nep-bec New Economics Papers
on Business Economics
Issue of 2018‒07‒30
thirteen papers chosen by
Vasileios Bougioukos
Bangor University

  1. Firms and Economic Performance: A View from Trade By Alessandra Bonfiglioli; Rosario Crinò; Gino Gancia
  2. (Group) Strategy-proofness and stability in many-to many marching markets By Antonio Romero-Medina; Matteo Triossi
  3. Import competition and vertical integration: Evidence from India By Stiebale, Joel; Vencappa, Dev
  4. All in the family? CEO choice and firm organization By Lemos, Renata; Scur, Daniela
  5. Firm-to-firm connections in Colombian imports By Bernard, Andrew B.; Bøler, Esther Ann; Dhingra, Swati
  6. On the determination of the granular size of the economy By Blanco-Arroyo, Omar; Ruiz-Buforn, Alba; Vidal-Tomás, David; Alfarano, Simone
  7. A Comparison of TFP Estimates via Distribution Dynamics: Evidence from Light Manufacturing Firms in Brazil By Mendez-Guerra, Carlos; Gonzales-Rocha, Erick
  8. Efficiency Wages in a Cournot-Oligopoly By Marco de Pinto; Laszlo Goerke
  9. Two Worlds Apart? Export Demand Shocks and Domestic Sales By Aksel (A.) Erbahar
  10. A Corporate Financing-Based Asset Pricing Model By Roberto Steri
  11. Optimal Cross-Licensing Arrangements: Collusion versus Entry Deterrence By Choi, Jay Pil; Gerlach, Heiko
  12. An Empirical Analysis of the Propagation of Corporate Bankruptcy By ARATA Yoshiyuki
  13. The European Union’s Proposed Digital Services Tax: A De Facto Tariff By Gary Clyde Hufbauer; Zhiyao (Lucy) Lu

  1. By: Alessandra Bonfiglioli; Rosario Crinò; Gino Gancia
    Abstract: We use transaction-level US import data to compare firms from virtually all countries in the world competing in a single destination market. Guided by a simple theoretical framework, we decompose countries'market shares into the contribution of the number of firm-products, their average attributes (quality and efficiency) and heterogeneity around the mean. Our results show that the number of firm-products explains half of the variation in sales, while the remaining part is equally accounted for by average attributes and their dispersion. Quality is the main driver of firm heterogeneity (explaining between 75% and 100%). We then study how the distribution of firm-level characteristics varies across countries, and we explore some of its determinants. Countries with a larger market size tend to be characterized by a more dispersed distribution of firms'sales, especially due to heterogeneity in quality. These countries also tend to be more likely to host superstar firms, although this is not the only source of higher heterogeneity. To further explore the role of exceptional firms, we develop a novel decomposition that separates the contribution of heterogeneity from that of granularity. While individual firms matter, we find that heterogeneity is more important than granularity for explaining sales.
    Keywords: US imports, firm heterogeneity, international trade, prices, Quality, variety, granularity
    JEL: F12 F14
    Date: 2018–03
  2. By: Antonio Romero-Medina; Matteo Triossi
    Abstract: We study strategy-profness in many-to many matching markets. We prove that when firms have acyclical preferences over workers and both firms and workers have responsive preferences, the worker-optimal stable mechanism is group strategy-proof and Pareto optimal. Absent any assumption on workers’ references, an Adjusted Serial Dictatorship among workers is stable, group strategy-proof and Pareto optimal for workers. In both cases, the set of stable matchings is a singleton. We show that acyclicity is the minimal condition guaranteeing the existence of stable and strategy-proof mechanisms in many-to-many matching markets. Economic Literature Classification Numbers: C71, C78, D71, D78. Key words: Keywords: Many-to-many markets, Acyclicity, Stability, Group Strategy-proofness, singleton core.
    Date: 2017
  3. By: Stiebale, Joel; Vencappa, Dev
    Abstract: Recent theoretical contributions provide conflicting predictions about the effects of product market competition on firms' organizational choices. This paper uses a rich firm-product-level panel data set of Indian manufacturing firms to analyze the relationship between import competition and vertical integration. Exploiting exogenous variation from changes in India's trade policy, we find that foreign competition, induced by falling output tariffs, increases backward vertical integration by domestic firms. The effects are concentrated in rather homogenous product categories, among firms that mainly operate on the domestic market, and in relatively large firms. Our results are robust towards different sub-samples and hold with or without conditioning on various firm- and product-level characteristics including input tariffs and firm-year fixed effects. We also provide evidence that vertical integration is associated with higher physical productivity, lower marginal costs and rising markups.
    Keywords: Trade Liberalization,Competition,Vertical Integration,Innovation
    JEL: F14 L25 L22 L23
    Date: 2018
  4. By: Lemos, Renata; Scur, Daniela
    Abstract: Family firms are the most prevalent firm type in the world, particularly in emerging economies. Dynastic family firms tend to have lower productivity, though what explains their underperformance is still an open question. We collect new data on CEO successions for over 800 firms in Latin America and Europe to document their corporate governance choices and, crucially, provide causal evidence on the effect of dynastic CEO successions on the adoption of managerial best practices tied to improved productivity. Specifically, we establish two key results. First, there is a preference for male heirs: when the founding CEO steps down they are 30pp more likely to keep control within the family when they have a son. Second, instrumenting with the gender of the founder’s children, we estimate dynastic CEO successions lead to 0.8 standard deviations lower adoption of managerial best practices, suggesting an implied productivity decrease of 5 to 10%. To guide our discussion on mechanisms, we build a model with two types of CEOs (family and professional) who decide whether to invest in better management practices. Family CEOs cannot credibly commit to firing employees without incurring reputation costs. This induces lower worker effort and reduces the returns to investing in better management. We find empirical evidence that, controlling for lower skill levels of managers, reputational costs constrain investment in better management.
    Keywords: CEO; family firms; organisation; emerging economies
    JEL: L2 M11
    Date: 2018–01–01
  5. By: Bernard, Andrew B.; Bøler, Esther Ann; Dhingra, Swati
    Abstract: The vast majority of world trade flows is between firms. Only recently has research in international trade started to emphasize the importance of the connections between exporters and importers both in aggregate trade flows and in the negative relationship between trade and geographic distance. This chapter documents the role of firm-to-firm connections in trade flows and the formation and duration of these importer-exporter relationships. Using customs data from Colombia for 1995-2014, we are able to identify both the Colombian importing firm and the foreign exporter in every Colombian import and export transaction. We document both the nature of these bilateral trading relationships and their evolution over time.
    Keywords: exporters; importers; gravity; export growth; margins of trade; heterogeneous firms
    JEL: F14
    Date: 2018–04–01
  6. By: Blanco-Arroyo, Omar; Ruiz-Buforn, Alba; Vidal-Tomás, David; Alfarano, Simone
    Abstract: Introducing the granular hypothesis, Gabaix (2011) shows that the idiosyncratic shocks of a few “granular” firms account for a significant fraction of aggregate fluctuations of the US business cycle. In the literature, however, the question of how many are the granular firms in an economy is left unanswered. Using Spanish data, we propose a novel methodology to calibrate the granular size of the economy, i.e. the number of granular firms.
    Keywords: Business cycle, idiosyncratic shocks, productivity, granular residual, granularity index
    JEL: C20 E32
    Date: 2018–06–26
  7. By: Mendez-Guerra, Carlos; Gonzales-Rocha, Erick
    Abstract: This article compares the distribution dynamics of two commonly used TFP estimation frameworks: the control function approach of Levinsohn and Petrin (2003) (LP for short) and the corrected control function approach of Ackerberg et al. (2015) (ACF for short). Using Brazilian firm-level data for the textile and furniture sectors, we estimate the transitional dynamics and long-run equilibrium of the TFP distribution for each framework over the 2003-2009 period. Results of this comparison are as follows. In the textile sector, the distribution dynamics for both frameworks are to some extent qualitatively similar. In the furniture sector, however, the distribution dynamics are largely different. While the LP framework shows relatively less mobility, two convergence clusters in the transition stage, and a bumpy distribution in the long run; the ACF framework shows relatively more backward mobility, a unique convergence cluster in the transition, and a highly symmetric distribution in the long run. In light of these results, the article concludes urging researchers not to rely too heavily on one or the other framework. It seems more appropriate to consider both frameworks for drawing inferences on productivity convergence and dispersion dynamics
    Keywords: total factor productivity, control function approach, distribution dynamics, manufacturing firms, Brazil
    JEL: D24 O47 O54
    Date: 2018–07–04
  8. By: Marco de Pinto (Institute for Labour Law and Industrial Relations in the European Union (IAAEU), Trier University); Laszlo Goerke (Institute for Labour Law and Industrial Relations in the European Union (IAAEU), Trier University)
    Abstract: In a Cournot-oligopoly with free but costly entry and business stealing, output per firm is too low and the number of competitors excessive, assuming labor productivity to depend on the number of employees only or to be constant. However, a firm can raise the productivity of its workforce by paying higher wages. We show that such efficiency wages accentuate the distortions occurring in oligopoly. Specifically, excessive entry is aggravated and the welfare loss due to market power rises
    Keywords: Oligopoly, Efficiency Wages, Excessive Entry, Welfare
    JEL: D43 J31 L13
    Date: 2018–07
  9. By: Aksel (A.) Erbahar (Erasmus School of Economics)
    Abstract: Traditional heterogeneous firms and trade models predict no causal relationship between firms' exports and domestic sales. This paper, using a rich dataset on Turkish firms for the 2005-14 period, analyzes the relationship between firm-product sales in different markets for the first time in the literature to identify the channels that link exports and domestic sales. First, I use an instrumental variables strategy and establish that an exogenous doubling of exports increases a firm's domestic sales by 26 percent on average--a result that is mostly driven by small firms. Second, I do an analogous exercise at the firm-product level, and find coefficients that are 62 percent larger, hinting to the importance of product-specific scale effects. Moreover, I propose a novel approach to isolate the production versus non-production factors that influence firm dynamics by focusing on non-produced (or carry-along trade, CAT) exports. I find that CAT exports also affect domestic sales positively, suggesting that spillovers at the firm level such as the easing of liquidity constraints play a role. In the process, I reveal that export demand shocks influence firms' expansion in terms of employment, wages per employee, and investment.
    Keywords: international trade; domestic sales; export shocks; carry-along trade
    JEL: F1 F14 L20
    Date: 2018–07–23
  10. By: Roberto Steri (University of Lausanne and Swiss Finance Institute)
    Abstract: I show that an asset pricing model for the equity claims of a value-maximizing firm can be constructed from its optimal financial contracting behavior. I study a dynamic contracting model in which firms trade off the costs and benefits of a given promise to pay external lenders in a specific economic state. Deals between firms and financiers reveal the importance of that state for firm's equity value, namely the stochastic discount factor the firm responds to. I empirically evaluate the model in the cross section of expected equity returns. I find that the financial contracting approach goes a long way in rationalizing observed cross-sectional differences in average returns, also in comparison to leading asset pricing models. In addition, the model discloses that two easily measured variables, the growth rates on net worth and profitability, generate sizeable cross-sectional spreads in returns. Finally, a calibrated version of the model is broadly consistent with observed corporate policies of US listed firms.
    Keywords: Dynamic Contracting, Cross Section of Returns, Hedging, Capital Asset Pricing Model, Stochastic Discount Factor.
    JEL: C61 C63 D21 D24 G10 G12 G31 G32 G35
    Date: 2018–06
  11. By: Choi, Jay Pil (Michigan State University, Department of Economics); Gerlach, Heiko (University of Queensland)
    Abstract: This paper analyzes optimal cross-licensing arrangements between incumbent firms in the presence of potential entrants. The optimal cross-licensing royalty rate trades off incentives to sustain a collusive outcome vis-a-vis incentives to deter entry with the threat of patent litigation. We show that a positive cross-licensing royalty rate, which would otherwise relax competition and sustain a collusive outcome, dulls incentives to litigate against entrants. Our analysis can shed light on the puzzling practice of royalty free cross-licensing arrangements between competing firms in the same industry as such arrangements enhance incentives to litigate against any potential entrants and can be used as entry-deterrence mechanism.
    Keywords: cross-licensing arrangements; patent litigation; collusion; entry deterrence
    JEL: D43 L13 O30
    Date: 2018–07–10
  12. By: ARATA Yoshiyuki
    Abstract: In our modern economy, firms are interconnected in a complex network of various relationships such as customer-supplier relationships. The important role that this network structure for aggregate fluctuations plays in aggregate fluctuations has received increasing attention in recent studies, and the analysis of shock propagation on the network has become an important field of research. The propagation of corporate bankruptcy via a production network is an example of such phenomena. A customer's bankruptcy may lead to a considerable loss for the firm's suppliers (e.g., losses in trade credit and future earnings), causing a cascade of bankruptcies among suppliers. This paper empirically analyzes this contagion effect by merging two comprehensive datasets, one on customer-supplier relationships of more than one million firms in Japan and the other on bankruptcies from April 2013 to February 2017, recorded on a daily basis. Our dataset enables us to identify the suppliers facing customer bankruptcy and to analyze the suppliers' subsequent response. We show that the contagion effect is economically and statistically significant at the firm level; for example, bankruptcies of 50% customers approximately double the bankruptcy probability of their suppliers. Based on this result, we examine the aggregate impact of the contagion effect by simulating our model. We find that bankruptcy propagation is highly unlikely to be pervasive even though there is a significant contagion effect at the firm level. This is because the aggregate consequence of bankruptcies is determined by the combined effect of the contagion at the firm level and the production network structure. Bankruptcy shocks are immediately absorbed by the economy because of the small-worldness of the production network. This characteristic feature of the production network prevents bankruptcy propagation in the economy, thus, it is unlikely to occur.
    Date: 2018–06
  13. By: Gary Clyde Hufbauer (Peterson Institute for International Economics); Zhiyao (Lucy) Lu (Peterson Institute for International Economics)
    Abstract: Over the past three years, the European Union has sought various ways to curb tax avoidance practices and collect more revenue from an array of US multinational corporations (MNCs), triggering disputes with some of the giants in the field. Now the European Commission is looking to tax MNCs’ digital earnings. It has proposed a digital services tax (DST), which would tax the part of a digital firm’s revenues attributed to European member states, and a digital profits tax, which would tax the slice of corporate profits derived in member states. These new tax proposals arise in a general European atmosphere of distrust towards highly successful US firms, exemplified by attacks on US digital firms over privacy issues and concerns that tech giants may be defying EU competition policy standards. Many US MNCs in the digital industry, such as Google and Facebook, may be subject to the proposed taxes. Hufbauer and Lu argue that the DST has the characteristics of a prohibited tariff under the rules of the World Trade Organization. They suggest several countermeasures the United States could pursue if the European Union moves forward with implementing the DST.
    Date: 2018–06

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