Creator: Klette, Tor Jakob and Kortum, Samuel Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 300 Abstract:
We develop a parsimonious model of innovating firms rich enough to confront firm-level evidence. It captures the dynamic behavior of individual heterogenous firms, describes the evolution of an industry with simultaneous entry and exit, and delivers a general equilibrium model of technological change. While unifying the theoretical analysis of firms, industries, and the aggregate economy, the model yields insights into empirical work on innovating firms. It accounts for the persistence over time of firms’ R&D investment, the concentration of R&D among incumbent firms, and the link between R&D and patenting. Furthermore, it explains why R&D as a fraction of revenues is strongly related to firm productivity yet largely unrelated to firm size or growth.
Keyword: Endogenous growth theory, Birth and death processes, Market structure, Productivity, R&D, and Firm growth Subject (JEL): L11 - Production, Pricing, and Market Structure; Size Distribution of Firms and O31 - Innovation and Invention: Processes and Incentives
Creator: Holmes, Thomas J. and Mitchell, Matt Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 325 Abstract:
In this paper we develop a theory of how factors interact at the plant level. The theory has implications for (1) the micro foundations for capital-skill complementarity, (2) the relationship between factor allocation and plant size, and (3) the effects of trade and growth on the skill premium. The theory is consistent with certain facts about factor allocation and factor price changes in the 19th and 20th centuries.
Subject (JEL): L20 - Firm Objectives, Organization, and Behavior: General, F10 - Trade: General, and J30 - Wages, Compensation, and Labor Costs: General
Creator: Blume, Andreas and Franco, April Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 299 Abstract:
We study decentralized learning in organizations. Decentralization is captured through a symmetry constraint on agents’ strategies. Among such attainable strategies, we solve for optimal and equilibrium strategies. We model the organization as a repeated game with imperfectly observable actions. A fixed but unknown subset of action profiles are successes and all other action profiles are failures. The game is played until either there is a success or the time horizon is reached. For any time horizon, including infinity, we demonstrate existence of optimal attainable strategies and show that they are Nash equilibria. For some time horizons, we can solve explicitly for the optimal attainable strategies and show uniqueness. The solution connects the learning behavior of agents to the fundamentals that characterize the organization: Agents in the organization respond more slowly to failure as the future becomes more important, the size of the organization increases and the probability of success decreases.
Keyword: Game Theory, Organizations, and Decentralized Learning Subject (JEL): C70 - Game Theory and Bargaining Theory: General and D21 - Firm Behavior: Theory
Creator: Atkeson, Andrew, Hellwig, Christian, and Ordonez, Guillermo Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 464 Abstract:
In all markets, firms go through a process of creative destruction: entry, random growth and exit. In many of these markets there are also regulations that restrict entry, possibly distorting this process. We study the public interest rationale for entry taxes in a general equilibrium model with free entry and exit of firms in which firm dynamics are driven by reputation concerns. In our model firms can produce high-quality output by making a costly but efficient initial unobservable investment. If buyers never learn about this investment, an extreme “lemons problem” develops, no firm invests, and the market shuts down. Learning introduces reputation incentives such that a fraction of entrants do invest. We show that, if the market operates with spot prices, entry taxes always enhance the role of reputation to induce investment, improving welfare despite the impact of these taxes on equilibrium prices and total production.
Keyword: General equilibrium, Entry and exit, Firm dynamics, Reputation, Regulation, and Creative destruction Subject (JEL): D82 - Asymmetric and Private Information; Mechanism Design, L51 - Economics of Regulation, D21 - Firm Behavior: Theory, and L15 - Information and Product Quality; Standardization and Compatibility
Creator: Camargo, Braz and Pastorino, Elena Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 475 Abstract:
We analyze commitment to employment in an environment in which an infinitely lived firm faces a sequence of finitely lived workers who differ in their ability to produce output. A worker’s ability is initially unknown to both the worker and the firm. A worker’s effort affects the information on ability conveyed by his performance. We characterize equilibria and show that they display commitment to employment only when effort has a persistent but delayed impact on output. In this case, by providing insurance against early termination, commitment to employment encourages workers to exert effort, thus improving the firm’s ability to identify workers’ talent. The incentive value of commitment to retention helps explain the use of probationary appointments in environments in which there is uncertainty about individual ability.
Keyword: Career concerns, Commitment, Learning, and Retention Subject (JEL): D83 - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness, D21 - Firm Behavior: Theory, C73 - Stochastic and Dynamic Games; Evolutionary Games; Repeated Games, and J41 - Labor Contracts
Creator: Holmes, Thomas J., Levine, David K., and Schmitz, James Andrew Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 402 Abstract:
Arrow (1962) argued that since a monopoly restricts output relative to a competitive industry, it would be less willing to pay a fixed cost to adopt a new technology. Arrow’s idea has been challenged and critiques have shown that under different assumptions, increases in competition lead to less innovation. We develop a new theory of why a monopolistic industry innovates less than a competitive industry. The key is that firms often face major problems in integrating new technologies. In some cases, upon adoption of technology, firms must temporarily reduce output. We call such problems switchover disruptions. If firms face switchover disruptions, then a cost of adoption is the forgone rents on the sales of lost or delayed production, and these opportunity costs are larger the higher the price on those lost units. In particular, with greater monopoly power, the greater the forgone rents. This idea has significant consequences since if we add switchover disruptions to standard models, then the critiques of Arrow lose their force: competition again leads to greater adoption. In addition, we show that our model helps explain the accumulating evidence that competition leads to greater adoption (whereas the standard models cannot).
Subject (JEL): D42 - Market Structure, Pricing, and Design: Monopoly, L12 - Monopoly; Monopolization Strategies, D21 - Firm Behavior: Theory, O33 - Technological Change: Choices and Consequences; Diffusion Processes, O32 - Management of Technological Innovation and R&D, and L14 - Transactional Relationships; Contracts and Reputation; Networks