nep-bec New Economics Papers
on Business Economics
Issue of 2021‒10‒11
eight papers chosen by
Vasileios Bougioukos
London South Bank University

  1. The struggle of small firms to retain high-skill workers: Job duration and importance of knowledge intensity By Hugo Castro-Silva; Francisco Lima
  2. The Heterogeneous Impact of Market Size on Innovation:Evidence from French Firm-Level Exports By P. AGHION; A. BERGEAUD; M. LEQUIEN; M.J.
  3. Information Technology and Returns to Scale By D. LASHKARI; A. BAUER; J. BOUSSARD
  4. Import Competition and Firms’ Internal Networks By Jay Hyun; Ziho Park; Vladimir Smirnyagin
  5. Tax avoidance in French Firms: Evidence from the Introduction of a Tax Notch By A. BAUER; - M. ROTEMBERG
  6. Why do firms compete on price comparison websites? The impact on productivity, profits, and wages By Lindgren, Charlie; Li, Yujiao; Rudholm, Niklas
  7. Market Power and Labor Share By A. BAUER; J. BOUSSARD
  8. The ambiguous competitive effects of passive partial forward integration By Papadopoulos, Konstantinos G.; Petrakis, Emmanuel; Skartados, Panagiotis

  1. By: Hugo Castro-Silva (Universidade de Lisboa); Francisco Lima (Universidade de Lisboa)
    Abstract: In the knowledge economy, skilled workers play an important role in innovation and economic growth. However, small firms may not be able to keep these workers. We study how the knowledge-skill complementarity relates to job duration in small and large firms, using a Portuguese linked employer-employee data set. We select workers displaced by firm closure and estimate a discrete-time hazard model with unobserved heterogeneity on the subsequent job relationship. To account for the initial sorting of displaced workers to firms, we introduce weights in the model according to the individual propensity of employment in a small firm. Our results show a lower premium on skills in terms of job duration for small firms. Furthermore, we find evidence of a strong knowledge-skill complementarity in large firms, where the accumulation of firm-specific human capital also plays a more important role in determining the hazard of job separation. For small firms, the complementarity does not translate into longer job duration, even for those with pay policies above the market. Overall, small knowledge-intensive firms struggle to retain high skill workers and find it harder to leverage the knowledge-skill complementarity.
    Keywords: knowledge intensity, technology, firm size, small firms, job duration, skills
    JEL: A1
    Date: 2021
  2. By: P. AGHION (Collège de France, LSE et PSE); A. BERGEAUD (Banque de France et CEP); M. LEQUIEN (Insee, Banque de France et PSE); M.J. (Harvard et NBER)
    Abstract: We analyze how demand conditions faced by a firm in its export markets impact its innovation decisions. To disentangle the direction of causality between export demand and innovation, we construct a firm-level export demand shock which responds to aggregate conditions in a firm's export destinations but is exogenous to firm-level decisions. Using exhaustive data covering the French manufacturing sector, we show that French firms respond to exogenous growth shocks in their export destinations by patenting more; and that this response is entirely driven by the subset of initially more productive firms. The patent response arises 2 to 5 years after a demand shock, highlighting the time required to innovate. In contrast, the demand shock raises contemporaneous sales and employment for all firms, without any notable differences between high and low productivity firms. We show that this finding of a skewed innovation response to common demand shocks arises naturally from a model of endogenous innovation and competition with firm heterogeneity. The market size increase drives all firms to innovate more by increasing the innovation rents; yet by inducing more entry and thus more competition, it also discourages innovation by low productivity firms.
    Keywords: Innovation, export, demand shocks, patents
    JEL: D21 F13 F14 F41 O30 O47
    Date: 2020
  3. By: D. LASHKARI (Boston College); A. BAUER (Insee - Crest); J. BOUSSARD (Commission européenne - Crest)
    Abstract: Relying on a novel dataset on hardware and software investments in the universe of French firms, we document a robust within-industry correlation between firm size and the intensity of IT demand. To explain this fact, we argue that the relative marginal product of IT inputs may rise with firm scale, since IT helps firms deal with organizational limits to scale. We propose a general equilibrium model of industry dynamics that features nonhomothetic production functions compatible with this mechanism. Estimating this production function, we identify the nonhomotheticity of IT demand and find an elasticity of substitution between IT and non- IT inputs that falls below unity. Under the estimated model parameters, the cross-sectional predictions of the model match the observed relationship of firm size with IT intensity (positive) and labor share (negative). In addition, in response to the fall in the relative price of IT inputs in post-1990 France, the model explains about half of both the observed rise in market concentration and the market reallocations toward low-labor-share firms.
    Keywords: information technology, labor share, competition, production function, nonhomotheticity.
    JEL: E10 E23 E25
    Date: 2020
  4. By: Jay Hyun; Ziho Park; Vladimir Smirnyagin
    Abstract: Using administrative data on U.S. multisector firms, we document a cross-sectoral propagation of the import competition from China (“China shock”) through firms’ internal networks: Employment of an establishment in a given industry is negatively affected by China shock that hits establishments in other industries within the same firm. This indirect propagation channel impacts both manufacturing and non-manufacturing establishments, and it operates primarily through the establishment exit. We explore a range of explanations for our findings, highlighting the role of within-firm trade across sectors, scope of production, and establishment size. At the sectoral aggregate level, China shock that propagates through firms’ internal networks has a sizable impact on industry-level employment dynamics.
    Keywords: China shock, import competition, multisector firms, multiproduct firms, network propagation, trade
    JEL: D22 F14 F40
    Date: 2021–09
  5. By: A. BAUER (Insee); - M. ROTEMBERG (New York University)
    Abstract: Corporate tax codes can have notches; values where after-tax profits decrease in before-tax sales. Firms endogenously respond to notches, leading to excess mass in the firm-size distribution. We study a 1997 policy reform in which the French government implemented a transient tax reform that increased profit taxes by 15% for firms with over 50 million Francs in turnover. We use two distinct and complementary approaches to estimate the extent of tax avoidance: (a) using firms far away from (and therefore unlikely to be responsive to) the tax notch in the same year and (b) the entire firm size distribution before the tax reform. Both strategies generate similar results for the extent of tax avoidance. We show that the firms who avoid the tax are the ones with the lowest calibrated adjustment costs and those with the larger profits. The tax avoidance behavior comes mostly from increases in inventories and decreases in sales.
    Keywords: Business Taxes, Tax Evasion, Firm Production
    JEL: H25 H26 H32 D24
    Date: 2020
  6. By: Lindgren, Charlie (Dalarna University, 791 88 Falun, Sweden); Li, Yujiao (Dalarna University, 791 88 Falun, Sweden); Rudholm, Niklas (Institute of Retail Economics (Handelns Forskningsinstitut))
    Abstract: This paper investigates how firm entry into a price comparison website marketplace affects firm productivity, profits, and wages. We want to answer the key research question: Why do firms compete on price comparison websites? A substantial literature indicates that competition in such marketplaces is fierce, leading to lower prices for products sold. We suggest that participation in these marketplaces also leads to increased productivity, i.e., output increases when holding constant the level of inputs used. This leads to increased profits, motivating firms to enter price comparison websites despite fierce competition. Our results indicate that for the full sample of firms, PriceSpy participation increases output by almost 12% when holding the level of inputs constant. Also, investigation of who gains from the increased productivity shows that, for entering firms, operating profits increase by 9% and gross wages by 14% when studying the full sample of firms. That labor gains more from PriceSpy participation is even clearer when studying the impact on wholesale and retail firms separately. For those firms, gross wages increased by 16–17% after entry, while no statistically significant impact was found regarding operating profits.
    Keywords: Online retailing; e-commerce; price comparison websites; productivity; value added.
    JEL: D22 D24 D33 L81
    Date: 2020–09–01
  7. By: A. BAUER (Insee - Crest); J. BOUSSARD (Commission européenne - Crest)
    Abstract: Secular trends in market power and labor share have important implications for inequality and allocative efficiency. Studying them requires comprehensive and detailed firm-level data spanning several decades. For that purpose, we leverage a novel and detailed database on the universe of French firms between 1984 and 2016, that we use to document a rise in concentration in France since the beginning of the 1990s. Despite a relative stability of the aggregate labor share, we show that firms with lower labor shares have been gaining market shares. As low labor share firms also tend to be larger, this market share reallocation has been stronger in industries where concentration increased the most. We rely on markups as proxies of firm-level market power, and on a flexible production function that allows the identification of firm-specific output elasticities and markups. We find that the markup of the typical firm has decreased, but the reallocation of market shares toward larger firms contributed to an increase of the aggregate markup. Finally, we show how taking into account reallocation across firms is essential to understand how the aggregate market power evolution has shaped the dynamics of the aggregate labor share in France.
    Keywords: Labor share, markup, competition, production function
    JEL: E10 E23 E25
    Date: 2020
  8. By: Papadopoulos, Konstantinos G.; Petrakis, Emmanuel; Skartados, Panagiotis
    Abstract: In a two-tier industry with an upstream monopolist supplier and downstream competition with differentiated goods, we show that passive partial forward integration (PPFI) has ambiguous effects on competition and welfare. When vertical trading is conducted via linear tariffs, PPFI is pro-competitive and welfare-increasing. While under two-part tariffs, it is anti-competitive and welfare-decreasing. These hold irrespectively of the degree of product differentiation, the observability or secrecy of contract terms, the mode of downstream competition, and the distribution of bargaining power between firms.
    Keywords: Partial Passive Forward Integration; Two-Part Tariffs; Linear Tariffs; Competition; Welfare
    JEL: D43 L13
    Date: 2021–10–01

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