This conference is supported by Grant #2018-1897 from the Smith Richardson Foundation
How does an increase in the size of the market, say due to fertility, immigration, or globalization, affect welfare? Baqaee and Farhi study this question using a model with heterogeneous firms, Kimball preferences, fixed costs, and monopolistic competition. They decompose changes in welfare from increased scale into changes in technical efficiency and changes in allocative efficiency due to reallocation. The researchers non-parametrically identify residual demand curves with firm-level data from Belgian manufacturing firms and, using these estimates, quantify their theoretical results. Baqaee and Farhi find that around 80% of the aggregate returns to scale are due to changes in allocative efficiency. As markets get bigger, competition intensifies and triggers Darwinian reallocations: socially-valuable firms expand, small firms shrink and exit, and new firms enter. However, important as they are, improvements in allocative efficiency are not driven by reductions in markups or deaths of unproductive firms. Instead, they are caused by a composition effect that reallocates resources from low- to high-markup firms.
In addition to the conference paper, the research was distributed as NBER Working Paper w27139, which may be a more recent version.
Using confidential establishment-level data from the U.S. Census Bureau’s Longitudinal Business Database from 1982-2015, Falato, Kim, and von Wachter examine how shareholder power affects firm employment and payroll decisions. Consistent with theory of the firm based on conflicts of interests between shareholders and stakeholders, the resarchers find that establishments of firms owned by larger and more concentrated institutional shareholders have lower employment and payroll. These results are not driven by unobserved heterogeneity across establishments or differences in exposure to industry and local shocks, and hold up in a difference-in-differences design that exploits large increases in block institutional ownership. The results are more pronounced in industries with a smaller fraction of unionized labor, in more concentrated local labor markets, and for dedicated and activist institutions. The labor losses are accompanied by higher shareholder returns but lower labor productivity. Their findings suggest a role for employment policies that aim at reforming shareholder capitalism.
Campaign finance laws aim to limit an individual's influence over the political process. Bertrand, Bombardini, Fisman, Trebbi, and Yegen show that corporate ownership may be an important mechanism by which institutional investors circumvent such constraints and amplify their influence. Using data on the political giving and ownership of all 13-F investors between 1980 and 2016, the researchers show that the probability that a firm's Political Action Committee (PAC) donates to a politician supported by an investor's PAC nearly doubles after the investor acquires a large stake, and that it increases five-fold when the investor obtains a board seat. This increase in similarity of political giving coincides with the election cycle the acquisition takes place in, and is not driven by selection into specific politically strategic acquisitions, as convergence in political behavior is observed even for exogenously determined acquisitions caused by stock index inclusions. The relationship is stronger for private funds, and those with high partisanship, suggesting the relationship is driven by investor preferences rather than strategic concerns. Finally, Bertrand, Bombardini, Fisman, Trebbi, and Yegen show that portfolio firms' PAC expenditure experiences a relatively large shift at the acquisition date relative to past giving, whereas no such pattern is observed for institutional investors. They argue that these findings are best explained by investors influencing portfolio firm giving, suggesting that PAC giving may be another means by which influential shareholders impact corporate decision-making, in a manner that amplifies investors' political voice.
Oberfield, Rossi-Hansberg, Sarte, and Trachter study the number, size, and location of a firm's plants. The firm's decision balances the benefit of delivering goods and services to customers using multiple plants with the cost of setting up and managing these plants, and the potential for cannibalization that arises as their number increases. Modeling the decisions of heterogeneous firms in an economy with a vast number of widely distinct locations is complex because it involves a large combinatorial problem. Using insights from discrete geometry, the researchers study a tractable limit case of this problem in which these forces operate at a local level. Their analysis delivers clear predictions on sorting across space. Productive firms place more plants in dense locations that exhibit high rents compared with less productive firms, and place fewer plants in markets with low density and low rents. Controlling for the number of plants, productive firms also operate larger plants than those operated by less productive firms in locations where both are present. Oberfield, Rossi-Hansberg, Sarte, and Trachter present evidence consistent with these and several other predictions using U.S. establishment-level panel data.
Industry concentration and corporate profit rates have increased, in the United States, over the past two decades. This paper investigates the welfare implications of economic activity concentrating within a few firms that hold market power. Pellegrino develops a general equilibrium model that features granular firms that compete in a network game of oligopoly, alongside a continuum of atomistic firms with free entry. To capture the degree of product differentiation among the oligopolists, he introduces a Generalized Hedonic-Linear (GHL) demand system. The researcher shows how to identify this demand system using a publicly-available dataset that measures product similarity among all public corporations in the US. Using my model, Pellegrino estimates a large deadweight loss from oligopolistic behavior, equal to 11% of the total surplus produced by public firms. This loss would increase to 20% if all these firms were allowed to collude. The distributional effects of oligopoly are quantitatively important as well: under perfect competition, consumer surplus would double with respect to the oligopolistic equilibrium. He also estimates that the deadweight loss has increased by at least 2.5 percentage points since 1997. The share of surplus that accrues to producers as profits also has increased. Finally, Pellegrino shows how the dramatic rise in startups' proclivity to sell off to incumbents (rather than go public) may have contributed to these trends.
Growth has fallen in the U.S. while firm concentration has risen. Aghion, Bergeaud, Boppart, Klenow, and Li propose a theory linking these trends in which the driving force is falling overhead costs of spanning multiple markets. In response, the most efficient firms (with higher markups) spread into new markets, thereby generating a temporary burst of growth. Eventually, due to greater competition from efficient firms, within-firm markups and incentives to innovate fall. When the researchers calibrate their model, Aghion, Bergeaud, Boppart, Klenow, and Li find the rise in market share of more efficient firms outweighs the drop in long-run growth, leaving welfare modestly enhanced by the fall in overhead costs.
This paper studies the short- and long-run effects of large firms on economic development. Van Patten and Mendez-Chacon use evidence from one of the largest multinationals of the 20th Century: the United Fruit Company (UFCo). The firm was given a large land concession in Costa Rica--one of the so-called "Banana Republics"--from 1899 to 1984. Using administrative census data with census-block geo-references from 1973 to 2011, the researchers implement a geographic regression discontinuity (RD) design that exploits a quasi-random assignment of land. They find that the firm had a positive and persistent effect on living standards. Regions within the UFCo were 29% less likely to be poor than nearby counterfactual locations in 1973, with only 56% of the gap closing over the following four decades. Company documents explain that a key concern at the time was to attract and maintain a sizable workforce, which induced the firm to invest heavily in local amenities that likely account for researchers' result. Van Patten and Mendez-Chacon then build a spatial model in which a firm's labor market power within a region depends on how mobile workers are across locations and run counterfactual exercises. The model is consistent with observable spatial frictions and the RD estimates. The model shows that the firm increased aggregate welfare by 3.7%, and that this effect is increasing in worker mobility.
The effects of large banks on the real economy are theoretically ambiguous and politically controversial. Huber identifies quasi-exogenous increases in bank size in postwar Germany. The researcher shows that firms did not grow faster after their relationship banks became bigger. In fact, opaque borrowers grew more slowly. The enlarged banks did not increase profits or efficiency, but worked with riskier borrowers. Bank managers benefited through higher salaries and media attention. The paper presents newly digitized microdata on German firms and their banks. Overall, the findings reveal that bigger banks do not always raise real growth and can actually harm some borrowers.