment pattern in Germany during the Great Recession implies that working time accounts have contributed positively.
    Keywords: working time accounts, turnover, Great Recession, Germany
    JEL: J23 J63 J64
    Date: 2016–12
  12. By: Kalina Manova; Zhihong Yu
    Abstract: We examine the global operations of multi-product firms. We present a flexible heterogeneous-firm trade model with either limited or strong scope for quality differentiation. Using customs data for China during 2002-2006, we empirically establish that firms allocate activity across products in line with a product hierarchy based on quality. Firms vary output quality across their products by using inputs of different quality levels. Their core competence is in varieties of superior quality that command higher prices but nevertheless generate higher sales. In markets where they offer fewer products, firms concentrate on their core varieties by dropping low-quality peripheral goods on the extensive margin and by shifting sales towards top-quality products on the intensive margin. The product quality ladder also governs firms' export dynamics, both in general and in response to the exogenous removal of MFA quotas on textiles and apparel. Our results inform the drivers and measurement of firm performance, the effects of trade reforms, and the design of development policies.
    Keywords: trade, trade reforms, multi-product firms, product quality, export prices
    JEL: D22 F10 F12 F14 L10 L11 L15
    Date: 2017–02
  13. By: Hopp, Daniel; Kriebel, Michael
    Abstract: This paper studies the impact of majority voting on interregional competition for firms. We model the competition as a first-price sealed bid auction under full information between two regions inhabited by low- and high-skilled individuals. The firm's location causes an increase in wages for the high-skilled. A region's bid is determined by the median voter's preference. We derive two results. First, the location decision may be inefficient because the firm may not locate in the region that benefits most. Second, if regional differences are sufficiently small and the median voter of the successful region is high-skilled, the winning region suffers a loss of aggregated income as subsidies exceed the surplus created by a firm's location. This implies that restricting inter-regional competition for firms, e.g. banning subsidies, may prevent inefficient location decisions.
    JEL: H23 H25 H31 P16
    Date: 2016
  14. By: Englmaier, Florian; Segal, Carmit
    Abstract: Many labor relations are characterized by the possibility of repeated interaction without long term contracts and with discretionary pay components. We implement such a structure in the lab by allowing workers and firms to interact repeatedly for many periods absent a pre-announced final period. In this setting persistent and different human resource practices emerge endogenously: we find (long-term) relationships characterized by generous surplus sharing and spot-interactions with little to no rent for the workers. Efficiency, i.e. exerted effort, is comparable across these two institutions. Hence, spot-interactions are at least as profitable for firms engaging in such relationships. In control treatments, we show that neither limited firm commitment nor structural unemployment alone is sufficient to generate these patterns. Analyzing individual level data, we document that firm and worker behavior are individually rational and that individual histories play a significant role in explaining the observed behavior.
    JEL: C91 D21 M50
    Date: 2016
  15. By: Eleftheriou, Konstantinos; Michelacakis, Nickolas
    Abstract: We consider a vertically structured market with two retail firms of mixed ownership competing against each other exercising spatial price discrimination. We examine the strategic behavior of downstream rivals as well as the effect of privatization on the intensity of competition and welfare in two cases; when location decisions are taken sequentially and when location decisions are taken simultaneously. We show that production cost differentials are crucial in determining the Nash equilibrium locations (hence market shares) and the impact of the degree of privatization on the level of downstream competition. Privatization leads to stiffer competition when the mixed ownership firm has the cost advantage. However, it can be welfare enhancing only when decisions are taken sequentially with the follower being the semi-public firm having a moderate production cost advantage over the market leader. The results of our model generalize to capture the case of vertical mergers.
    Keywords: mergers; mixed oligopoly; privatization; spatial competition
    JEL: L13 L33 L42 R32
    Date: 2017–02–19
  16. By: Trung Dang Le and Paul Shaffer
    Abstract: This article investigates whether there are efficiency costs associated with the pronounced rightward skew in the firm size distribution, or Vietnam's ‘missing small and medium size enterprise (SMEs)’, drawing on panel data analysis of firm growth and survival. Specifically, it examines if factor allocation biases with respect to credit, preferable treatment of state owned enterprises, barriers to entry into export markets and economies of scale are important determinants of growth rates and survival probabilities of small, medium and large-sized firms. Overall, findings on the earlier variables do not support the view that there are large efficiency costs associated with Vietnam's ‘missing SMEs’. Together with other results in the literature with do not find significant equity costs associated with Vietnam's ‘missing SMES’, these findings raise questions about policy initiatives in support of SMEs in Vietnam, such as the National SME Support program, in particular, through improved access to credit.
    Keywords: firm survival, firm growth, SMEs, panell data, Vietnam
    Date: 2017–02–16
  17. By: Salamat Ali; Richard Kneller; Chris Milner
    Abstract: Using novel firm-level microdata that track the locations of export-processing stations and modes of shipments over time, this study examines the trade effect of the Integrated Cargo Container Control (IC3) programme, launched between Pakistan and the US in the wake of 9/11 to thwart the potential vulnerability of cargo containers to terrorist exploitations. Although primarily a security measure, IC3 affected the beyond-the-border and behind-the-border costs of exporting to the US. We exploit the exogenous nature of this shock and its specificity to one export market in the identification strategy. Using the EU as a counterfactual, the difference-in-difference estimates show that after this intervention, Pakistan’s overall exports to the US relative to the EU dropped by between 8% and 11% depending on the fixed effects structure. This security policy caused therefore a significant loss of US market access between 2007 and 2014. The IC3 effect on trade was, however, heterogeneous across firms depending upon where they exported from pre-IC3 and whether they switched export location following IC3. These findings have policy implications for the adoption of similar technologies aimed at ensuring the security of the supply chain together with facilitating trade in the wake of the emerging security situation in other parts of the world.
    Keywords: Trade Costs, Supply Chain Security, Scanning, Integrated Cargo Container Control, 9/11 and Trade, Trade Diversion JEL Codes: F1, F13, F14
    Date: 2017

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