nep-bec New Economics Papers
on Business Economics
Issue of 2018‒08‒27
twelve papers chosen by
Vasileios Bougioukos
Bangor University

  1. Earnings Dynamics and Firm-Level Shocks By Benjamin Friedrich; Costas Meghir; Lisa Laun; Luigi Pistaferri
  2. Let' s Try Next Door: Technical Barriers to Trade and Multi-destination Firms By Lionel Fontagné; Gianluca Orefice
  3. Choosing between Growth and Glory By Sharon Belenzon; Aaron Chatterji; Brendan Daley
  4. A Unified Model of International Business Cycles and Trade By Saroj Bhattarai; Konstantin Kucheryavyy
  5. A firm-level perspective on micro- and macro-level uncertainty; An analysis of business expectations and uncertainty from the UK Management and Expectations Survey By Gaganan Awano; Nicholas Bloom; Ted Dolby; Paul Mizen; Rebecca Riley; Tatsuro Senga; John Van Reenen; Jenny Vyas; Philip Wales
  6. Cascading Innovation By Vasco Carvalho; Mirko Draca
  7. Corporate Governance, Managerial Compensation, and Disruptive Innovations By Murat Celik; Xu Tian
  8. Differential Firm Commitment to Industries Supported by Social Movement Organizations By Durand, Rodolphe; Georgallis, Panayiotis
  9. Physician-Industry Interactions: Persuasion and Welfare By Matthew Grennan; Kyle Myers; Ashley Swanson; Aaron Chatterji
  10. Short and medium term financial-real cycles: An empirical assessment By Engelbert Stockhammer; Rob Jump; Karsten Kohler; Julian Cavallero
  11. Patents to Products: Innovation and Firm Performance By David Argente; Douglas Hanley; Salome Baslandze; Sara Moreira
  12. How do Firms Grow? The Life Cycle of Products Matters By David Argente; Munseob Lee; Sara Moreira

  1. By: Benjamin Friedrich (Northwestern Unversity); Costas Meghir (Yale University); Lisa Laun (Institute for Evaluation of Labour Marke); Luigi Pistaferri (Stanford University)
    Abstract: In this paper we use matched employer employee data from Sweden to study the role of the firm in affecting the stochastic properties of the wage process. We consider two ways in which the firm may induce variations in pay across workers and over time: match effects (allowed to vary over time), and the transmission of firm-specific productivity shocks. In both cases we separate temporary from more persistent effects. Our statistical model accounts for endogenous participation and mobility decisions and thus deals with the potential truncation in the impact of productivity on wages that is induced by people quitting into unemployment or changing employer. We document a number of key findings. First, firm-specific permanent productivity shocks transmit to individual wages, but the effect is mostly concentrated among the high-skilled workers; the opposite pattern is found for firm-specific temporary shocks. Moreover, we find only modest updates in match effects over the life of a firm-worker relationship. Finally, we estimate a significant role for permanent individual shocks that stick with the worker. However, a substantial part of the growth in earnings variance over the life cycle for high-skilled workers is driven by firms. By age 55, 44% of the cross-sectional variance is attributable to firm-level shocks.
    Date: 2018
  2. By: Lionel Fontagné (PSE - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique); Gianluca Orefice (CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique)
    Abstract: Highlights Stringent TBTs drive the average firm out of the market with a magnified effect for multi-destination players, who are encouraged to redirect their exports to other destinations (free of TBT concerns). Multi-destination firms are more likely to exit as a response to a stringent TBT. Thus, the imposition of a stringent TBT, by pushing multi-destination (high-productive) firms out of the market, reduces the average productivity of incumbent firms (i.e. the welfare of the imposing country). We combine aggregate estimations at sector-destination level with firm-level estimations and find that stringent TBTs represent mainly increases in fixed (more than variable) trade costs, with trade elasticity magnified for more homogeneous sectors.
    Keywords: Multi-destination Firms,Non-tariff Measures, TBT, Trade Margins
    Date: 2016–07
  3. By: Sharon Belenzon; Aaron Chatterji; Brendan Daley
    Abstract: Prior work has established that the financing environment can impact firm strategy. We argue that this influence can shape the earliest strategic choices of a new venture by creating a potential tradeoff between two objectives: rapid growth and reaping the benefits of a positive reputation (glory). We leverage a simple reputation-building strategic choice, naming the firm after the founder (eponymy), that is associated with superior profitability. Next, we argue via a formal model that the availability of/dependence on external financing can explain why high-growth firms are rarely eponymous. We find empirical support for the model's predictions using a large dataset of 1 million European firms. Eponymous firms grow considerably more slowly than similarly profitable firms. Moreover, eponymy varies in accordance with the firm's financing environment in a pattern consistent with our model. We discuss implications for the literature on new venture strategy.
    JEL: D21 D22 D23 D8 M13
    Date: 2018–08
  4. By: Saroj Bhattarai (University of Texas at Austin); Konstantin Kucheryavyy (University of Tokyo)
    Abstract: We present a general, competitive open economy business cycle model with capital accumulation, trade in intermediate goods, production externalities in the intermediate and final goods sectors, and iceberg trade costs. Our main theoretical result shows that models developed in the modern international trade literature that feature comparative advantage, monopolistic competition and cost of entry, and firm heterogeneity and cost of exporting are isomorphic, in terms of aggregate equilibrium, to versions of this competitive dynamic model under appropriate restrictions on the externalities. In particular, the restrictions apply on the overall scale of externalities, the split of externalities between the different factors of production, and the identity of the sectors with production externalities. Our quantitative exercise assesses whether various restricted versions of the general model, in forms they are typically considered in the literature, are able to resolve the well-known aggregate empirical puzzles in international business cycle models. Our theoretical result on isomorphism between models then provides insights on why they fail to do so in many instances. We thus provide a unified theoretical and quantitative treatment of the international business cycles and trade literatures in a general dynamic framework.
    Date: 2018
  5. By: Gaganan Awano; Nicholas Bloom; Ted Dolby; Paul Mizen; Rebecca Riley; Tatsuro Senga; John Van Reenen; Jenny Vyas; Philip Wales
    Abstract: In the current climate, it is difficult to over-state the importance of improving our understanding of the economic impact of uncertainty. While it is widely accepted that uncertainty depresses economic activity, there is scarce quantitative evidence, particularly at the firm-level, to examine this relationship. This paper exploits a new data source on business-level expectations – the Management and Expectations Survey conducted by the Office for National Statistics (ONS) in collaboration with the Economic Statistics Centre of Excellence (ESCoE) – to give insight into British firms’ expectations and uncertainty concerning their turnover, expenditure, investment and employment growth for 2017 and 2018, as well as real UK GDP growth for 2018. Our results suggest that firms’ expectations of UK GDP growth for 2018 are more pessimistic, compared with recent trends and professional forecasters. We find that younger businesses and those with more structured management practices are more optimistic of their future turnover growth, while foreign-owned firms are more pessimistic than domestically-owned firms. We measure the uncertainty that businesses have around these expectations, and find that firms that are smaller, younger, domestically-owned, family- owned-and-family-managed and less productive display higher levels of uncertainty. We also identify a relationship between firms’ micro- and macro-economic expectations: firms that are more optimistic of future GDP growth are also more optimistic of their own future performance, and firms that are more uncertain of future GDP growth are also more uncertain of their own future performance. We establish a relationship between firms’ past experiences and their uncertainty for the future: firms that operate in industries with typically volatile growth are more uncertain of their future growth.
    Keywords: Expectations, uncertainty, productivity, management practices
    JEL: L2 M2
    Date: 2018–07
  6. By: Vasco Carvalho (U of Cambridge); Mirko Draca (University of Warwick)
    Abstract: US government spending since World War II has been characterized by large investments in defense-related high-tech goods and services and R&D. In turn, this means that the Department of Defense (DoD) has had a large role in funding corporate innovation in the US. This paper (i) quantifies the impact of military procurement spending on corporate innovation by publicly listed firms and (ii) shows that DoD impact on innovation was not limited to the winners of defense contracts but instead cascaded through the supply chainof DoD contractors via indirect market size effects, working through firm-to-firm input linkages. We use a database of detailed, historical procurement contracts for all Department of Defense (DoD) prime contracts since 1966. Product-level spending shifts are used as a source of exogenous variation in firm-level procurement receipts. We combine this data with information on the supply chain linkages of publicly listed firms. Our estimates indicate that defense procurement has a positive direct impact on patenting and R&D investment, with an elasticity of approximately 0.07 across both measures of innovation for DoD contractors. Further, our estimates imply that the derived demand for inputs following the award of a DoD contract constitutes a large indirect market size effect for the suppliers of DoD contractors. These indirect market size effects in turn induce innovation cascades working up the supply chain. We find that the elasticity of innovation outcomes to indirect DoD market size shocks is about half of that estimated for direct contractors but affects a much larger number of firms, increasing the effect of defense spending on aggregate innovation by at least 20%.
    Date: 2018
  7. By: Murat Celik (University of Toronto); Xu Tian (University of Toronto)
    Abstract: Whether a CEO manages the innovation efforts of the firm in line with shareholder preferences has a substantial impact on market value and firm growth, which in turn influence aggregate productivity growth and welfare. Using data on U.S. public firms, we find that (i) firms with better corporate governance tend to adopt highly incentivized contracts rich in stock options; and (ii) such contracts are more likely to lead to disruptive innovations -- patented inventions that are in the upper tail of the distribution in terms of quality and originality. We develop and estimate a new dynamic general equilibrium model of firm-level innovation with agency frictions and endogenous determination of executive contracts. The model is used to study the joint dynamics of corporate governance, managerial compensation, and disruptive innovations. Better corporate governance can reduce the influence of the CEO in the determination of the compensation structure. This leads to more incentivized contracts and boosts innovation, with substantial benefits for the shareholders, as well as the broader economy through knowledge spillovers. Shutting down the agency frictions leads to an increase in long-run output growth, which translates into a significant welfare gain in consumption equivalent terms.
    Date: 2018
  8. By: Durand, Rodolphe; Georgallis, Panayiotis
    Abstract: This article theorizes about and tests the conditions under which firms’ commitment to an industry is influenced by social movement organizations (SMOs) that favor the industry. We argue that the more prominent SMOs are within an industry, the more a firm increases its commitment to that industry by expanding its operations; yet, this main effect should be moderated substantially by a firm’s idiosyncratic characteristics. The current research predicts that a firm’s location, its sensitivity to information about the industry’s potential, and its history of associations with activists determine the magnitude of the effect of SMO prominence on its strategic commitment to the industry. We test and find support for these hypotheses using a longitudinal data set of European manufacturers of solar photovoltaic cells between 1990 and 2011. The findings offer new insights for literature on social movements and organizations, as well as strategic management research.
    Keywords: Organization and Management Theory; Strategy and Policy; Sustainability/Corporate Environmentalism; Economic Sociology; Nonmarket/Political Environment
    JEL: L10
    Date: 2017–06–22
  9. By: Matthew Grennan; Kyle Myers; Ashley Swanson; Aaron Chatterji
    Abstract: In markets where consumers seek expert advice regarding purchases, firms seek to influence experts, raising concerns about biased advice. Assessing firm-expert interactions requires identifying their causal impact on demand, amidst frictions like market power. We study pharmaceutical firms' payments to physicians, leveraging instrumental variables based on regional spillovers from hospitals' conflict-of-interest policies and market shocks due to patent expiration. We find that the average payment increases prescribing of the focal drug by 73 percent. Our structural model estimates indicate that payments decrease total surplus, unless payments are sufficiently correlated with information (vs. persuasion) or clinical gains not captured in demand.
    JEL: I1 L0
    Date: 2018–07
  10. By: Engelbert Stockhammer (Kingston University); Rob Jump; Karsten Kohler; Julian Cavallero
    Abstract: Theories such as Minsky’s financial instability hypothesis or New Keynesian financial accelerator models assign a key role to financial factors in business cycle dynamics. We present descriptive statistics and a simple estimation framework to examine the financial-real interaction mechanisms that are at the core of these theories. Specifically, we examine cycle frequencies in seven OECD countries over the period 1970 to 2015, and find that interest rates, business debt, and household debt exhibit cycle lengths of 4-6, 8-11, and 14-26 years, respectively. We then estimate bivariate VAR models which provide evidence for financial-real interaction mechanisms, (i) at high frequencies between interest rates and GDP, and (ii) at low frequencies between business debt and GDP. In contrast, there is no evidence for a cycle mechanism between household debt and GDP.
    Keywords: Minsky, financial accelerator, financial cycle, business cycle
    JEL: E32 G01
    Date: 2018–10
  11. By: David Argente (University of Chicago); Douglas Hanley (University of Pittsburgh); Salome Baslandze (EIEF - Einaudi Institute for Economics a); Sara Moreira (Northwestern University)
    Abstract: What do standard patent-based innovation measures capture? Using the unique match of firms’ patenting activities and their product introduction in the con sumer goods sector, we study the relationship between patents and innovation. Our current results indicate that both at the extensive margin and the intensive margin, patents (and citations-adjusted patents) are strongly associated with higher product introduction as well as product destruction and hence larger re allocation at the firm level. We provide additional evidence that this association is at least partly causal. Firms that are patenting also introduce products of higher quality, enjoy larger sales and hold more diverse set of products. We disentangle the effect of patents on product versus process innovation, distinction that has been hard to measure from standard data sources. We find that the effect of patenting on product creation is larger for smaller firms, while the process innovation seems more pronounced in larger firms. Textual analysis of patents and product descriptions sheds additional light on the exact transmission of innovation embedded in the patents into specific product creation.
    Date: 2018
  12. By: David Argente (University of Chicago); Munseob Lee (University of California San Diego); Sara Moreira (Northwestern University)
    Abstract: We exploit detailed product- and firm-level data to study the size of firms and products over their life cycles. We build a dataset that contains information on the product portfolio of each firm in the consumer goods sector over the period 2006-2015. We document that, with the exception of the first few quarters, sales of products decline at a steady pace throughout most of their life cycle. These dynamics are robust across very heterogenous types of products, and contrast with the profile of firms, which grow throughout most of their life cycle. Motivated by these results, we create a statistical framework of firm growth as a function of the vintages of products. Using this decomposition we quantify, for young and mature firms, the importance of new product introduction (both the intensive and extensive margins) and the impact of decreasing sales of older vintages. We find that firms must grow by continuously adding products that generate sufficiently large revenue in order to compensate the reduction in revenue accruing from previous vintages of products. We structurally estimate a model of heterogeneous multiproduct firms and decompose sales over the life cycle of the product to understand the mechanisms behind their decline. Our results indicate that demand-side factors are behind the decline in sales of products and are consistent with preferences for newer vintages of products.
    Date: 2018

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