|
on Business Economics |
| By: | Hong, Sungki (Federal Reserve Bank of St. Louis) |
| Abstract: | This paper studies the importance of firm-level price markup dynamics for business cycle fluctuations. The first part of the paper uses state-of-the-art IO techniques to measure the behavior of markups over the business cycle at the firm level. I find that markups are countercyclical with an average elasticity of -0.9 with respect to real GDP, in line with the earlier industry-level evidence. Importantly, I find substantial heterogeneity in markup cyclicality across firms, with small firms having significantly more countercyclical markups than large firms. In the second part of the paper, I develop a general equilibrium model that matches these empirical findings and explore its implications for business cycle dynamics. In particular, I embed customer capital (due to deep habits as in Ravn, Schmitt-Grohe, and Uribe 2006) into a standard Hopenhayn (1992) model of firm dynamics with entry and exit. A key feature of the model is that a firm's decision about markups becomes dynamic {firms accumulate customer capital in the periods of fast growth by charging low markups, and choose to exploit it by charging high markups in the downturns. In particular, during recessions, the endogenous higher exit probability for smaller firms implies that they place lower weight on future profits, leading them to charge higher markups. This mechanism serves to endogenously increase the dispersion of firm sales and employment in recessions, a property that is consistent with the data. I further show that the resulting input misallocation amplifies both the volatility and persistence of the exogenous productivity shocks driving the business cycle. |
| Date: | 2017–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2017-033&r=bec |
| By: | Baumöhl, Eduard; Iwasaki, Ichiro; Kočenda, Evžen |
| Abstract: | We analyze firm survival determinants in four new European Union member states (Czech Republic, Hungary, Poland, and Slovakia). We employ the Cox proportional hazards model on firm-level data over the period of 2006–2015. We show that less concentrated control of large shareholders, higher solvency, and more board directors are linked with increased probability of firm survival in all four countries. However, an excessive number of board directors shows a detrimental effect. Firms with foreign owners and higher returns on their assets exhibit better survival chances. On the other hand, larger firms and those hiring international auditors show lower probabilities of survival. A number of determinants specifically influence firm survival in different ways across countries. This fact emphasizes that differences in business conditions are important when studying firm survival. |
| Keywords: | firm survival, new EU member states, survival and exit determinants, hazards model, panel data |
| JEL: | D22 G01 G33 G34 P34 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hitcei:2017-5&r=bec |
| By: | Anderson, Ronald W.; Bustamante, Maria Cecilia; Guibaud, Stéphane; Zervos, Mihail |
| Abstract: | We study the relation between firm growth and managerial incentive provision under moral hazard when a long-lived firm is operated by a sequence of managers. In our model, firms replace their managers not only upon poor performance to provide incentives, but also when outside managers are at a comparative advantage to lead the firm through a new growth phase. We show how the optimal contract can be implemented with a system of deferred compensation credit and bonuses, along with dismissal and severance policies. Firms with better investment prospects have higher managerial turnover and rely on more front-loaded compensation schemes. Growth-induced turnover can result in positive severance if the principal needs to incentivize the manager to truthfully report the arrival of a growth opportunity. Realized firm growth depends jointly on the exogenous arrival of growth opportunities and the severity of the moral hazard problem. We also find a new component of agency costs due to the spillover effect of the tenure of the incumbent manager onto the present value of future managers’ compensation. |
| Keywords: | Dynamic contracting; managerial turnover; growth; moral hazard |
| JEL: | D82 D86 D92 G30 |
| Date: | 2017–09–25 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:68784&r=bec |
| By: | Giammario Impullitti; Omar Licandro; Pontus Rendahl |
| Abstract: | We study the gains from trade in an economy with oligopolistic competition, firm heterogeneity, and innovation. Oligopolistic competition together with free entry make markups responsive to firm productivity and trade costs. Lowering trade costs reduces markups on domestic sales but increases markups on export sales, as firms do not pass the entire reduction in trade costs onto foreign consumers. Nevertheless, the downward pressure dominates and the average markup declines, deterring firms from entering the market and leading to higher market concentration. Neither the increased concentration nor the incomplete pass-through of trade costs to export markups are strong enough to compensate for the increase in competition on domestic sales. Thus the overall effect of trade on markups is pro-competitive and a key source of the associated welfare gains. In addition to markups, selection and innovation provide additional channels through which the trade-induced effect on competition impacts welfare. In a quantitative exercise, we decompose the total gains from trade into these three contributing channels; we find that innovation plays a small but non-negligible role, while the main component is equally split between the pro-competitive and the selection channel. |
| Keywords: | gains from trade, heterogeneous firms, oligopoly, innovation, endogenous markups, endogenous market structure |
| JEL: | F12 F13 O31 O41 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6727&r=bec |
| By: | Brand, Thomas; Isoré, Marlène; Tripier, Fabien |
| Abstract: | We develop a business cycle model with gross flows of firm creation and destruction.The credit market is characterized by two frictions. First,entrepreneurs undergo a costly search for intermediate funding to create a firm. Second, upon a match, a costlystate-verification contract is set up. When defaults occurs, banks monitor firms, seize their assets, and a fraction of financial relationships are severed. The model is estimated using Bayesian methods for the U.S. economy. Among other shocks, uncertainty in productivity turns out to be a major contributor to both macro-financial aggregates and firm dynamics. |
| JEL: | D8 E3 E4 E5 |
| Date: | 2017–11–23 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2017_034&r=bec |
| By: | Massenot, Baptiste; Pettinicchi, Yuri |
| Abstract: | This paper presents new evidence on the expectation formation process of firms from a survey of the German manufacturing sector. It focuses on the expectation about their future business conditions, which enters the widely followed economic sentiment index and which is an important determinant of their employment and investment decisions. We find that firms extrapolate their experience too much and make predictable forecasting errors. Moreover, firms do not seem to anticipate the upcoming reversals of business cycle peaks and troughs which causes suboptimal adjustment of investment and employment and affects their inventories and profits. However, the impact on expectation errors decreases with the size and the age of the firm as firms learn to reduce their extrapolation bias over time. |
| Keywords: | Expectation Formation,Expectation Error,Learning,Extrapolation,Experience |
| JEL: | D90 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:187&r=bec |
| By: | Iwasaki, Ichiro |
| Abstract: | Using a unique firm-level dataset obtained from a large-scale questionnaire survey conducted in late 2015, we examined the generality and heterogeneity of corporate governance systems between the eastern and western regions of Russia. The survey results strongly suggest that various characteristics of corporate governance systems observed in industrial firms and listed companies are, in fact, common and long-term trends that are seen across all Russian business sectors. At the same time, however, we also found pronounced regional heterogeneity between the eastern and western regions, with companies in the east being more reluctant than those in the west to introduce a governance system to monitor and supervise top management. Regression analysis shows that this finding is robust, even after a series of firm-level attributes are simultaneously controlled for. |
| Keywords: | corporate governance system, legal form of incorporation, board of directors, audit system, regional heterogeneity, Russia |
| JEL: | D22 G34 L22 M42 P25 P31 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:hit:rrcwps:72&r=bec |
| By: | David C. Stapleton; David R. Mann; Pragya Singh; Jae Song |
| Abstract: | We simulate the effects of Social Security Disability Insurance (SSDI) reform proposals that make firms partially responsible for SSDI benefits paid to their former workers. The simulations suggest the proposals (if implemented) would greatly affect firms and the workforces that the firms employ. |
| Keywords: | economics/social security, employment, labor, policy, system(s) change |
| JEL: | I J |
| URL: | http://d.repec.org/n?u=RePEc:mpr:mprres:cae81342c4354db58a613c3ae11ca907&r=bec |
| By: | Benjamin W. Pugsley (University of Notre Dame); Petr Sedlacek (Centre for Macroeconomics (CFM); University of Oxford); Vincent Sterk (Centre for Macroeconomics (CFM); University College London (UCL)) |
| Abstract: | Only half of all startups survive past the age of ve and surviving businesses grow at vastly dierent speeds. Using micro data on employment in the population of U.S. businesses, we estimate that the lion's share of these differences is driven by ex-ante heterogeneity across firms, rather than by ex-post shocks. We embed such heterogeneity in a firm dynamics model and study how ex-ante differences shape the distribution of firm size, "up-or-out" dynamics, and the associated gains in aggregate output. "Gazelles" - a small subset of startups with particularly high growth potential - emerge as key drivers of these outcomes. Analyzing changes in the distribution of ex-ante firm heterogeneity over time reveals that gazelles are driven towards extinction, creating substantial aggregate losses. |
| Keywords: | Firm dynamics, Startups, Macroeconomics, Big data |
| JEL: | D22 E23 E24 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1737&r=bec |
| By: | Haraguchi, Junichi; Yasui, Yuta |
| Abstract: | We examine the supply function equilibrium (SFE), which is often used in the analysis of multi-unit auctions such as wholesale electricity markets, among (partially) public firms. In a general model, we characterize the SFE of such firms and examine the properties of symmetric SFE. We show, analyzing an asymmetric SFE in a duopoly model with linear demand and quadratic cost functions, that, when a partially public firm weighs more on the social welfare, the supply functions of not only the partially public firm but also a profit maximizing firm are flatter at the equilibrium. We also confirm that in a linear-quadratic model, the SFE converges to the (inverse) marginal cost function when the firms' social concerns increase symmetrically in the industry. |
| Keywords: | supply function equilibrium, electricity markets, partial privatization, corporate social responsibility, mixed oligopoly |
| JEL: | H42 L13 L33 |
| Date: | 2017–11–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:82394&r=bec |
| By: | McKenzie, David J.; Paffhausen, Anna Luisa |
| Abstract: | Small firms are an important source of income for the poor in developing countries, and the target of many interventions designed to help them grow. But there is no systematic information on the failure or death of such firms. We put together 16 panel surveys from 12 different developing countries to develop stylized facts from over 14,000 firms on how much firm death there is; on which types of these firms are most likely to die; and on why they die, paying careful attention to issues of measurement and attrition. We find small firms die at an average rate of 8.3 percent per year over the first five years of following them, so that half of all firms observed to be operating at a given point in time are dead within 6 years. Death rates are higher for small firms in richer countries, younger firms, retail firms, less productive and less profitable firms, and those whose owners are female and not middle-aged. We propose three theories of why small firms die: firm competition and firm shocks, occupational choice, and non-separability from the household. We find the cause of firm death to be heterogeneous, with different subgroups of firms more likely to die for reasons consistent with each of these theories. |
| Keywords: | firm death; microenterprise dynamics; survival |
| JEL: | D22 L26 O12 O17 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12401&r=bec |
| By: | Françoise Delmez (University of Namur, Economics Department); Vincent Vandenberghe (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)) |
| Abstract: | From the point of view of a profit-maximizing firm, the optimal number of working hours depends not only on the marginal productivity of hours but also on the marginal labour cost. This paper develops and assesses empirically a simple model of firms' decision making where productivity varies with hours and where the firm faces labour costs per worker that are invariant to the number of hours worked: i.e. quasi-fixed labour costs. Using Belgian firm-level data on production, labour costs, workers and hours, and focusing of the estimation of workers/hours elasticities of isoquant and isocost, we find evidence of the declining productivity of hours, but also of quasi-fixed labour costs in the range of 20% of total labour costs. We also show that industries with larger estimated quasi-fixed labour costs display higher annual working hours and make less use of part-time contracts. The tentative conclusion is that firms facing large quasi-fixed labour costs are enticed to raise working hours (or oppose their reduction), even if this results in lower labour productivity. |
| Keywords: | men vs hours, working hours, imperfect substitutability, labour costs |
| JEL: | J22 J23 C13 |
| Date: | 2017–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvir:2017022&r=bec |
| By: | Mai Chi Dao; Camelia Minoiu; Jonathan David Ostry |
| Abstract: | We examine the relationship between real exchange rate depreciations and indicators of firm performance using data for a sample of more than 30,000 firms from 66 (advanced and emerging market) countries over the 2000-2011 period. We show that depreciations boost profits, investment, and sales of firms that are more financially-constrained and have higher labor shares. These findings are consistent with the view that depreciations boost internal financing opportunities by reducing real wages, thereby spurring investment. We show that these effects on firm performance are enduring, including in the market valuation of firms. |
| Date: | 2017–08–04 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/183&r=bec |
| By: | Johannes Boehm; Swati Dhingra; John Morrow |
| Abstract: | The presence of global value chains challenges the neoclassical idea of the firm since it implies firms are not monolithic but are rather interdependent on the larger economic environment. Examining establishments, the smallest units of production within firms, sheds light on the microeconomic incentives determining the location of production and whether a firm produces a good or sources it. Most work on multiproduct firms looks at developed countries, but constraints on firm growth are greater in developing economies. We examine multiproduct establishments in India during a high growth period. Multiproduct establishments made up the bulk of manufacturing production, and their product turnover contributed 28 per cent to net sales growth. Unlike the nineties which witnessed drastic liberalization, establishments in the two-thousands dropped products at rates similar to those for the US. Sales dispersion across products also predicts product addition. |
| Keywords: | multiproduct firms, product adoption, product diversity |
| JEL: | L1 L2 M2 O3 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1509&r=bec |
| By: | Uwe Jirjahn |
| Abstract: | From a theoretical viewpoint the relationship between foreign ownership and unionization is ambiguous. On the one hand, foreign owners have better opportunities to undermine workers' unionization. On the other hand, workers of foreign-owned firms have an increased demand for the protection provided by unions. Which of the two opposing influences dominates can vary according to moderating circumstances. This study shows that firm size and industry-level bargaining play a moderating role. The relationship between foreign ownership and unionization is negative in larger firms whereas it is positive in smaller firms. Coverage by industry-level collective bargaining makes a positive relationship both stronger and more likely. |
| Keywords: | Corporate Globalization, Foreign Direct Investment, Union Membership, Firm Size, Centralized Collective Bargaining |
| JEL: | F23 J51 J52 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:trr:wpaper:201709&r=bec |
| By: | Hong, Sungki (Federal Reserve Bank of St. Louis) |
| Abstract: | Many models in the business cycle literature generate counter-cyclical price markups. This paper examines if the prominent models in the literature are consistent with the empirical findings of micro-level markup behavior in Hong (2016). In particular, I test the markup behavior of the following two models: (i) an oligopolistic competition model, and (ii) a New Keynesian model with heterogeneous price stickiness. First, I explore the Atkeson and Burstein (2008) model of oligopolistic competition, in which markups are an increasing function of firm market shares. Coupled with an exogenous uncertainty shock as in Bloom (2009), i.e. a second-moment shock to firm productivities in recessions, this model results in a countercyclical average markup, as in the data. However, in contrast with the data, this model predicts that smaller firms reduce their markups. Second, I calibrate both Calvo and menu cost models of price stickiness to match the empirical heterogeneity in price durations across small and large firms, as in Goldberg and Hellerstein (2011). I find that both models can match the average counter-cyclicality of markups in response to monetary shocks. Furthermore, since small firms adjust prices less frequently, they exhibit greater markup counter-cyclicality, consistent with the empirical patterns. Quantitatively, however, only the menu cost model, through its selection effect, can match the extent of the empirical heterogeneity in markup cyclicality. In addition, both sticky price models imply pro-cyclical markup behavior in response to productivity shocks. |
| Date: | 2017–09–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2017-034&r=bec |
| By: | Feng, Xunan (Southwestern University of Finance and Economics); Johansson, Anders C. (Stockholm China Economic Research Institute) |
| Abstract: | Social media platforms are becoming increasingly important channels for information dissemination. This study examines how microblogging by top executives affects the information environment for listed firms in an emerging market. Using manually collected set from Sina Weibo, one of China’s most popular and largest social media platforms, we find that a board chair having a Weibo account is associated with the dissemination of more firm-specific information to the capital market. This result holds up to a battery of robustness tests. We also show that the relationship between board chairs’ Weibo usage and information dissemination is stronger for smaller firms, firms that went public more recently, and firms characterized by less analyst coverage. Findings in this study have important implications for the understanding of the role of social media in the dissemination process of corporate information. |
| Keywords: | Social Media; Information dissemination; Capital market; Investors; China |
| JEL: | G12 G14 M41 N20 |
| Date: | 2017–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:hascer:2017-047&r=bec |
| By: | Yao Amber Li (Hong Kong University of Science and Technology); Valerie Smeets (Department of Economics and Business Economics, Aarhus University, Denmark); Frederic Warzynski (Department of Economics and Business Economics, Aarhus University, Denmark) |
| Abstract: | In this paper, we use a detailed production survey in the Chinese manufacturing industry to estimate both revenue and physical productivity and relate our measurements to firms' trade activity. We find that Chinese exporters for largely export oriented products like leather shoes or shirts appear to be less efficient than firms only involved on the domestic market based on the standard revenue productivity measure. However, we show strong positive export premium when we instead consider physical productivity. The simple and intuitive explanation of our results is that exporters charge on average lower prices. We focus more particularly on the role of processing trade and find that price differences are especially (and probably not surprisingly) large for firms involved in this type of contractual arrangements. |
| Keywords: | Productivity, prices, processing trade, China |
| JEL: | L2 D2 F14 |
| Date: | 2017–11–23 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2017-12&r=bec |