nep-bec New Economics Papers
on Business Economics
Issue of 2021‒08‒23
eight papers chosen by
Vasileios Bougioukos
Bangor University

  1. Contracting, pricing, and data collection under the AI flywheel effect By Huseyin Gurkan; Francis de Véricourt
  2. Employment Protection, Workforce Mix and Firm Performance By Ardito, Chiara; Berton, Fabio; Pacelli, Lia; Passerini, Filippo
  3. Business Groups: Panics, Runs, Organ Banks and Zombie Firms By Asli M. Colpan; Randall Morck
  4. Communication within Firms: Evidence from CEO Turnovers By Stephen Michael Impink; Andrea Prat; Raffaella Sadun
  5. The Productivity Puzzle in Business Services By Alexander S. Kritikos; Alexander Schiersch; Caroline Stiel
  6. Private equity buyouts and firm exports: evidence from UK firms By Paul Lavery; José María Serena Garralda; Marina-Eliza Spaliara
  7. Contract Labor and Firm Growth in India By Marianne Bertrand; Chang-Tai Hsieh; Nick Tsivanidis
  8. Preference Signaling and Worker-Firm Matching: Evidence from Interview Auctions By Laschever, Ron A.; Weinstein, Russell

  1. By: Huseyin Gurkan (ESMT European School of Management and Technology); Francis de Véricourt (ESMT European School of Management and Technology)
    Abstract: This paper explores how firms that lack expertise in machine learning (ML) can leverage the so-called AI Flywheel effect. This effect designates a virtuous cycle by which, as an ML product is adopted and new user data are fed back to the algorithm, the product improves, enabling further adoptions. However, managing this feedback loop is difficult, especially when the algorithm is contracted out. Indeed, the additional data that the AI Flywheel effect generates may change the provider's incentives to improve the algorithm over time. We formalize this problem in a simple two-period moral hazard framework that captures the main dynamics among ML, data acquisition, pricing, and contracting. We find that the firm's decisions crucially depend on how the amount of data on which the machine is trained interacts with the provider's effort. If this effort has a more (less) significant impact on accuracy for larger volumes of data, the firm underprices (overprices) the product. Interestingly, these distortions sometimes improve social welfare, which accounts for the customer surplus and profits of both the firm and provider. Further, the interaction between incentive issues and the positive externalities of the AI Flywheel effect has important implications for the firm's data collection strategy. In particular, the firm can boost its profit by increasing the product's capacity to acquire usage data only up to a certain level. If the product collects too much data per user, the firm's profit may actually decrease, i.e., more data is not necessarily better.
    Keywords: Data, machine learning, data product, pricing, incentives, contracting
    Date: 2020–03–03
  2. By: Ardito, Chiara (University of Turin); Berton, Fabio (University of Turin); Pacelli, Lia (University of Turin); Passerini, Filippo (Catholic University Milan)
    Abstract: We measure the impact of employment protection reduction in an uncertain framework on firms' hires and performance, exploiting the Italian 2015 Jobs Act. Results indicate that firms (1) stabilize workforce mainly through contract transformations of low-tenure and low-human-capital incumbent workers performing high-physical and low-intellectual tasks; (2) apply a cost-saving strategy that increases profits and decreases value added per-head. Effects are stronger among non-exporting and non-innovative firms. Our evidence casts doubts on the effectiveness of employment protection reductions in enhancing productivity in the long run.
    Keywords: employment protection, human capital, productivity, tenure, tasks
    JEL: J08 J21 J24
    Date: 2021–07
  3. By: Asli M. Colpan; Randall Morck
    Abstract: Business groups often contain banks or near banks that can protect group firms from economic shocks. A group bank subordinate to other group firms can become an “organ bank” that selflessly bails out distressed group firms and anticipates a government bailout. A group bank subordinating other group firms can extend loans to suppress their risk-taking to default risk, preserving risk-averse low-productivity zombie firms. Actual business groups can fall between these polar cases. Subordinated group banks magnify risk-taking; subordinating banks suppress risk-taking; yet both distortions promote business group firms’ survival. Limiting intragroup income and risk shifting, severing banks from business groups, or dismantling business groups may mitigate both distortions; but also limits business groups’ internal markets, thought important where external markets work poorly.
    JEL: F65 G01 G21 G23 N2
    Date: 2021–07
  4. By: Stephen Michael Impink; Andrea Prat; Raffaella Sadun
    Abstract: This paper uses novel, firm-level measures derived from communications metadata before and after a CEO transition in 102 firms to study if CEO turnover impacts employees’ communication flows. We find that CEO turnover leads to an initial decrease in intra-firm communication, followed by a significant increase approximately five months after the CEO change. The increase is driven primarily by vertical (i.e. manager to employee) communication. Greater increases in communication after CEO change are associated with greater increases in firm market returns.
    JEL: L2 M12
    Date: 2021–07
  5. By: Alexander S. Kritikos; Alexander Schiersch; Caroline Stiel
    Abstract: In Germany, the productivity of professional services, a sector dominated by micro and small firms, declined by 40 percent between 1995 and 2014. This productivity decline also holds true for professional services in other European countries. Using a German firm-level dataset of 700,000 observations between 2003 and 2017, we analyze this largely uncovered phenomenon among professional services, the 4th largest sector in the EU15 business economy, which provide important intermediate services for the rest of the economy. We show that changes in the value chain explain about half of the decline and the increase in part-time employment is a further minor part of the decline. In contrast to expectations, the entry of micro and small firms, despite their lower productivity levels, is not responsible for the decline. We also cannot confirm the conjecture that weakening competition allows unproductive firms to remain in the market.
    Keywords: business services, labor productivity, productivity slowdown
    JEL: L84 O47 D24 L11
    Date: 2021
  6. By: Paul Lavery; José María Serena Garralda; Marina-Eliza Spaliara
    Abstract: This paper examines the impact of private equity buyouts on the export activity of target firms. We exploit data on UK firms over the 2004-2017 period, and use difference-in-differences estimations on matched target versus non-target firms. Following private equity buyouts, non-exporting firms are more likely to begin exporting, and target firms are likewise more likely to increase their value of exports and their export intensity. Evidence from split-sample analysis further suggests that these patterns are consistent with private equity investors relaxing financial constraints and inducing productivity improvements.
    Keywords: private equity buyouts, exporting, financial constraints, transactions
    JEL: G34 G32
    Date: 2021–08
  7. By: Marianne Bertrand; Chang-Tai Hsieh; Nick Tsivanidis
    Abstract: India's Industrial Disputes Act (IDA) of 1947 requires firm with more than 100 workers to pay large costs if they shrink their employment. Since the early 2000s, large Indian manufacturing firms have increasingly relied on contract workers who are not subject to the IDA. By 2015, contract workers accounted for 38% of total employment at firms with more than 100 workers compared to 20% in 2000. Over the same time period, the thickness of the right tail of the firm size distribution in formal Indian manufacturing plants increased, the average product of labor for large firms declined, the job creation rate for large firms increased, and the probability that large firms introduce new products rose. We provide evidence that these outcomes were caused by an increased reliance on contract labor among large establishments. A model of firm growth subject to firing costs suggests the rise of contract labor increased TFP in Indian manufacturing by 7.6%, occurring all through a one-time reduction in misallocation between large and small firms with negligible change in the long-run growth rate.
    JEL: J23 J4 J5 O0 O4
    Date: 2021–08
  8. By: Laschever, Ron A. (Compass Lexecon); Weinstein, Russell (University of Illinois at Urbana-Champaign)
    Abstract: We study whether there are improvements in worker-firm matching when employers and applicants can credibly signal their interest in a match. Using a detailed résumé dataset of more than 400 applicants from one university over five years, we analyze a matching process in which firms fill some of their inter- view slots by invitation and the remainder are filled by an auction. Consistent with the predictions of a signaling model, we find the auction is valuable for less desirable firms trying to hire high desirability applicants. Second, we find evidence that is consistent with the auction benefiting overlooked applicants. Candidates who are less likely to be invited for an interview (e.g., non-U.S. citizens) are hired after having the opportunity to interview through the auction. Among hires, these candidates are more represented among auction winners than invited interviewees, and this difference is more pronounced at more desirable firms. Finally, counterfactual analysis shows the auction increases the number and quality of hires for less desirable firms, and total hires in the market.
    Keywords: labor markets, signaling, hiring, interview, matching
    JEL: J20 M51 D83
    Date: 2021–07

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