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on Business Economics |
| By: | Christian Osterhold; Ana Fontoura Gouveia |
| Abstract: | Productivity growth is slowing down among OECD countries, coupled with increased misallocation of resources. A recent strand of literature focuses on the role of non-viable firms ("zombie firms") to explain these developments. Using a rich firm-level dataset for one of the OECD countries with the largest drop in barriers to firm exit and restructure, we assess the role of zombies on firm dynamics, both in the extensive and intensive margins. We confirm the results on the high prevalence of zombie firms, significantly less productive than their healthy counterparts and thus dragging aggregate productivity down. Moreover, while we find evidence of positive selection within zombies, with the most productive restructuring and the least productive exiting, we also show that the zombies' productivity threshold for exit is much lower than that of non-zombies, allowing them to stay in the market, distorting competition and sinking resources. Zombie prevalence curbs the growth of viable firms, in particular the most productive, harming the intra-sectoral resource reallocation. We show that a reduction in exit and restructuring barriers promotes a more effective exit channel and fosters the restructuring of the most productive, highlight the role of public policy in addressing zombies' prevalence, fostering a more efficient resource allocation and enabling productivity growth. |
| JEL: | D24 E22 E24 G33 J24 L25 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201811&r=bec |
| By: | Gorodnichenko, Yuriy; Revoltella, Debora; Švejnar, Jan; Weiss, Christoph T. |
| Abstract: | Using a new survey, we show that the dispersion of marginal products across firms in the European Union is about twice as large as that in the United States. Reducing it to the US level would increase EU GDP by more than 30 percent. Alternatively, removing barriers between industries and countries would raise EU GDP by at least 25 percent. Firm characteristics, such as demographics, quality of inputs, utilization of resources, and dynamic adjustment of inputs, are predictors of the marginal products of capital and labor. We emphasize that some firm characteristics may reflect compensating differentials rather than constraints and the effect of constraints on the dispersion of marginal products may hence be smaller than has been assumed in the literature. We also show that cross-country differences in the dispersion of marginal products are more due to differences in how the business, institutional and policy environment translates firm characteristics into outcomes than to the differences in firm characteristics per se. |
| Keywords: | Marginal products,resource allocation,firm-specific factors,economic growth |
| JEL: | O12 O47 O52 D22 D24 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:eibwps:201806&r=bec |
| By: | Nicholas Bloom; Hong Cheng; Mark Duggan; Hongbin Li; Franklin Qian |
| Abstract: | We analyze a new management survey for around 1,000 firms and 10,000 employees across two large provinces in China. The unique aspect of this survey is it collected management data from the CEO, a random sample of senior managers and workers. We document four main results. First, management scores, much like productivity, have a wide spread with a long left-tail of poorly managed firms. This distribution of management scores is similar for CEOs, senior managers and workers management, and appears broadly reasonably compared to US scores for similar questions. Moreover, for all groups these scores correlate with firm performance, suggesting all employees within the firm are (at least partly) aware of the their firms’ managerial abilities. Second, the scores across the groups are significantly cross-correlated, but far from completely. This suggests that while different levels of the firm have similar views on the firms’ management capabilities, they do not fully agree. Third, we find that the CEO’s management scores are the most predictive of firm performance, followed by the senior managers and then the workers. Hence, CEOs do appear to know best about their firms management strengths and weaknesses. Fourth, within-firm management score dispersion is negatively correlated with investment and R&D intensity, suggesting long-run planning is linked with greater consistency in management across levels in firms. |
| JEL: | J0 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24760&r=bec |
| By: | Doireann Fitzgerald; Anthony Priolo |
| Abstract: | The question of how firms build market share matters for firm dynamics, business cycles, international trade, and industrial organization. Using Nielsen Retail Scanner data for the United States, we document that in the consumer food industry, brands experience substantial growth in market share in the first four years after successful entry into a regional market. However, markups are flat with respect to brand tenure. This finding is at odds with a large literature on customer markets which argues that firms acquire customers by temporarily offering low markups, and later raise markups once customers are locked in. However, it is consistent with a literature which emphasizes the importance of marketing and advertising activities for building market share. |
| JEL: | E3 L11 M3 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24794&r=bec |
| By: | Tatsuro Senga (Queen Mary University of London); Iacopo Varotto (Queen Mary University of London) |
| Abstract: | Idiosyncratic shocks faced by large firms in the U.S. appears to be volatile. Such idiosyncratic shocks may not average out in the cross-section and thus can even generate aggregate fluctuations. In this paper, we first construct a panel of US firms using data from Compustat and show a set of stylized facts about cross-sectional and cyclical features of idiosyncratic shocks faced by large firms. Our panel data reveals that the mean and kurtosis of idiosyncratic shocks decrease with firm size, while the standard deviation and skewness increase with firm size. In particular, the distribution of idiosyncratic shocks faced by the largest firms has a negative mean and positive skew. We also show that the mean of idiosyncratic shocks faced by the largest firms is significantly countercyclical. To examine the quantitative importance of such features of idiosyncratic shocks faced by large firms, we then develop an equilibrium business cycle model wherein idiosyncratic shocks can alone alter the shape of the distribution of firms and thus can drive aggregate fluctuations. We develop a general framework to study such models, wherein the law of large number does not hold and the distribution of firms over productivities becomes a random object, rendering infeasible the use of a standard numerical method. The flexibility of this new approach allows us to isolate the two channels through which the idiosyncratic movements of the firms generate aggregate volatility: average productivity and dynamic inefficiency. In addition we quantify the relative importance of the shocks to large firms in driving the cycle. The model is estimated to match micro-level moments of firm size distribution and idiosyncratic shocks, together with standard macro moments. Consistent with existing studies, our results show that idiosyncratic shocks are a quantitatively important micro-origin of aggregate fluctuations, accounting for 25 percent of output volatility relative to the data. Large firm movements account for 11 percent of aggregate volatility, wherein 63 percent reflects dynamic inefficiency channel. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1012&r=bec |
| By: | Akerman, Anders (Dept. of Economics, Stockholm University) |
| Abstract: | This paper proposes a new reason for why the relative demand for skilled workers has increased over past decades. I suggest that increases in market concentration and the rise of superstar firms may be important causes for the rise in demand for skill. I use detailed employer-employee data for the Swedish manufacturing sector between 1997 and 2014 to validate my hypothesis. My analysis demonstrates a strong correlation between firm size and the skilled share of a firm’s worker mix. The slope of this relationship is at its steepest in the right tail of the size distribution. I also, as Autor et al. (2017b), find a substantial rise in market concentration in Swedish manufacturing, both in the aggregate and across sub-sectors. The rise in market concentration is strongly correlated with a rise in the relative usage of skilled workers. Furthermore, a majority of the change in skill usage is due to between-firm variation, a reallocation of production across firms. This supports the notion that market concentration, rather than a general skill upgrading across all firms, has caused the rise in skill demand. Finally, the reallocation of production was most pronounced in industries characterized by large increases in market concentration. I estimate that about a tenth of the rise in the usage of skilled labor in Swedish manufacturing is due to the increasing importance of the largest firms. |
| Keywords: | Relative Skill Demand; Skill Premium; Market Concentration; Superstar Firms |
| JEL: | D22 D33 D43 J24 J31 L13 L40 |
| Date: | 2018–07–31 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sunrpe:2018_0002&r=bec |
| By: | Jay Pil Choi; Heiko Gerlach |
| Abstract: | This paper analyzes optimal cross-licensing arrangements between incumbent firms in the presence of potential entrants. The optimal cross-licensing royalty rate trades off incentives to sustain a collusive outcome vis-a-vis incentives to deter entry with the threat of patent litigation. We show that a positive cross-licensing royalty rate, which would otherwise relax competition and sustain a collusive outcome, dulls incentives to litigate against entrants. Our analysis can shed light on the puzzling practice of royalty free cross-licensing arrangements between competing firms in the same industry as such arrangements enhance incentives to litigate against any potential entrants and can be used as entry-deterrence mechanism. |
| Keywords: | cross-licensing arrangements, patent litigation, collusion, entry deterrence |
| JEL: | D43 L13 O30 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7151&r=bec |
| By: | Daniel A. Dias; Carlos Robalo Marques |
| Abstract: | Using firm level data, we show that the Portuguese financial crisis had, overall, a cleansing effect on productivity. During the crisis, aggregate productivity gains, both in manufacturing and services, came from relatively higher contributions of entry and exit of firms and from reallocation of resources between surviving firms. At the microlevel, we find that the crisis reduced the probability of survival for high and low productivity firms, but hit low productivity firms disproportionately harder, in line with the cleansing hypothesis. The correlation between productivity and employment growth in manufacturing and services strengthened, but the correlation between productivity and capital growth in the service sector weakened. We attribute this result in part to structural sectoral differences, but mainly to the large negative demand and credit shocks that affected mainly the nontradable services sub-sector. We also find that the probability of exit increased disproportionately for firms operating in more financially dependent industries, but there is no evidence of a scarring effect on productivity stemming from changing credit conditions. |
| JEL: | D24 E32 L25 O47 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201818&r=bec |
| By: | Amodio, Francesco; De Giorgi, Giacomo; Rahman, Aminur |
| Abstract: | Firms in developing countries often avoid paying taxes by making informal payments to tax officials. These bribes may raise the cost of operating a business, and the price charged to consumers. To decrease these costs, we designed a feedback incentive scheme for business tax inspectors that rewards them according to the anonymous evaluation submitted by inspected firms. We show theoretically that feedback incentives decrease the equilibrium bribe amount, but make firms with more inelastic demand more attractive for inspectors. A tilted scheme that attaches higher weights to the evaluation of smaller firms limits the scope for targeting and decreases the bribe amount to a lesser extent. We evaluate both schemes in a field experiment in the Kyrgyz Republic and find evidence that is consistent with the model predictions. By decreasing bribes, our intervention reduces the average cost for firms and the price they charge to consumers. Since fewer firms substitute bribes for taxes, tax revenues increase. Our study highlights the role of firm heterogeneity and market structure in shaping the relationship between firms and tax inspectors, and provides clear evidence of pass-through of bribes to consumers. |
| Keywords: | business tax; demand elasticity; incentives; market structure |
| JEL: | D22 D40 H26 H71 O12 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13055&r=bec |
| By: | Gaurav Khanna; Munseob Lee |
| Abstract: | Economists have identified product entry and exit as a primary channel through which innovation impacts economic growth. In this paper, we document how high-skill immigration affects product reallocation (entry and exit) at the firm level. Using data on H-1B Labor Condition Applications (LCAs) matched to retail scanner data on products and Compustat data on firm characteristics, we find that H-1B certification is associated with higher product reallocation and revenue growth. A ten percent increase in the share of H-1B workers is associated with a two percent increase in product reallocation rates -- our measure of innovation. These results shed light on the economic consequences of innovation by high-skill immigrant to the United States. |
| JEL: | D22 D24 F22 J61 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24824&r=bec |
| By: | Birgitte Ringstad; João Amador; Sónia Cabral |
| Abstract: | This paper describes the main features of Portuguese international trade of non-tourism services, using a new transaction-level database on services trade merged with detailed balance-sheet data. We find that a few two-way traders with diversified service and geographical portfolios account for a substantial share of exports and imports. Compared with one-way traders, two-way traders are larger, older, more productive and more profitable. We also unveil new evidence on the bi-modality of the distributions of export intensity, with density concentrating on both ends of the distribution. Moreover, considering all margins of firms' services trade and controlling for several firm characteristics, the intensive margins of exports and imports of services are positively related to both productivity and profitability. Regarding the extensive margins, the number of different types of services imported by a firm is also positively associated with its performance. |
| JEL: | F1 F14 L25 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201810&r=bec |
| By: | Sebastian Gryglewicz (Erasmus University Rotterdam); Simon Mayer (Erasmus University Rotterdam); Erwan Morellec (Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute) |
| Abstract: | We develop a dynamic agency model in which the agent controls both current earnings via short-term effort and firm growth via long-term effort. Under the optimal contract, agency conflicts can induce both over- and underinvestment in short- and long-term efforts, leading to short- or long-termism in corporate policies. The paper shows how firm characteristics shape the optimal contract and the horizon of corporate policies, thereby generating a number of novel empirical predictions on the optimality of short- vs. long-termism. It also demonstrates that combining short- and long-term agency conflicts naturally leads to asymmetric pay-for-performance in managerial contracts, rationalizing the asymmetric benchmarking observed in the data. |
| Keywords: | Agency conflicts, Multi-tasking, Optimal short- and long-termism |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1816&r=bec |
| By: | Fally, Thibault; Hillberry, Russell |
| Abstract: | International supply chains require coordination of numerous activities across multiple countries and firms. We adapt a model of supply chains and apply it to an international trade setting. In each chain, the measure of tasks completed within a firm is determined by a tradeoff between transaction costs and diseconomies of scope linked to management of a larger measure of tasks within the firm. The structural parameters that determine firm scope explain variation in supply-chain length and gross-output-to-value-added ratios, and determine countries' comparative advantage along and across supply chains. We calibrate the model to match key observables in East Asia, and evaluate implications of changes in model parameters for trade, welfare, the length of supply chains and countries' relative position within them. |
| Keywords: | Boundary of the firm; Fragmentation of production; Trade in intermediate goods; transaction costs |
| JEL: | F10 L23 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13062&r=bec |
| By: | Marc Frattaroli (Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute) |
| Abstract: | I study a protectionist anti-takeover law introduced in 2014 that covers a subset of all firms in the economy. The law had a negative impact on shareholder value and substantially reduced affected firms' likelihood of becoming a takeover target. There is no evidence that management of those firms subsequently altered firm policies in its interest. Investment, employment, wages, profitability, financial leverage and distributions to shareholders remain unchanged. The share of annual CEO compensation consisting of equity instruments increased by 9.4 percentage points, suggesting that boards reacted to the loss in monitoring by the takeover market by increasing the pay-for-performance sensitivity. |
| Keywords: | Protectionism, Anti-Takeover Legislation, Corporate Governance, Mergers and Acquisitions, Executive Compensation, Free Cash Flow Problem |
| JEL: | F52 G34 G38 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1766&r=bec |
| By: | Aubhik Khan (Ohio State University); Julia Thomas (Ohio State University); Tatsuro Senga (Queen Mary University of London) |
| Abstract: | We develop a model with endogenous entry and exit in an economy subject to aggregate total factor productivity shocks that are non-stationary. Firms exhibit a life-cycle consistent with data and our model economy reproduces both their size and age distribution. In this setting, persistent shocks to aggregate total factor productivity growth rates endogenously drive long term reductions in business formation. The economic consequences of this persistent decline in entry grows over time. In our model, individual firms vary in both the permanent and transitory components of their total factor productivity and in their capital stock. Capital adjustment is subject to one period time-to-build and involves both convex and nonconvex costs. Our dynamic stochastic general equilibrium model involves an aggregate state that includes a distribution of firms over total factor productivity and capital. Changes in this distribution, following aggregate shocks to the common component of TFP, drive persistent fluctuations in aggregate economic activity. We show that equilibrium movements in firms' stochastic discount factors, following persistent shocks to TFP growth, imply long-run declines in the value of entry. The resulting fall in the number of firms propagates a reduction in economic activity. This slows down the recovery. We apply our model to understanding the last decade of economic activity in the U.S. This period began with a large recession followed by a period of slow economic growth. At the same time there was a persistent reduction in the new business formation. Our dynamic stochastic general equilibrium analysis is consistent with relatively small reductions in the level of total factor productivity, as seen in the last recession, and large reductions in GDP and Business Fixed Investment. Moreover, the recovery from such a large recession is slowed by a persistent reduction in firm entry. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:707&r=bec |
| By: | Rajshree Agarwal; Serguey Braguinsky; Atsushi Ohyama |
| Abstract: | We study the processes of firm growth in the evolution of the Japanese cotton spinning industry during 1883-1914 by integrating strategy and historical approaches and utilizing rich quantitative firm-level data and detailed business histories. The resultant conceptual model highlights growth outcomes of path dependencies as firms evolve across periods of single vs. shared leadership, establish stability in shared leadership, or experience repeated discord-induced TMT leader departures. While most firms do not experience smooth transitions to stable shared TMT leadership, a focus on value creation, in conjunction with talent recruitment and promotion, enabled some firms to achieve stable shared leadership in spite of discord-induced departures, engage in long term expansion, and emerge as “centers of gravity” for output and talent in the industry. |
| JEL: | L2 L25 L26 M12 M13 N85 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24742&r=bec |
| By: | Timothy J. Bartik (W.E. Upjohn Institute for Employment Research) |
| Abstract: | This paper reviews the research literature in the United States on effects of state and local “economic development incentives.” Such incentives are tax breaks or grants, provided by state or local governments to individual firms, that are intended to affect firms’ decisions about business location, expansion, or job retention. Incentives’ benefits versus costs depend greatly on what percentage of incented firms would not have made a particular location/expansion/retention decision “but for” the incentive. Based on a review of 34 estimates of “but for” percentages, from 30 different studies, this paper concludes that typical incentives probably tip somewhere between 2 percent and 25 percent of incented firms toward making a decision favoring the location providing the incentive. In other words, for at least 75 percent of incented firms, the firm would have made a similar decision location/expansion/retention decision without the incentive. Many of the current incentive studies are positively biased toward overestimating the “but for” percentage. Better estimates of “but for” percentages depend on developing data that quantitatively measure diverse changes in incentive policies across comparable areas. |
| Keywords: | Tax incentives, business location decisions, local economic development |
| JEL: | R30 R12 H71 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:upj:weupjo:18-289&r=bec |
| By: | Braz Camargo (Sao Paulo School of Economics - FGV); Elena Pastorino (Stanford University); Fabian Lange (McGill University) |
| Abstract: | Using both public individual survey data and proprietary firm personnel records, we document that the importance of performance pay declines at the end of a career. This evidence is at odds with the implication of models of implicit and explicit performance incentives that have attempted to explain the life-cycle profile of the variable component of wages. We provide a novel model that integrates uncertainty and learning about ability, human capital acquisition, and performance incentives to account for the life-cycle profile of individual wages and provide a rationale for the declining importance of the pay-for-performance component of wages with experience. We analytically characterize the equilibrium wage contract in this environment, derive its qualitative properties, and decompose the pay-for-performance component of the equilibrium wage into different terms. These terms capture the standard trade-off between risk and incentives arising in contexts of moral hazard, the desire to hedge against the risk inherent in learning about ability, and the changing strength of reputational and human capital investment motives over time. We prove the model is identified based on a panel of wages. We derive estimators of the model's primitive parameters, estimate the model, and use the estimated parameters to measure the relative contribution of the three sources of wage dynamics we nest---learning, human capital acquisition, and performance incentives---to the life-cycle profile of total wages and their variable component. According to our preliminary estimates, performance incentives seem to be qualitatively and quantitatively key to explaining the life-cycle profile of wages and variable pay, despite the declining importance of variable pay relative to fixed pay over time. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:581&r=bec |