Creator: Arellano, Cristina, Bai, Yan, and Zhang, Jing Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 392 Abstract:
This paper studies the impact of cross-country variation in financial market development on firms’ financing choices and growth rates using comprehensive firm-level datasets. We document that in less financially developed economies, small firms grow faster and have lower debt to asset ratios than large firms. We then develop a quantitative model where financial frictions drive firm growth and debt financing through the availability of credit and default risk. We parameterize the model to the firms’ financial structure in the data and show that financial restrictions can account for the majority of the difference in growth rates between firms of different sizes across countries.
Keyword: Cross-country firm level dataset, Default risk, and Firm investment and growth Subject (JEL): F20 - International Factor Movements and International Business: General and E22 - Investment; Capital; Intangible Capital; Capacity
Creator: Atkeson, Andrew and Burstein, Ariel Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 444 Abstract:
We present a general equilibrium model of the response of firms' decisions to operate, innovate, and engage in international trade to a change in the marginal cost of international trade. We find that, although a change in trade costs can have a substantial impact on heterogeneous firms' exit, export, and process innovation decisions, the impact of changes in these decisions on welfare is largely offset by the response of product innovation. Our results suggest that microeconomic evidence on firms' responses to changes in international trade costs may not be informative about the implications of changes in these trade costs for aggregate welfare.
Creator: Engbom, Niklas Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 756 Abstract:
I develop an idea flows theory of firm and worker dynamics in order to assess the consequences of population aging. Older people are less likely to attempt entrepreneurship and switch employers because they have found better jobs. Consequently, aging reduces entry and worker mobility through a composition effect. In equilibrium, the lower entry rate implies fewer new, better job opportunities for workers, while the better matched labor market dissuades job creation and entry. Aging accounts for a large share of substantial declines in firm and worker dynamics since the 1980s, primarily due to equilibrium forces. Cross-state evidence supports these predictions.
Keyword: Economic growth, Employment, Labor turnover, Entrpreneurial choice, and Demographics Subject (JEL): O40 - Economic Growth and Aggregate Productivity: General, J11 - Demographic Trends, Macroeconomic Effects, and Forecasts, and E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
Creator: Hopenhayn, Hugo Andres and Vereshchagina, Galina Series: Advances in dynamic economics Abstract:
Entrepreneurs bear substantial risk, but empirical evidence shows no sign of a positive premium. This paper develops a theory of endogenous entrepreneurial risk taking that explains why self-financed entrepreneurs may find it optimal to invest into risky projects offering no risk premium. The model has also a number of implications for firm dynamics supported by empirical evidence, such as a positive correlation between survival, size, and firm age.
Keyword: Occupational choice, Risk taking, Intertemporal firm choice, Borrowing constraints, Financing, Firm dynamics, and Investment Subject (JEL): L26 - Entrepreneurship, L25 - Firm Performance: Size, Diversification, and Scope, E21 - Macroeconomics: Consumption; Saving; Wealth, and G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
Creator: Bergoeing, Raphael, Hernando, Andrés, and Repetto, Andrea Series: Advances in dynamic economics Abstract:
We estimate the effects of policy distortions on aggregate productivity. Based on a model of plant production and productivity uncertainty and heterogeneity, and using Chilean manufacturing data, we focus on the effect of taxation on the exit behavior of plants. We find that taxes do distort the liquidation decisions of firms, suggesting that policy distortions reduce the extent to which factors are reallocated towards the most productive plants. Our results have important consequences for growth and development, as policies that alter the measure of plants that operate in equilibrium change the short-run response of output to exogenous shocks and the long run level of aggregate TFP. In particular, we find that the amount of productivity lost due to excessive plant shutdowns are very large.
Keyword: Total factor productivity, Latin America, Exit behavior of firms, South America, Taxation policy, and Chile Subject (JEL): H25 - Taxation, subsidies and revenue - Business taxes and subsidies and E23 - Macroeconomics : Consumption, saving, production, employment, and investment - Production
Creator: Fitzgerald, Doireann, Haller, Stefanie, and Yedid-Levi, Yaniv Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 524 Abstract:
We document how export quantities and prices evolve after entry to a market. Controlling for marginal cost, and taking account of selection on idiosyncratic demand, there are economically and statistically significant dynamics of quantities, but no dynamics of prices. To match these facts, we estimate a model where firms invest in customer base through non-price actions (e.g. marketing and advertising), and learn gradually about their idiosyncratic demand. The model matches quantity, price and exit moments. Parameter estimates imply costs of adjusting investment in customer base, and slow learning about demand, both of which generate sluggish responses of sales to shocks.
Keyword: Customer base, Firm dynamics, and Exporter dynamics Subject (JEL): E20 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General (includes Measurement and Data), F10 - Trade: General, and L10 - Market Structure, Firm Strategy, and Market Performance: General
Creator: Gowrisankaran, Gautam and Holmes, Thomas J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 264 Abstract:
Will an industry with no antitrust policy converge to monopoly, competition or somewhere in between? We analyze this question using a dynamic dominant firm model with rational agents, endogenous mergers and constant returns to scale production. We find that perfect competition and monopoly are always steady states of this model and that there may be other steady states with a dominant firm and a fringe co-existing. Mergers are likely only when supply is inelastic or demand is elastic, suggesting that the ability of a dominant firm to raise price through monopolization is limited. Additionally, as the discount rate increases, it becomes harder to monopolize the industry, because the dominant firm cannot commit to not raising prices in the future.
Keyword: Dynamics, Merger, and Dominant Firm Subject (JEL): L41 - Monopolization; Horizontal Anticompetitive Practices and L12 - Monopoly; Monopolization Strategies
Creator: Mongey, Simon J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 558 Abstract:
I propose an equilibrium menu cost model with a continuum of sectors, each consisting of strategically engaged firms. Compared to a model with monopolistically competitive sectors that is calibrated to the same data on good-level price flexibility, the dynamic duopoly model features a smaller inflation response to monetary shocks and output responses that are more than twice as large. The model also implies (i) four times larger welfare losses from nominal rigidities, (ii) smaller menu costs and idiosyncratic shocks are needed to match the data, (iii) a U-shaped relationship between market concentration and price flexibility, for which I find empirical support.
Keyword: Monetary policy, Menu costs, Firm dynamics, and Oligopoly Subject (JEL): L11 - Production, Pricing, and Market Structure; Size Distribution of Firms, E39 - Prices, Business Fluctuations, and Cycles: Other, E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data), L13 - Oligopoly and Other Imperfect Markets, and E51 - Money Supply; Credit; Money Multipliers