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on Business Economics |
| By: | Ruiz-García, J. C. |
| Abstract: | How do financial frictions affect firm dynamics, allocation of resources across firms, and aggregate productivity and output? Is the nature of productivity shocks that firms face primary for the effects of financial frictions? I first use a comprehensive dataset of Spanish firms from 1999 to 2014 to estimate non-parametrically the firm productivity dynamics. I find that the productivity process is non-linear, as persistence and shock variability depend on past productivity, and productivity shocks are non-Gaussian. These dynamics differ from the ones implied by a standard AR(1) process, commonly used in the firm dynamics literature. I then build a model of firm dynamics with financial frictions in which productivity shocks are non-linear and non-Gaussian. The model is consistent with a host of evidence on firm dynamics, financial frictions, and firms’ financial behaviour. In the model economy, financial frictions affect the firm life cycle. Without financial frictions, the size of an entrant firm will be three times larger. Furthermore, profit accumulation, which allows firms to overcome financial frictions, is slow, and it only speeds up when firms are mature. As a consequence, the average exiting firm is smaller than it would be without financial frictions. The aggregate consequences of financial frictions are significant. They result in misallocation of capital and reduce aggregate productivity by 16%. This figure is only 8% if productivity dynamics evolve according to a standard AR(1) process. |
| Keywords: | Firm Dynamics, Non-Linear Productivity Process, Financial Frictions, Misallocation |
| JEL: | E22 G32 O16 |
| Date: | 2021–08–03 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:2157&r= |
| By: | Katharina Erhardt; Simon Haenni |
| Abstract: | Can culture explain persistent differences in economic activity among individuals and across regions? A novel measure of cultural origin enables us to contrast the entrepreneurial activity of individuals located in the same municipality but whose ancestors lived just on opposite sides of the Swiss language border in the 18th century. Individuals with ancestry from the German-speaking side create 20% more firms than those with ancestry from the French-speaking side. These differences persist over generations and independent of the predominant culture at the current location. Yet, founders’ ancestry does not affect exit or growth of newly-founded firms. A model of entrepreneurial choice and complementary survey evidence suggest that the empirical patterns are mainly explained by differences in preferences, rather than skill. The results have sizable economic implications, accounting for 120,000 additional jobs over a period of 15 years. |
| Keywords: | culture, entrepreneurship, natural experiment, spatial RDD |
| JEL: | D22 L26 O12 Z10 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9198&r= |
| By: | Giuseppe Fiori (Board of Governors of the Federal Reserve System); Filippo Scoccianti (Bank of Italy) |
| Abstract: | This paper uses over two decades of Italian survey data on business managers’ expectations to measure subjective firm-level uncertainty and quantify its economic effects. We document that firm-level uncertainty persists for a few years and varies across firms’ demographic characteristics. Uncertainty induces long-lasting economic effects over a broad array of real and financial variables. The source of uncertainty matters with firms responding only to downside uncertainty, that is, uncertainty about future adverse outcomes. Economy-wide uncertainty, constructed aggregating firmlevel uncertainty, is countercyclical but uncorrelated with typical proxies in the literature, and accounts for a sizable amount of GDP variation during crises. |
| Keywords: | uncertainty, business cycles, investment, expectations, cash holdings, downside uncertainty |
| JEL: | D24 E22 E24 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_630_21&r= |
| By: | Kazunori Miwa (Graduate School of Economics, Osaka University) |
| Abstract: | This study experimentally investigates the interaction between firms f information acquisition decisions and disclosure. In particular, I focus on a Cournot duopoly market under industry-wide demand uncertainty. The results demonstrate that acquiring industry-wide demand information improves firms f production decisions in that firms can adjust their quantity levels depending on the market demand. However, disclosure diminishes a firm fs incentive to acquire such information. This is because once the information, which a firm acquired at a cost, is subsequently disclosed, a rival firm can take a free ride on the disclosed information and make a more informed decision. Hence, disclosure decreases the benefit of acquiring information for the disclosing firm. Taken together, although acquiring information improves production decisions, disclosure decreases the incentive to do so and thus, deteriorates a firm fs internal information environment. This leads to inefficient production, which in turn might have a substantial impact on market outcomes. |
| Keywords: | Information acquisition; Disclosure; Duopoly; Experiment |
| JEL: | L13 M41 M48 |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1301r&r= |
| By: | Michelacakis, Nickolas |
| Abstract: | We consider a mixed ownership duopoly delegation model with spatial price discrimination and constant, albeit different, marginal production costs. In contrast to what holds true for a private duopoly, the Nash equilibrium, absent delegation, for a mixed duopoly with discriminatory pricing according to location is both consistent and socially optimal. We find that under Nash conjectures, in most cases, firm owners have a strong incentive to delegate location decisions to managers. In such cases, firms locate closer to each other. The intensity of the competition leads to lower prices, lower profits, for both firms, and increased surplus for the consumer. |
| Keywords: | mixed duopoly; delegation; spatial competition; consistent conjectures; Nash equilibrium |
| JEL: | D43 L13 L21 L22 R32 |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:109011&r= |
| By: | Promit Kanti Chaudhuri (Indira Gandhi Institute of Development Research) |
| Abstract: | In this paper, a differentiated product economy is modeled where firms strategically set up autonomous rival divisions and the divisions play the quantity competition game `a la Cournot or by means of monopolistic competition, where the divisions are unaware of the impact of their output either on the firm's total output or on the total industry output. This case of divisions being unaware of the impact of their outputs on the firm's aggregate output or on the industry total output is termed as `Strategic Inattention'. The incentive to divisionalize still remains within the firms even in the case of the `Strategic Inattention', but the incentive is lower than the case of normal Cournot competition. Next in a duopoly, the firms play a three stage game. In the first stage, the firms decide whether to let their divisions utilize or ignore the information on the impact of their individual output on the firm's total output or industry total output. In the second stage the firms strategically decide on the number of divisions and in the final stage the divisions compete against each other in terms of quantity. It is seen that one firm deciding to be inattentive to the information available and the other firm using that information, is the equilibrium outcome. Thus inattentive and attentive firms coexist in a Subgam Perfect Nash Equilibrium. This result is in sharp contrast to the findings of Cellini et al. (2020). |
| Keywords: | Divisionalization, information, Monopolistic competition, Oligopoly, Strategic interaction |
| JEL: | D43 L11 L13 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2021-020&r= |
| By: | Junjie Hu; Wolfgang Karl H\"ardle |
| Abstract: | We study the cross-sectional returns of the firms connected by news articles. A conservative algorithm is proposed to tackle the type-I error in identifying firm tickers and the well-defined directed news networks of S&P500 stocks are formed based on a modest assumption. After controlling for many other effects, we find strong evidence for the comovement effect between news-linked firms' stock returns and reversal effect from lead stock return on 1-day ahead follower stock return, however, returns of lead stocks provide only marginal predictability on follower stock returns. Furthermore, both econometric and portfolio test reveals that network degree provides robust and significant cross-sectional predictability on monthly stock returns, and the type of linkages also matters for portfolio construction. |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2108.05721&r= |