nep-bec New Economics Papers
on Business Economics
Issue of 2020‒08‒17
fifteen papers chosen by
Vasileios Bougioukos
Bangor University

  1. A Theory of Falling Growth and Rising Rents By Aghion, Philippe; Bergeaud, Antonin; Boppart, Timo; Klenow, Peter J.; Li, Huiyu
  2. Entry Deregulation, Firm Organization and Wage Inequality By Dudley Cooke; Ana P. Fernandes; Priscila Ferreira
  3. Software Development and Innovation ‒ Exploring the Software Shift in Innovation in Swedish Firms By Andersson, Martin; Kusetogullari, Anna; Wernberg, Joakim
  4. Trainspotting: Board Appointments in Private Firms By Audinga Baltrunaite; Egle Karmaziene
  5. A cross-sectional analysis of growth and profit rate distribution: the Spanish case By Vidal-Tomás, David; Ruiz-Buforn, Aba; Blanco-Arroyo, Omar; Alfarano, Simone
  6. Climate Regulation and Emissions Abatement: Theory and Evidence from Firms' Disclosures By Ramadorai, Tarun; Zeni, Federica
  7. The Financing of Investment: Firm Size, Asset Tangibility and the Size of Investment By Mathias Lé; Frédéric Vinas
  8. What Jobs are Being Done at Home During the Covid-19 Crisis? Evidence from Firm-Level Surveys By Alexander W. Bartik; Zoe B. Cullen; Edward L. Glaeser; Michael Luca; Christopher T. Stanton
  9. Gender Equity Insights 2020: Delivering the Business Outcomes By Rebecca Cassells; Alan S Duncan
  10. Market exit and minimax regret. By Gisèle Umbhauer
  11. Marginal Entrants and Trade-Liberalization Effects Across Models of Imperfect Competition By Alfaro, Martin; Lander, David
  12. The innovation premium to soft skills in low-skilled occuptions By Aghion, Philippe; Bergeaud, Antonin; Blundell, Richard; Griffith, Rachel
  13. An International Comparison of FDI Entry Mode (Japanese) By SAITO Yukiko; TAKAYAMA Haruka
  14. Using Equity Market Reactions to Infer Exposure to Trade Liberalization By Andrew N. Greenland; Mihai Ion; John W. Lopresti; Peter K. Schott
  15. Spouses and entrepreneurship By Joao Galindo da Fonseca; Charles Berube

  1. By: Aghion, Philippe; Bergeaud, Antonin; Boppart, Timo; Klenow, Peter J.; Li, Huiyu
    Abstract: Growth has fallen in the U.S., while firm concentration and profits have risen. Meanwhile, labor's share of national income is down, mostly due to the rising market share of low labor share firms. We propose a theory for these trends in which the driving force is falling firm-level costs of spanning multiple markets, perhaps due to accelerating IT advances. In response, the most efficient firms (with higher markups) spread into new markets, thereby generating a temporary burst of growth. Because their efficiency is difficult to imitate, less efficient firms find markets more difficult to enter profitably and therefore innovate less. Eventually, due to greater competition from efficient firms, within-firm markups actually fall. Despite the increase in the aggregate markup and rents, firm incentives to innovate decline --- lowering the long run growth rate.
    Keywords: Concentration; labor's income share; Markups; productivity slowdown; rents
    JEL: O31 O47 O51
    Date: 2019–11
  2. By: Dudley Cooke (University of Exeter); Ana P. Fernandes (University of Exeter); Priscila Ferreira (NIPE and University of Minho)
    Abstract: This paper identifies a causal link between changes in product market competition, firm reorganization and within-firm wage inequality. We exploit a unique episode of comprehensive firm entry deregulation as a quasi-natural experiment and use exceptionally detailed linked employer-employee data for the universe of private sector firms and workers. We find that following deregulation affected firms flatten their hierarchies: the number of layers is reduced and managers´spans of control increased. Dropping a hierarchy layer is accompanied by a significant reduction in wage inequality within the firm, by 10% for the average pay ratio between the top and the bottom layer, showing that there are real changes arising from firm reorganization. Overall dispersion is also reduced. We discuss mechanisms and interpretations for these changes.
    Keywords: Firm entry deregulation, Hierarchical layers, Internal organization, Product Market Competition, Span of control, Wage Inequality
    JEL: L22 L23 M12 J31
    Date: 2020
  3. By: Andersson, Martin (Department of Industrial Economics Blekinge Institute of Technology (BTH)); Kusetogullari, Anna (Department of Industrial Economics Blekinge Institute of Technology (BTH)); Wernberg, Joakim (Swedish Entrepreneurship Forum)
    Abstract: Several scholars as well as industry professionals have claimed that there is a “software-biased shift” in the nature and direction of innovation in that software development is a core part of innovation activities in firms across a wide array of industries. Empirical firm-level evidence of such a shift is still scant. We employ new and unique firm-level survey data on the frequency and nature of software development among firms in Sweden, matched with the Community Innovation Survey (CIS). We find robust evidence supporting a software-bias in innovation in that software development is associated with a higher likelihood of introducing innovations as well as higher innovation sales among firms in both manufacturing and services industries. Furthermore, this positive relationship is stronger for firms employing in-house software developers than for those that only use external developers, suggesting that there is a hierarchy but possibly also a complementarity between internal and external software development. We also find support for complementarity between software-based technology and human capital; the estimated marginal effect of software development on innovation is particularly strong for firms that combine in-house software development with a highly educated workforce in STEM as well as in other disciplines.
    Keywords: Innovation; Software; Software development; Digitalization; Human capital; Software bias; Digital technology; Absorptive capacity
    JEL: L25 O15 O32 O33 O43
    Date: 2020–06–30
  4. By: Audinga Baltrunaite (Bank of Italy); Egle Karmaziene (VU University Amsterdam; Swedish House of Finance; Tinbergen Institute)
    Abstract: We examine how the size of the corporate directors’ labor market affects the quality of board appointments in Italian private firms. To establish the causality of the relationship, we exploit exogenous variations in firms’ access to non-local potential directors following the gradual introduction of a high-speed train, which improved rail connections between cities. Using administrative data on board members belonging to the universe of limited liability companies and a two-way fixed-effects model, we obtain time-invariant measures of firm and director quality. We demonstrate that a positive shock to the non-local director supply increases positive assortative matching between firms and directors. High-quality firms improve the quality of their boards, while lower-quality firms attract lower quality directors. The effect arises from a more active re-matching along the high-speed train line. Our results further suggest that the private firms’ boards with higher quality directors are associated with higher firm growth and productivity, and a lower probability of default.
    Keywords: director supply, board of directors, match quality.
    JEL: G32 G34
    Date: 2020–06
  5. By: Vidal-Tomás, David; Ruiz-Buforn, Aba; Blanco-Arroyo, Omar; Alfarano, Simone
    Abstract: We analyse the time evolution of the empirical cross-sectional distribution of firms profit and growth rates. In particular, we analyse the conditional properties of the empirical distributions depending on the size of the firms and business cycle phase. In order to do so, we employ the Laplace distribution as a benchmark, further considering the Subbotin and Asymmetric Exponential Power (AEP hereafter) distributions, to capture the potential asymmetry and leptokurtosis of the empirical distribution. Our results show that the profit rates of large firms are characterised by an asymmetric Laplace distribution with parameters largely independent of the business cycle phase. Small firms, instead, are characterised by the AEP distribution, which accounts for the conditional dependence of distribution on the phase of the business cycle. We observe that the largest firms are more robust to downturns compared to the small firms, given their invariant distributional characteristics during crisis periods.
    Keywords: Profit rates ; Growth rates ; Firm size ; Business cycle ; Laplace distribution ; Asymmetric Exponential Power distribution
    JEL: C10 D21 E10 L10
    Date: 2020–07–26
  6. By: Ramadorai, Tarun; Zeni, Federica
    Abstract: We use data from the Carbon Disclosure project (CDP) to measure firms' beliefs about climate regulation, their plans for future abatement, and their current actions on mitigating carbon emissions. These measures vary both across firms and time in a manner that is especially pronounced around the Paris climate change agreement announcement. A simple dynamic model of carbon abatement with a firm exposed to a certain future carbon levy, facing a trade-off between emissions reduction and capital growth, and convex emissions abatement adjustment costs cannot explain the data. A more complex two-firm dynamic model with both information asymmetry across firms and reputational concerns fits the data far better. Our findings imply that firms' abatement actions depend greatly on their beliefs about climate regulation, and that both informational frictions and reputational concerns can amplify responses to climate regulation, increasing its effectiveness.
    Keywords: abatement; Carbon Emissions; climate change; climate regulation; Dynamic Models; information asymmetry; reputation
    JEL: G31 G38 Q52 Q54
    Date: 2019–11
  7. By: Mathias Lé; Frédéric Vinas
    Abstract: How do firms finance their investment? To what extent does the financing mix depends on the nature or the size of investment? To what extent does the funding mix of investment vary along firm size? Relying on a unique database of firms covering 72% of the value added in France over three decades, this paper addresses those questions and provides a comprehensive picture of the financial resources used by firms to finance their investment. We uncover significant cross-sectional heterogeneity in the financing mix of investment along firm size, asset tangibility and investment size. In particular, we show that the commonly held view that "firms strongly rely on bank credit in a bank-based economy" weakens significantly as we consider larger firms or when it comes to finance intangible investments or relatively small investments.
    Keywords: Investment, Working Capital, Firm Financing, Bank Credit, Equity Finance, Retained Earnings, Firm Size, Investment Spikes .
    JEL: E22 G21 G30 G31 G32
    Date: 2020
  8. By: Alexander W. Bartik; Zoe B. Cullen; Edward L. Glaeser; Michael Luca; Christopher T. Stanton
    Abstract: The threat of COVID-19 has increased the health risks of going to an office or factory, leading more workers to do their jobs remotely. In this paper, we provide results from firm surveys on both small and large businesses on the prevalence and productivity of remote work, and expectations about the persistence of remote work once the COVID-19 crisis ends. We present four main findings. First, while overall levels of remote work are high, there is considerable variation across industries. The Dingel and Neiman (2020) measure of suitability for remote work does a remarkably good job of predicting the industry level patterns of remote work - highlighting the challenge of moving many industries to remote work. Second, remote work is much more common in industries with better educated and better paid workers. Third, in our larger survey, employers think that there has been less productivity loss from remote working in better educated and higher paid industries. Fourth, more than one-third of firms that had employees switch to remote work believe that remote work will remain more common at their company even after the COVID-19 crisis ends.
    JEL: J01 J24 M5 O3
    Date: 2020–06
  9. By: Rebecca Cassells (Bankwest Curtin Economics Centre (BCEC), Curtin University); Alan S Duncan (Bankwest Curtin Economics Centre (BCEC), Curtin University)
    Abstract: Leadership has never been more important as we navigate our way through the COVID-19 crisis and towards an economic recovery that workers, families and businesses are depending on. The business case for increasing the number of women in senior leadership positions has long been argued, with greater diversity of thought delivering new ideas, new management styles and ultimately better business outcomes. Now, more than ever, it is a compelling case. In this fifth report in the BCEC|WGEA Gender Equity Insights series, we find a strong and convincing causal relationship between increasing the share of women in leadership and subsequent improvements in company performance. This relationship is present when increasing women’s representation on boards, increasing the share of women in the most senior leadership tier of the company and when appointing a female CEO. Taking advantage of the longitudinal nature of the WGEA reporting data, we are able to assess just how much influence women in leadership have on company performance. This has been done using sophisticated econometric panel data techniques that relate prior changes in female leadership shares to subsequent company performance outcomes. Our methodology takes into account other firm characteristics that influence business performance, intrinsic differences between individual companies as well as business cycle effects. The findings in this report provide clear support for the business case. More women at the top means better company performance, greater productivity and greater profitability.
    Keywords: gender equity, gender and business performance, women and leadership, gender representation and business outcomes, company profitability.
    Date: 2020–06
  10. By: Gisèle Umbhauer
    Abstract: We study an overcrowded duopoly market where the only strategic variable is the exit time. We suppose that the surviving firm gets a positive monopoly profit and we focus on the classic context with complete information and identical firms. The only symmetric Nash equilibrium of this war of attrition is a mixed-strategy equilibrium that leads to a null expected payoff, i.e. the payoff a firm gets when it immediately exits the market. This result is not persuasive, both from an economic and from a strategic viewpoint. We argue that the minimax regret approach, that builds upon two opposite regrets - exiting the market too late and exiting the market too early - is more convincing. The minimax regret behavior, quite different from the mixed- strategy Nash equilibrium behavior, allows both firms to get a positive expected payoff.
    Keywords: war of attrition, minimax regret, Nash equilibrium, maximin payoff, mixed strategy, duopoly.
    JEL: C72 D4
    Date: 2020
  11. By: Alfaro, Martin (University of Alberta, Department of Economics); Lander, David (Peking University)
    Abstract: When should we expect a trade shock to create pro competitive effects? In this paper, we investigate this in setups with firm heterogeneity and a linear demand with horizontal product differentiation. Our main finding is that the characterization of marginal entrants completely determines whether pro-competitive effects arise across standard settings of monopolistic competition (i.e., a la Krugman, Melitz, and Chaney/short-run Melitz) and Cournot (with free and restricted entry). This result holds independently of the assumptions on the rest of the firms, and is particularly stark in Cournot, where marginal entrants comprise merely one firm (the last entrant). We also provide conditions on marginal entrants across market structures that lead to pro-competitive, anti competitive, or null effects following a unilateral trade liberalization.
    Keywords: marginal entrants; imperfect competition; import competition; export opportunities
    JEL: D43 F10 F12 L13
    Date: 2020–07–19
  12. By: Aghion, Philippe; Bergeaud, Antonin; Blundell, Richard; Griffith, Rachel
    Abstract: Matched employee-employer data from the UK are used to analyze the wage premium to working in an innovative firm. We find that firms that are more R&D intensive pay higher wages on average, and this is particularly true for workers in some low-skilled occupations. We propose a model in which a firm's innovativeness is reflected in the degree of complementarity between workers in low-skill and high-skilled occupations, and in which non-verifiable soft skills are an important determinant of the wages of workers in low-skilled occupations. The model yields additional predictions on training, tenure and outsourcing which we also find support for in data.
    Date: 2019–11
  13. By: SAITO Yukiko; TAKAYAMA Haruka
    Abstract: There are two types of FDI entry modes. The first is greenfield FDI (i.e., an investing firm builds a new foreign affiliate), and the other is cross-border M&A or brownfield FDI (i.e., an investing firm acquires an existing local firm). We investigate how firms choose between entry modes and compare the choices of Japanese, US, German and Chinese firms. Our empirical analysis suggests that more productive Japanese firms choose cross-border M&A rather than greenfield FDI. This evidence contrasts with the existing literature, specifically, Nocke and Yeaple (2008), which suggests that more productive firms conduct greenfield FDI rather than cross-border M&A.
    Date: 2020–07
  14. By: Andrew N. Greenland; Mihai Ion; John W. Lopresti; Peter K. Schott
    Abstract: We outline a method for using asset prices to identify firm exposure to changes in policy. We highlight the benefits of this approach for studying trade agreements and apply it to two US trade liberalizations, with China and Canada. We find that abnormal equity returns during key events associated with these liberalizations are correlated with standard measures of import competition, vary across firms even within industries, predict subsequent firm outcomes, and provide a more complete view of distributional implications. In both cases, predicted relative increases in operating profit among the largest firms dwarf the relative losses of smaller firms.
    JEL: E0 F13 F14 G12
    Date: 2020–07
  15. By: Joao Galindo da Fonseca (Université de Montréal); Charles Berube (Innovation, Science and Economic Development Canada)
    Abstract: Does having a spouse influence an individual’s decision to start a firm and what firms they create? The answer to this question is crucial for our understanding of how recent changes to family composition influence firm creation. We develop a model of endogenous entrepreneurship with spousal labour supply decisions and endogenous marriage. Married individuals have three channels, that go in opposite directions, which influence their choice to start a firm relative to the unmarried. Firstly, spouses work less when the business is more profitable partially offsetting the benefit of higher profits (spousal substitution effect). Secondly, if the business fails, the spouse works more hours (spousal insurance effect). Finally, a married individual shares their income with their spouse which decreases their income as a worker, their cost to entrepreneurship (spousal opportunity cost effect). We proceed to test empirically the relative strength of these channels. The model is informative of the components of the error term and the conditions for validity of our instrumental variable strategy. Using city level variation in the past composition of immigrants we show higher marriage rates are associated to more entry and lower average size of startups.
    Keywords: Firm dynamics, Macroeconomics, Labor markets, Family economics
    JEL: E24 E23 J63 J64
    Date: 2019–05

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