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on Business Economics |
| By: | Hanwei Huang; Kalina Manova; Oscar Perelló; Frank Pisch; Kalina B. Manova |
| Abstract: | We study the role of firm heterogeneity and imperfect competition for global production networks and the gains from trade. We develop a quantifiable trade model with two-sided firm heterogeneity, matching frictions, and oligopolistic competition upstream. More productive buyers endogenously match with more suppliers, thereby inducing tougher competition among them to enjoy lower input costs and superior performance. Transaction-level customs data confirms that downstream French and Chilean firms import higher values and quantities at lower prices as upstream Chinese markets become more competitive over time, with stronger responses by larger firms. Moreover, suppliers charge more diversified buyers lower mark-ups. Counterfactual analysis indicates that entry upstream benefits high-productivity buyers, while lower matching or trade costs benefit all buyers, with the biggest boost to mid-productivity buyers. All three shocks generate sizeable welfare gains, especially under package reforms. Global production networks thus mediate bigger effects and cross-border spillovers from industrial and trade policies. |
| Keywords: | production networks, global value chains, matching frictions, imperfect competition, gains from trade |
| JEL: | D24 F10 F12 F14 L11 L22 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11302 |
| By: | Josep Pijoan-Mas (CEMFI AND CEPR); Pau Roldan-Blanco (BANCO DE ESPAÑA, CEMFI AND UNIVERSIDAD AUTÓNOMA DE BARCELONA) |
| Abstract: | We study the effects of dual labor markets (i.e. the co-existence of fixed-term and open-ended contracts) on the allocation of workers within and across firms, the equilibrium distribution of firms, aggregate productivity, and welfare. Using rich Spanish administrative data, we document that the use of fixed-term contracts is very heterogeneous across firms within narrowly defined sectors. In particular, there is a strong relationship between the share of temporary workers and firm size, which is positive when looking at within-firm variation but negative when looking at the variation between firms. To explain these facts, we use a directed search model of multi-worker firms, with ex-ante firm heterogeneity in technology types, and ex-post firm heterogeneity in transitory productivity, the composition of employment by contract type (fixed-term or open-ended) and human capital accumulated on the job. In counterfactual exercises, we find that limiting the use of fixed-term contracts decreases the share of temporary employment and increases aggregate productivity, but it also reduces total employment and leads to an overall decline in total output and welfare. The increase in productivity comes from an improved selection of firms, which more than offsets an increased misallocation of workers across firms. |
| Keywords: | dual labor markets, temporary contracts, firm dynamics, unemployment |
| JEL: | D83 E24 J41 L11 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2442 |
| By: | Chung, Richard Yiu-Ming (Saint Francis University, Hongkong); DeVaro, Jed (California State University, East Bay); Fung, Scott (California State University) |
| Abstract: | Research Question/ Issue: Do large, within-firm executive pay differences hurt firm performance? Prior literature shows mixed results concerning the sign of the relationship between executive pay disparity and firm performance. This study evaluates that literature, clarifies what tournament theory predicts about the relationship, identifies methodological pitfalls and how to address them, and guides future scholarship in this area of considerable importance to firms and policy makers. Research Findings/ Insights: We estimate the relationship using improved methodology and find evidence of an inverted-U shaped relationship between the executive pay spread and firm performance. However, the peak of this inverted U occurs at such a high level of the executive pay spread that it is practically irrelevant in most firms. The inverted U is found using a market-based measure of firm performance, but not a returns-based measure (i.e., ROA). Theoretical/Academic Implications: This study addresses the theoretical and empirical limitations of the prior literature, thereby providing more credible estimates of the relationship between pay disparity and firm performance. Tournament theory offers a unified framework that can explain an inverted-U-shaped relationship between the executive pay spread and firm performance. Practitioner/Policy Implications: Our results should reduce public concerns that CEOs increase their own compensation to exorbitant levels, to the detriment of firm performance. |
| Keywords: | executive compensation, vertical pay disparity, firm performance, tournament theory, market structure |
| JEL: | G32 G39 J31 M12 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17346 |
| By: | DeVaro, Jed (California State University, East Bay); Fung, Scott (California State University) |
| Abstract: | We empirically test whether executives' increases in base salary when promoted to CEO result from the wage bids of competing firms (i.e., "market-based tournaments") or from the strategic choices of the firm's board of directors to elicit optimal executive incentives (i.e., "classic tournaments"). Our test emphasizes the effect of the "importance of luck" (i.e., the variance of luck) on the pay raises that accompany promotion. Specifically, we focus on how that effect differs between the two types of tournaments. An estimated negative relationship between the importance of luck and the executive salary spread supports market-based tournaments, whereas a positive relationship supports classic tournaments. The results are non-monotonic in firm size. Executive tournaments in both the bottom 13% of firms (i.e., total assets below $376 million) and the top 2.5% of firms (i.e., total assets above $112 billion) are more consistent with classic tournaments, whereas the nearly 85% in the middle of the distribution of firm size are more consistent with market-based tournaments. Also, controlling for firm size, highly concentrated product markets are more consistent with market-based tournaments. Extending market-based tournament theory to allow executives to choose the luck variance reveals that executives infuse their tournaments with a high luck variance, which lowers the expected pay differential and depresses incentives. |
| Keywords: | executive compensation, promotion tournaments, importance of luck, uncertainty in promotion contests, classic and market-based tournaments, vertical pay disparity, firm size, market structure |
| JEL: | G32 G39 J31 M12 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17327 |
| By: | Hongyong ZHANG (RIETI); Ha Thi Thanh DOAN (Economic Research Institute for ASEAN and East Asia (ERIA)) |
| Abstract: | Firms hold inventory to manage input shortages and stockout risks. This is particularly true for firms relying on international supply chains and imported inputs. Using a large-scale quarterly government survey of Japanese manufacturing firms (Q1 2015–Q2 2021), we examine firm-level inventory adjustments to supply chain shocks and focus on firms that sourced inputs globally during the pandemic. We find that before the pandemic, relative to firms that purchase inputs only domestically, importing firms tend to have larger inventories (inventories over sales) in materials, work in process (intermediate goods), and finished goods, even after controlling for firm size. After the pandemic, importers significantly and persistently increased their inventories of intermediate inputs, especially for firms with ex ante higher import intensity and multinational firms that experienced supply chain disruptions in China. These results suggest the possibility of a shift from just-in-time to just-in-case production during the pandemic. We then discuss the role of inventories as a buffer against input shortages and other factors affecting inventory holdings, such as the prefecture-level severity of COVID19 infections, industry-level input and output prices, and firm-level financial constraints and uncertainties regarding the economic and business outlook. |
| Keywords: | global sourcing, imports, inventory, COVID-19 |
| Date: | 2024–02–16 |
| URL: | https://d.repec.org/n?u=RePEc:era:wpaper:dp-2023-30 |
| By: | Katharina Erhardt; Apoorva Gupta |
| Abstract: | This paper aims to understand the pathways by which exporters become entities that sell multiple goods to multiple customers. To understand firms’ export strategies, we analyse new trade flows – new seller-buyer-product combinations – of individual exporters. Our first finding highlights that these new trade flows are an important margin for firms of all size classes, accounting for approximately 62% of their overall trade flows. Classifying new trade flows into going-wide (introducing new products) and going-deep (reaching new buyers for existing products), we find that the dominant margin of export expansion depends on the size and life-cycle stage of exporters; smaller firms rely relatively more on going-wide and large firms more on going-deep. We also demonstrate that selling new products is different from selling existing products: Firms target new products to a single, often new, buyer. To rationalize these facts, we propose a conceptual framework where firms allocate scarce sales personnel between selling existing products to more buyers and matching with new buyers for introducing new products. We empirically test and confirm the model’s key predictions. In particular, we use the 2015 Swiss exchange rate shock and show that going-deep is more pronounced as an export strategy when a firm’s effective market size is relatively larger. The findings suggest varying scope and size for firms born in different phases of globalisation. |
| Keywords: | export strategies, product introduction, customer accumulation, buyer-seller relationships, multi-product firms |
| JEL: | F10 F14 L25 O31 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11269 |
| By: | Jonathan J Adams (Department of Economics, University of Florida); Min Fang (Department of Economics, University of Florida); Zheng Liu (FRB San Francisco); Yajie Wang (Department of Economics, University of Missouri) |
| Abstract: | We document key stylized facts about the time-series trends and cross-sectional distributions of AI pricing and study its implications for firm performance, both on average and conditional on monetary policy shocks. We use the universe of online job posting data from Lightcast to measure the adoption of AI pricing. We infer that a firm is adopting AI pricing if it posts a job opening that requires AI-related skills and contains the keyword ``pricing''. At the aggregate level, the share of AI-pricing jobs in all pricing jobs has increased by more than tenfold since 2010. The increase in AI-pricing jobs has been broad-based, spreading to more industries than other types of AI jobs. At the firm level, larger and more productive firms are more likely to adopt AI pricing. Moreover, firms that adopted AI pricing experienced faster growth in sales, employment, assets, and markups, and their stock returns are also more sensitive to high-frequency monetary policy surprises than non-adopters. We show that these empirical observations can be rationalized by a simple model where a monopolist firm with incomplete information about the demand function invests in AI pricing to acquire information. |
| JEL: | D40 E31 E52 O33 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:ufl:wpaper:001015 |
| By: | Andrea Ascani (Gran Sasso Science Institute); Lakshmi Balachandran Nair (LUISS Guido Carli University) |
| Abstract: | Whilst most governments’ supportive measures have kept businesses afloat during the most depressing stages of the COVID-19 pandemic, these massive liquidity injections can also hide the risk of keeping financially fragile firms alive artificially, thus starting a process that turns them into zombie firms (zombies). In this article, we investigate whether and under what circumstances the presence of zombies in an industry constitutes a barrier to the innovativeness of non-zombies in the same sector. By analysing matched patent-firm data from Bureau van Dijk ORBIS Intellectual Property on 426, 130 Italian firms from 2012 to 2018, we find evidence in favour of negative intraindustry spillovers. Nonetheless, this general relationship is subject to various contingencies connected to both industry and firm characteristics. Specifically, we highlight that the retention of zombies can congest the innovative activities of healthy firms, especially when they depend on external sources of finance, operate in highly competitive markets, are more exposed to the erosion of their market shares, and do not possess a pre-existing strong knowledge base. Our findings have relevant policy and managerial implications. |
| Keywords: | zombie firms, innovation, Italy, spillovers, poisson, instrumental variable |
| JEL: | O31 L20 D22 |
| Date: | 2023–06 |
| URL: | https://d.repec.org/n?u=RePEc:ahy:wpaper:wp40 |
| By: | Carsten Eckel; Ina Charlotte Jäkel; Luca Macedoni; Raymond Riezman; Raymond G. Riezman |
| Abstract: | Using firm-level data on production and trade from Denmark, we document that firms frequently employ a strategy of entering new export markets with Carry-Along Trade (CAT), i.e., with products manufactured by other firms. This strategy is surprising because, empirically, CAT products have below average market shares and mark-ups, and trade models predict firms to focus on core products with large sales in export markets with additional fixed and variable costs. To rationalize this new stylized fact, we propose a model where CAT plays a pivotal role in enabling firms to learn about market conditions and assess market viability. In our framework, exporting own-produced core products requires upfront sunk entry investments that create a benefit of knowing the exact market conditions. Firms can learn these market conditions by either investing first based on expected market conditions, or by exporting CAT products that do not require additional investments. We provide empirical evidence in support of our mechanism by showing that entering with CAT is particularly prevalent (i) among small firms, (ii) in distant markets, and (iii) among firms with no prior exporting experience. |
| Keywords: | market entry, carry-along trade, delivery of own goods, learning |
| JEL: | F14 F12 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11340 |
| By: | Ju Hyun PYUN (Korea University Business School) |
| Abstract: | This study empirically examines the effect of services offshoring and regional amenities on the composition of skilled employment for services firms. Analysing Korean firm-level data spanning from 2006 to 2019, we find that services offshoring, characterised by the import of services intermediate inputs, correlates with an increase in the proportion of skilled workers within firms. Additionally, the effects of this shift are nuanced based on different skill levels: services offshoring leads to an increase in the share of permanent headquarters workers to total workers. However, it does not affect the share of high-end skilled workers, such as headquarters’ share of management and research and development (R&D) workers. Moreover, regional amenities promote the positive effect of services offshoring on permanent headquarters workers’ shares. Lastly, the positive effect of offshoring on demand for highend skilled workers in headquarters is significantly greater for firms with higher R&D intensity. |
| Keywords: | Services firms; Entry; Productivity; Korean firm-level data; Regional amenities;Industry heterogeneity |
| JEL: | F10 F14 L80 |
| Date: | 2024–05–07 |
| URL: | https://d.repec.org/n?u=RePEc:era:wpaper:dp-2024-01 |
| By: | Santiago Caicedo; Jeremy Pearce |
| Abstract: | This paper studies how the speed-quality tradeoff in innovation interacts with firm dynamics, concentration, and economic growth. Empirically, we document long-run trends in the increasing speed of innovation alongside declining quality at large firms. Leveraging variation from an exogenous policy change, we document the existence of the speed-quality tradeoff both at the firm and aggregate level. We develop an endogenous growth model that incorporates the speed-quality tradeoff and show that allocating less labor towards speed increases growth, particularly in the presence of private benefits to innovation and spillovers from heterogeneous innovations. We quantify the model to link firms’ decisions across speed and quality to aggregate outcomes. Quantitatively, the recent growth slowdown is mainly due to changes in the innovation production function, while the allocation of inventors between speed and quality within firms has a modest impact. When spillovers across firms are taken into account, the effect becomes significantly larger; the shift to speed over the last 30 years explains up to one-quarter of the decrease in growth. |
| Keywords: | innovation; economic growth; slowdown; inventors; firm dynamics |
| JEL: | J63 O30 O31 O33 |
| Date: | 2024–10–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:98928 |