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on Business Economics |
| By: | Sungki Hong (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: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:959&r=all |
| By: | Bruno de Borger (University of Antwerp); Ismir Mulalic (Technical University of Denmark); Jan Rouwendal (Vrije Universiteit Amsterdam) |
| Abstract: | Most studies of the effects of transport infrastructure on the performance of individual firms have focused on marginal expansions of the rail or highway network over time. In this paper, we study the short-run effects of a large discrete shock in the quality of transport infrastructure, viz. the opening of the Great Belt bridge connecting the Copenhagen area with a neighboring island and the mainland of Denmark. We analyse the effect of the opening of the bridge on the productivity of firms throughout the country using a two-step approach: we estimate firm- and year-specific productivity for a large panel of individual firms, using the approaches developed by Levinsohn and Petrin (2003) and De Loecker (2011). Then, controlling for firm-fixed effects, we relate productivity to a calculated measure of accessibility that captures the effect of the opening of the bridge. We find large productivity effects for firms located in the regions near the bridge, especially for relatively small firms in the construction and retail industry. Estimation results further suggest statistically significant but small positive wage effects throughout the country, even in regions far from the bridge. Finally, there is some evidence that the bridge has stimulated new activities in the Copenhagen region at the expense of firms disappearing on the neighboring island Funen. |
| Keywords: | production functions, productivity, accessibility, agglomeration, transport infrastructure |
| JEL: | R12 H54 O18 |
| Date: | 2019–09–13 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:201900065&r=all |
| By: | Aubhik Khan (Ohio State University); Julia Thomas (Ohio State University); Tatsuro Senga (Queen Mary University of London) |
| Abstract: | We develop a model with endogenous entry and exit in an economy subject to non-stationary shocks to aggregate total factor productivity. Firms exhibit a life-cycle consistent with microeconomic data, and our model reproduces key moments of the empirical firm age and size distribution. In this setting, persistent shocks to trend growth can drive long term reductions in business formation. The economic consequences of a persistent decline in entry grow over time and, together with "wait-and-see" effects on aggregate capital investment, can compound and protract a productivity slowdown. We apply our model to understanding the last decade of U.S. economic activity, an episode marked by slow GDP growth and persistently low entry rates and business fixed investment in the aftermath of the Great Recession. Firms vary in the permanent and transitory components affecting their productivity and in their capital stocks, and their capital adjustments are subject to one period time-to-build, alongside convex and nonconvex costs. Thus, the economy's aggregate state includes a distribution of firms over productivity and capital, and changes in this distribution have a persistent influence on economic activity. Epstein-Zin preferences and a time-varying relative price of capital goods combine to accommodate countercyclical risk premia capable of driving large changes in firm values. Following a persistent shock to trend growth, equilibrium movements in firms' stochastic discount factors imply long-run reductions in the value of entry. The resulting declines in new business formation propagate the shock's effects on investment and GDP, slowing aggregate recovery. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1453&r=all |
| By: | Sytsma, Tobias |
| Abstract: | I study how rules of origin in potential export destinations influence firm- and industry-level export behavior in least-developed countries (LDCs). Rules of origin restrict LDCs from taking advantage of preferential tariff rates in export markets, and this undermines market access for LDCs and reduces the efficacy of export-oriented industrialization. I develop a model of multi-product firms in which rules of origin influence the product scope and export revenue of final goods producers through their effect on input sourcing decisions. I test the model's predictions using the 2011 revisions to the EU's rules of origin for apparel products from LDCs. To control for the potential endogeneity of the policy change I use a triple-difference approach, exploiting variation in the input-cost differentials across apparel products and export destination, before and after the EU policy change. Liberalizing rules of origin results in revenue gains, expansion of product scope, and firm entry into the export market. Within firms, incumbents upgrade product quality. Across firms, market share is reallocated toward more productive incumbents. |
| Keywords: | Rules of origin, Non-tariff barriers, Economic development, Exports-oriented industries, Ready-made garments |
| JEL: | F13 L25 O19 O24 |
| Date: | 2019–09–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:95956&r=all |
| By: | Gustavo Grullon (Rice University - Jesse H. Jones Graduate School of Business); Yelena Larkin (York University - Schulich School of Business); Roni Michaely (University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute) |
| Abstract: | In the last two decades, over 75% of U.S. industries have experienced an increase in concentration levels. We find that firms in industries with the largest increases in product market concentration have enjoyed higher profit margins and more profitable M&A deals. At the same time, we do not find evidence of a significant increase in operational efficiency, which suggests that market power is becoming an important source of value. These findings are robust to the inclusion of private firms, factors that account for foreign competition, as well as to the use of alternative measures of concentration. We also show that the higher profit margins associated with an increase in concentration are reflected in higher returns to shareholders. Overall, our results suggest that the nature of U.S. product markets has undergone a shift that has potentially weakened competition across the majority of industries. |
| Keywords: | industry concentration; HHI; product markets; profit margins; publicly-traded firms; M&A; antitrust |
| JEL: | G18 G30 G34 L40 L10 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1941&r=all |
| By: | Limor Golan (Dr.); Carl Sanders (Washington University in St. Louis); Jonathan James (California Polytechnic State University, San Luis Obispo) |
| Abstract: | The black-white pay gap increases substantially over the life-cycle. We document that white workers are assigned initially to occupations with higher complex task requirements. The accumulated earnings gap grows from $30K after 5 years to $143K after 15 years. The growth in the total earrings gap are large even for workers with the same education and AFQT scores. During these years, the gap in the degree of task complexity grows substantially. To understand the source of these long run pay gaps and to analyze their link to occupational sorting and experience, we develop a dynamic Roy model of employment and occupation choice and learning which nests discrimination and accounts for the dynamic selection of workers into occupations over time. We then develop a two-step estimation method to recover the model’s structural parameters, and use them to simulate counterfactual exercises that allows us to decompose the different factors affecting these gaps. About 27% of the total pay gap after 15 years is explained by higher entry costs of black workers into complex-task occupation. In addition, equating the initial pre-market skills and the initial mean differences in beliefs (which reflect differences in initial unobserved skills) explain about half of the total earnings after 15 years. This reflects the importance of sorting of workers into jobs over time in explaining the long-term earnings gaps, and the role of mismatch of workers to occupation in explaining the long-run racial pay gaps. Our estimates indicate that the variance of beliefs is increasing substantially more for white workers. This is consistent with statistical discrimination (Phelps 1972) and also reflecting unobserved promotion gaps and training gaps. While the pre-market skill gaps (observed and unobserved) between black and white workers are clearly an important factor in the labor market outcome gaps, frictions and discrimination are important determinants of the life-cycle labor market outcome gaps. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:320&r=all |
| By: | Gullstrand, Joakim (Department of Economics, Lund University); Knutsson, Polina (Department of Economics, Lund University) |
| Abstract: | Exposure to international competition on a country level has been shown to improve the efficiency of domestic producers. We contribute to this literature by assessing whether the distance between producers and importers, within a country, matters for import competition effects at product level. Using detailed geographical information about the location of all manufacturing firms in Sweden during the period 2005–2014, we find strong evidence of an increased efficiency in the domestic production when imports surge, but that the effect diminishes with the distance between the producer and the importer. In addition to the importance of the geographical pattern within a country, we find that the average effect of import competition conceals large variations across firms and products. Highly productive firms respond to import competition by further improving efficiency, which, in turn, is transmitted to both a lower price and a higher markup. Firms are also more likely to drop fringe products while keeping core ones. Products undercut by low import prices in their proximity respond by lowering prices only, although highly efficient products resist this by a more pronounced improvement in the marginal cost, which, in turn, is transmitted to both a lower price and a higher markup. |
| Keywords: | Import competition; distance; firm-product performance |
| JEL: | F14 |
| Date: | 2019–09–10 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2019_013&r=all |
| By: | Darai, D.; Roux, C.; Schneider, F. |
| Abstract: | We study whether firms’ collusive ability influences their incentives to merge: when tacit collusion is unsuccessful, firms may merge to reduce competitive pressure. We run a series of Bertrand oligopoly experiments where the participants decide whether, when, and to whom they send merger bids. Our experimental design allows us to observe (i) when and to whom mergers are proposed, (ii) when and by whom merger offers are accepted, and (iii) the effect on prices when mergers occur in this way. Our findings suggest that firms send more merger offers when prices are closer to marginal costs. Maverick firms that cut prices and thereby fuel competition are the predominant (but reluctant) receivers of these offers. |
| Keywords: | Tacit collusion, Mavericks, Bertrand oligopoly, Experiments |
| JEL: | C91 D43 K21 L13 L41 |
| Date: | 2019–09–17 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1984&r=all |
| By: | Enghin Atalay (University of Wisconsin, Madison); sarada sarada (UNIV OF WISCONSIN-MADISON) |
| Abstract: | Using the text of vacancy postings from 1940 to 2000, we examine the characteristics of firms which hire for newly emerging and soon-to-be disappearing work practices. To do so, we classify job titles as emerging or disappearing according to the years in which they appear. We verify that emerging work involves higher skill levels and is closer to the technological frontier --- qualities inherent to innovation. We find that, among the set of publicly listed firms, those which post ads for emerging work tend to be younger, more R&D intensive, and have higher future sales growth. Among privately held firms, those which post ads for emerging work are more likely to go public in the future. We then explore heterogeneity in the job vintage-firm performance relationship according to jobs that are in product-related technical fields versus in business related non-technical fields. New technological work correlates with R&D intensity and future sales growth, while survival and publicly traded status is more closely related to having newer vintages of business-related non-technological jobs. Our measures of firm innovativeness can be constructed for all employers, and are not limited to publicly traded firms or to industries in which R&D spending and patenting are prevalent. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:484&r=all |
| By: | Dan Cao (Georgetown University); Erick Sager (Federal Reserve Board); Henry Hyatt (US Census Bureau); Toshihiko Mukoyama (Georgetown University) |
| Abstract: | This paper analyzes firm growth along two margins: the extensive margin (adding more establishments) and intensive margin (adding more workers per establishment). We utilize administrative datasets to document the behavior of these two margins in relation to changes in the U.S. firm size distribution. Between 1990 and 2015, we find that the significant increase in average firm size was driven primarily by the expansion along the extensive margin, particularly in superstar firms. We develop a general equilibrium model of endogenous innovation that features both extensive and intensive margins of firm growth. We estimate the model to uncover the fundamental forces that caused the changes over this time period through the lens of our model. We find that, over time, the cost of innovations that lead to new establishments has declined for firms who are innovative in that dimension. Meanwhile, the duration that a firm can enjoy high growth through such innovation became shorter, and firm entry became more costly. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1484&r=all |
| By: | Roberto Gabriele; Andrea Mazzitelli; Giuseppe Espa; Maria Michela Dickson |
| Abstract: | The paper presents an empirical analysis of the effect of formal network agreements on growth of firm in Italy in the years 2011-2013. The theoretical background is given by evolutionary theories that assign a key role in determining the ability of firms to capture business opportunities to internal capabilities and to external knowledge and capabilities. We suggest that firms establishing formal relationships with other firms can extend the “set of things that they are able to do†–the set of capabilities– so that they are able to capture opportunities and grow. The study is based on a novel database of Italian firms that matches networked firms in year 2012 with firms that did not sign a formal network agreement but possess similar structural characteristics. In order to deal with possible self-selection phenomenon, we use difference-in-differences regression models to assess the effect on growth of belonging to a formal network agreement. Moreover, to study the effect of characteristics of network we employ two stage Hackman regression models. Results show that networked firms have a higher growth rate and that the size of the network plays a role. Results are in line with the evolutionary interpretation and suggest that formal network agreement can function as long-range antennas for firms that are more constrained from the geographical point of view. These agreements allow to acquire capabilities and knowledge of the market that allow firms to expand their economic activity. |
| Keywords: | Collaboration agreements, Difference in differences, firm growth |
| JEL: | D22 L25 M21 L52 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwprg:2019/16&r=all |
| By: | Reka Juhasz (Columbia University); Mara Squicciarini (Bocconi University); Nico Voigtländer |
| Abstract: | The transition from millennia of stagnating per-capita incomes to sustained economic growth constitutes the most important structural break in economic history. A key feature of the Industrial Revolution was the unprecedented growth in manufacturing productivity. So far, productivity growth during this period has been studied mostly at the country level, or – in some cases – at the aggregate sectoral level. However, theoretical and empirical research over the past decade has pointed to the importance of firm dynamics for understanding aggregate productivity. The dearth of firm-level data has thus far made it impossible to study this channel in the context of the Industrial Revolution. This paper uses a novel dataset of French firms across various industries to study the evolution of firm productivity before and during the onset of industrialization. First, we document a set of novel stylized facts about firms in innovative and traditional sectors during the Industrial Revolution in France. Second, we exploit regional variation to estimate the extent to which different firm dynamics account for different levels of industrialization across France in 1850. Third, we estimate the extent to which productivity gains were driven by firm entry relative to the intensive margin. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:528&r=all |
| By: | Antonella Nocco; Gianmarco Ottaviano; Matteo Salto |
| Abstract: | How should multilateral trade policy be designed in a world in which countries differ in terms of market access and technology, and ?firms with market power differ in terms of productivity? We answer this question in a model of monopolistic competition in which variable markups increasing in firm size are a key source of misallocation across ?firms and countries. We use ?disadvantaged?to refer to countries with smaller market size, worse state of technology (in terms of higher innovation and production costs), and worse geography (in terms of more remoteness from other countries). We show that, in a global welfare perspective, optimal multilateral trade policy should: promote the sales of low cost ?firms to all countries, but especially to disadvantaged ones; trim the sales of high cost ?firms to all countries, but especially to disadvantaged ones; reduce firm entry in all countries, but especially in disadvantaged ones. This would not only restore efficiency but also reduce welfare inequality between advantaged and disadvantaged countries if their differences in market size, state of technology and geography are large enough. |
| Keywords: | International trade policy, monopolistic competition, ?rm heterogeneity, pricing to market, multilateralism. |
| JEL: | D4 D6 F1 L0 L1 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp19109&r=all |