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on Business Economics |
| By: | Daisoon Kim (London Business School); Yoonsoo Lee (Sogang University) |
| Abstract: | This paper develops a dynamic stochastic general equilibrium model to analyze endogenous mechanisms of changes in the first and second moments of firm heterogeneity over the business cycle. In the model, monopolistic competition and endogenous firm entry generate procyclical marginal cost, which implies a procyclical selection mechanism (i.e., increase in a production cutoff during booms). As more firms enter during booms, competition increases in factor markets, resulting in an increase in factor prices. Such an increase in the production costs makes less productive firms shrink: an increase in the production cutoff. While this mechanism explains the countercyclical dispersion in firm-level productivity endogenously, it cannot account for the cyclical changes in the first moment (i.e., relative productivity of entering and exiting firms). We introduce initial uncertainty for entrants to generate empirically consistent movements of both first and second moments. We assume that entrants face additional uncertainty because it is more challenging to predict firm-specific productivity before they produce. Our results suggest that a part of countercyclical dispersion of productivity (at lease, 20%) can be endogenously generated in a model, without the help of the second moment shocks. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:927&r=all |
| By: | Danial Lashkari (Boston College); Arthur Bauer (ENSAE-CREST); Jocelyn Boussard (Banque de France) |
| Abstract: | This paper investigates the role of IT in shaping recent trends in market concentration, factor income shares, and market competition. 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 specifically helps firms deal with organizational limits to scale. We propose a general equilibrium model of industry dynamics that features firm-level production functions compatible with this mechanism. We estimate the production function and find evidence for the nonhomotheticity of IT demand and for an elasticity of substitution between IT and other 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, as a response to the fall in the relative price of IT inputs in post-1990 France, the model can explain about half of both the observed rise in market concentration and the observed market reallocations toward low-labor-share firms. |
| Keywords: | Information Technology, Labor Share, Industry Concentration, Production Function Estimation, Nonhomotheticity, Firm Heterogeneity |
| JEL: | O3 O4 E2 |
| Date: | 2019–09–26 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:984&r=all |
| By: | Sergio Salgado (University of Minnesota); Fatih Guvenen (University of Minnesota); Nicholas Bloom (Stanford University) |
| Abstract: | We show in panels of US Census and international firm data that the cross-sectional skewness of employment and sales growth distributions are procyclical. In particular, during recessions they display a large left-tail of negative growth rates (and during booms a large right tail of positive growth rates). These results are extremely robust to different selection criteria, across countries, industries, and measures. We build a heterogeneous-agents model in which entrepreneurs face shocks with time varying skewness risk that matches the firm-level distributions we document for the US. This model shows that a negative shock to skewness (that keeps the mean and variance constant) to firms’ productivity growth generates significant and persistent decreases in investment, hiring, growth and consumption. Hence, we argue that periods of heightened left-tail risk help to drive business cycle fluctuations. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1189&r=all |
| By: | Thomas Cooley (New York University); Ramon Marimon (European University Institute and UPF - Barcelona GSE); Vincenzo Quadrini (USC) |
| Abstract: | Two core principles of economics are that welfare can be enhanced with stronger commitment to individual arrangements (contracts) and with more competition. However, in the presence of search frictions, commitment may deter entry with consequent reduction in the reallocation of human resources. We study these tradeoffs when there are different degrees of commitment in a model with on-the-job search. Since the degree of commitment depends on the organizational structure of a firm, we contrast the equilibrium of an industry where firms are organized in the form of partnerships with the equilibrium where firms are public companies. We show that in the equilibrium with public companies there is more investment in high return but uncertain activities (risk-taking), higher productivity (value added per employee) and greater income dispersion (inequality). These predictions are consistent with the observed evolution of the financial sector where the switch from partnerships to public companies has been especially important in the decades that preceded the 21st Century financial crisis. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:424&r=all |
| By: | Hengjie Ai (University of Minnesota); Anmol Bhandari (University of Minnesota); Chao Ying (University of Minnesota); Yuchen Chen (University of Minnesota) |
| Abstract: | This paper shows that factor misallocation is closely tied to the risk-sharing avenues available to firm owners. In contrast to the commonly studied bond-only economy with collateral constraints (for example Moll (2014)), we find that the degree of misallocation is increasing in persistence of the idiosyncratic risk when firms have access to state-contingent contracts. The possibility to transfer wealth from high productivity states to low productivity states allows firm owners to trade off efficient allocation of consumption against efficient allocation of capital. We show that for reasonable values of risk aversion, insurance needs more than offset production efficiency concerns and thereby generates large capital misallocation. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1215&r=all |
| By: | Philippe Aghion (College de France); Antonin Bergeaud (Banque de France); Huiyu Li (Federal Reserve Bank of San Francisco); Peter Klenow (Stanford University); Timo Boppart (IIES, Stockholm University) |
| Abstract: | Growth has fallen in the U.S., while firm concentration and profits have risen. Labor's share has fallen, mostly due to rising market share of low labor share firms. We propose a theory for these trends in which the driving force is falling firm-level costs of spanning multiple markets, perhaps due to ICT advances. The most efficient firms spread into new markets in response, generating a temporary burst of growth but also erecting barriers to future innovation if their efficiency is difficult for other firms to imitate. Despite rising rents, even the efficient firms do less innovation in the long run as they are more likely to face stiff competition if they enter markets against each other. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:458&r=all |
| By: | Stéphane Esquerré (LARGE - Laboratoire de recherche en gestion et économie - UNISTRA - Université de Strasbourg - L'europe en mutation : histoire, droit, économie et identités culturelles - UNISTRA - Université de Strasbourg - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | Law and Economics literature recently gazed upon the "failure of judges" showing the various biases, psychological but also political, they can display. One of the seminal criticisms against bankruptcy judges focused on their attempt to go beyond the strict applications of law in their decisions. The main drawback is their lack of business-related expertise. The French bankruptcy system was created four centuries ago with this last problem in mind and remains unique today. The bankruptcy judges are elected among local businessmen and top executives. They rule without any professional judge along them, like in mixed courts in Belgium. They are given a key role in the decision as in the U.S.. This chapter shows how judges display a home bias when the area suffers from economic turmoil. They attempt to favor the reorganization of bankrupt firms when the local unemployment rate is high. The analysis is based on an original dataset of all filings for restructuring (Redressement Judiciaire) from 2006 to 2013. This is shown to hold robust despite several tests using survival analysis in a competing risk setting. This effect is found to reduce the time of negotiation between the firm and its creditors with no effect on the survival of the firm after the reorganization plan was agreed upon. We infer that judges cram-down decisions faster in these contexts and let creditors bear the costs of these reorganisations. It underlines how Courts wish to implement decisions that exceed solely debt-collection with a concern for the local area at the risk of hurting the firm's creditors. JEL-Classification: G33, H73, K22 |
| Keywords: | Bankruptcy,Judge,Interjurisdictional Differentials and Their Effects |
| Date: | 2019–09–19 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-02291688&r=all |
| By: | Kato, Takao (Colgate University); Kodama, Naomi (Hitotsubashi University) |
| Abstract: | There is a growing body of evidence on the efficacy of Short-Time Compensation (STC), a subsidy to promote worksharing in a recession, in achieving its intended goal of curtailing layoffs and preventing a sharp rise in unemployment. However, very little is known about the consequences of STC for firm performance. We apply the Propensity Score Matching (PSM) with difference-in-differences methodology to unique data from Japan, a country known for its extensive use, and find that STC results in improved profitability. The improved profitability is further found to be achieved through sales growth without raising labor costs. We explore possible mechanisms behind the observed positive consequences of STC for sales and profits. Additional evidence tends to favor what the psychology literature calls "shared adversity"- worksharing promoted by STC facilitates supportive interactions among workers in the firm and strengthens commitment of workers to the firm, and thereby enhances goal alignment between workers and the firm as well as between coworkers. Such workers are more open to the firm's effort to increase sales/revenues without raising cost. |
| Keywords: | short-time work, short-time compensation, worksharing, employment adjustment, firm performance |
| JEL: | J23 J65 J68 H25 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp12596&r=all |
| By: | Ufuk Akcigit (University of Chicago); Emin Dinlersoz (U.S. Census Bureau); Jeremy Greenwood (University of Pennsylvania); Veronika Penciakova (University of Maryland) |
| Abstract: | Venture capital and growth are examined both empirically and theoretically. Empirically, VC-backed startups have higher early growth rates and patenting levels than non-VC-backed ones. Venture capitalists increase a startup's likelihood of reaching the right tails of firm size and innovation distributions. Furthermore, there is positive assortative matching: better venture capitalists match with better startups, creating a synergistic effect. An endogenous growth model, where venture capitalists provide both expertise and financing to business startups, is constructed to match these facts. The degree of assortative matching and the taxation of VC-backed startups are important for growth. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:36&r=all |
| By: | Lee G. Branstetter; Brian K. Kovak; Jacqueline Mauro; Ana Venancio |
| Abstract: | This paper considers the effects of Chinese import competition on firm-level labor market outcomes in Portugal. We examine direct competition in the Portuguese market and indirect competition Portugal's largest export markets in Western Europe. Using rich employer-employee data matched to firm-level trade transactions, we measure the degree to which different Portuguese firms faced Chinese import competition, based on firm product mix and distribution of sales across countries. We find economically and statistically significant employment declines in firms with more exposure to Chinese competition in European export markets, but minimal effects of direct competition in Portugal. Our findings also suggest a centrally important role for Portugal's stringent labor market regulations in limiting firms' ability to adjust to competitive shocks. In our earlier sample period (1995-2000), firms have limited ability to adjust employment, hours, or wages, and the primary adjustment margin is firm exit. In the later period (2000-2007), when more flexible temporary contracts comprise a larger share of employment, we find employment reductions among more exposed firms. Those employment reductions are entirely accounted for by changes in temporary employment, with no effect on permanent employment. We expect these findings to be informative for other peripheral European countries that had specialized in labor-intensive manufacturing industries operating under inflexible labor market regimes. |
| JEL: | F14 F16 J21 J31 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26252&r=all |
| By: | Ufuk Akcigit (University of Chicago); Sina Ates (Federal Reserve Board) |
| Abstract: | In the last several decades the U.S. economy has witnessed a number of striking trends that indicate a rising market concentration and a slowdown in business dynamism. In this paper, we make an attempt to understand potential common forces behind these empirical regularities through the lens of a micro-founded general equilibrium model of endogenous firm dynamics. Importantly, the theoretical model captures the strategic behavior between competing firms, its effect on their innovation decisions, and the resulting “best vs. the rest” dynamics. We focus on four potential mechanisms that can potentially drive the observed changes and use the calibrated version of the model to assess the relative importance of these channels. One particular exercise replicates the transitional dynamics of the U.S. economy through joint moves in all four channels and decomposes the contribution of each channel to the resulting trends. Our results highlight the dominant role of a decline in the intensity of knowledge diffusion from the frontier firms to the laggard ones in explaining the observed shifts. We conclude presenting new evidence that shows an increasing concentration of innovative activity. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:150&r=all |
| By: | Jie Bai; Ludovica Gazze; Yukun Wang |
| Abstract: | Collective reputation implies an important externality. Among firms trading internationally, quality shocks about one firm’s products could affect the demand of other firms from the same origin country. We study this issue in the context of a large-scale scandal that affected the Chinese dairy industry in 2008. Leveraging rich firm-product level administrative data and official quality inspection reports, we find that the export revenue of contaminated firms dropped by 84% after the scandal, relative to the national industrial trend, and the spillover effect on non-contaminated firms is measured at 64% of the direct effect. Notably, firms deemed innocent by government inspections did not fare any better than noninspected firms. These findings highlight the importance of collective reputation in international trade and the challenges governments might face in signaling quality and restoring trust. Finally, we investigate potential mechanisms that could mediate the strength of the reputation spillover. We find that the spillover effects are smaller in destinations where people have better information about parties involved in the scandal. New firms are more vulnerable to the collective reputation damage than established firms. Supply chain structure matters especially in settings where firms are less vertically integrated and exhibit fragmented upstream-downstream relationships. |
| JEL: | F10 F14 L15 L66 O10 O19 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26283&r=all |
| By: | Kolev, Atanas; Maurin, Laurent; Ségol, Matthieu |
| Abstract: | We use the association between non-financial firms and their banks, an information available in the European Investment Bank Investment Survey (EIBIS), to disentangle the effects of borrowers' and lenders' financial weakness on the satisfaction with the loan contracted. The dataset matches survey data of non-financial firms about their satisfaction with bank lending with their financial data and the financial data of their banks. We find evidence of both demand and supply factors determining firm satisfaction with bank loan financing: non-financial firms with weaker finances and those financed by weaker banks are less satisfied with their bank financing. We also find that the impact of supply factors differs across regions within the EU: the effect of bank's financial weakness on borrower satisfaction is not significant in core countries but is in periphery countries. |
| Keywords: | financial constraints,bank lending,survey data,bank-firm matching,satisfaction with bank loans,bank weakness,EU regions |
| JEL: | E44 G01 G32 L25 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:eibwps:201907&r=all |
| By: | Paige Clayton (University of North Carolina at Chapel Hill); Maryann Feldman (University of North Carolina at Chapel Hill); Benjamin Montmartin (SKEMA Business School; Université Côte d'Azur, France) |
| Abstract: | Although prior research argues that location is important for firm performance, we lack an understanding of how resources accumulate in regions and how innovative ecosystems emerge and evolve over time. This paper focuses on the temporal development of an industry in a region and provides a framework for characterizing phase changes in a geographically defined entrepreneurial ecosystem. We add to the literature on entrepreneurial ecosystems by considering emergence as a temporal process and explicating finance as a mechanism that transitions between phases. Emergence is captured by the accumulation of individual entry by entrepreneurs, and punctuated by phase changes as the region accumulates resources and evolves. We use threshold regression to identify inflection points in stages of industry emergence. We then focus on the role of finance, from both public and private sources. Using a dynamic random effects probit model with regime analysis, we demonstrate interrelationships between public and private funding sources that differ over time. Finally, we estimate the relationship between the funding from various sources and firm survival within different phases using a discrete event history analysis. Our results demonstrate that public and private funding sources are complementary but with different impacts on firm survival during different phases. The results have implications for startup firms seeking funding and for policy making trying to encourage industry emergence. |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:gre:wpaper:2019-25&r=all |
| By: | Daron Acemoglu (Massachusetts Institute of Technology); Alireza Tahbaz-Salehi (Northwestern University) |
| Abstract: | This paper develops a theory of firm-level production networks, with firm-specific relationships, endogenous bankruptcies, and market power. Firms in each industry have access to a production technology that uses relationship-specific intermediate inputs produced by their “customized” suppliers, with prices determined via pairwise bargaining between suppliers and customers. Operating the customized technology, however, requires paying fixed costs of entry. Hence, negative shocks can result in a cascade of firm failures in the economy. We establish the existence of an equilibrium and provide comparative static results on how prices, firm failures, and macroeconomic aggregates respond to changes in parameters. We then study how the interplay between firm-level linkages and firm failures shape the propagation of shocks over the economy’s production network. Our theoretical results indicate that understanding network-originated aggregate fluctuations may require moving beyond models of sectoral linkages and focusing on how firm-level interactions can lead to chains of failures. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1148&r=all |
| By: | Proeger, Till; Runst, Petrik |
| Abstract: | The Knowledge Spillover Theory of Entrepreneurship (KSTE) considers determinants of knowledge diffusion as well as their impact on entrepreneurial activities and growth. Extending the KSTE, the role of incumbent firms for the broad diffusion of new knowledge has been emphasized. For those firms, the barriers to an effective flow of information are considered using the concepts of knowledge filters and absorptive capacities. Both concepts enable the derivation of institutional measures to penetrate knowledge filters and systematically increase absorptive capacities. We interpret the process of digitization as a central process of knowledge spillover in recent years and determine digitization-related knowledge filters for particular domains of firm decision-making. Using a consultant-based in-depth evaluation of 200 SMEs conducted in the context of a federal innovation program, structural drivers, firm clusters and domain-specific knowledge filters for digitization are determined. We find little evidence for structural drivers of knowledge spillover effectiveness. However, as firms are clustered according to their digitization pattern, we show that firms realize high degrees of digitization in most domains or in none, leading us to argue that domain-specific knowledge filters are weak. Rather, knowledge spillover in digitization can be considered a process with initially strong general knowledge filter and - once this filter has been penetrated - weaker subsequent domain-specific knowledge filters. Policy and managerial implications for increasing digitization-related knowledge spillovers in SMEs are discussed. |
| Keywords: | Digitization,Knowledge Filter,Knowledge Spillover Theory of Entrepreneurship,Small and Medium Enterprises |
| JEL: | D21 D82 H41 K23 L14 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifhwps:202019&r=all |
| By: | Kaoru Hosono (Gakushuin University); Miho Takizawa (Gakushuin University) |
| Abstract: | We propose a novel approach to decomposing aggregate productivity growth into changes in technical efficiency, allocative efficiency, and variety of goods as well as relative efficiency of entrants and exiters. We measure technical efficiency by the aggregate production possibility frontier and allocative efficiency by the distance from the frontier. Applying our approach to establishment- and firm-level datasets from Japan, we find that the allocative efficiency among survivors declined during the banking crisis period, while the technical efficiency declined during the Global Financial Crisis period. Furthermore, we find that both entrants and exiters were likely to be more efficient than survivors. |
| Keywords: | Productivity decomposition, Allocative efficiency, Japan. |
| JEL: | D24 O40 O47 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:upd:utmpwp:012&r=all |