The impact of the net percentage growth rate in the number of small firms on differential state-level employment growth rates in the US: an exploratory empirical note

This brief exploratory empirical note seeks to identify key determinants of geographic differentials in the percentage growth rate of state-level employment in the US, with the primary focus being on the percentage net growth rate in the number of small firms (i.e., those with fewer than 20 employees) in each state, where this variable serves as a de facto reflection of ‘entrepreneurship’. In the interest of identifying other key factors that influence state-level employment growth rates, the effective income tax rate in each state, quality of life elements and labour market considerations are also included in the analysis. The study period runs from the year 2000 to the year 2007, ending just prior to the ‘Great Recession’. The estimation results imply that the state-level employment growth rate in the US was an increasing function of the percentage net growth rate in the number of small firms in each state. Thus, it appears that the small firms growth rate may in fact be a significant source.     

INTERNATIONAL ANTITRUST ENFORCEMENT AND MULTIMARKET CONTACT*

This article analyzes cartel formation and international antitrust enforcement when multinational firms operate in several jurisdictions with local antitrust authorities. We are concerned with how the sustainability of collusion in one local market is affected by the existence of collusion in other markets when they are linked by a negative demand relationship. The interdependence of cartel stability across markets leads to potential externalities in antitrust enforcement across jurisdictions. Local antitrust enforcement equilibrium enforcement may exhibit a nonmonotonicity in the degree of market integration. We compare it with globally optimal antitrust enforcement policy and discuss the role of international antitrust coordination.     

Dynastic entrepreneurship,entry, and non-compete enforcement

We investigate entry in a dynastic entrepreneurship (overlapping generations) environment created by employee spinoffs. Contracting failures, caused by non-verifiability of profits from new activities in original firms and overall profits from subsequent entrants, may lead respectively to implementation of new employee ideas in spinoffs and constraints on borrowing to buy out non-compete agreements. If borrowing constraints are not binding, enforcement of non-compete agreements unambiguously improves social welfare outcomes, increasing the entry of both original firms and subsequent generations of spinoffs. However, if employees are unable to buy out their non-compete covenants, enforcement of these agreements shuts down socially profitable spinoff firms. Non-enforcement sacrifices entry of original firms that would be marginally profitable in the absence of employee spinoffs, but otherwise clearly improves social welfare outcomes over enforcement in the presence of binding finance constraints.     

Entry of foreign firms and the R&D behaviour: a panel data study of domestic and foreign firms in China's manufacturing sector

Rapid globalization has resulted in increased competitive pressures. The entry of foreign firms in a host economy increases the level of competition faced by not only the domestic firms but also the existing foreign firms. We argue that domestic firms, especially in developing countries, respond to this situation by increasing their research and development (R&D) spending, whereas the foreign firms decrease their R&D spending. By making use of firm-level panel data from China's manufacturing sector, over the period 2005–2007, this paper investigates the impact of the entry of foreign firms on R&D behaviour of domestic and foreign firms. Empirical analysis, based on Tobit and Instrumental Variables Tobit regression, reveals that foreign entry increases the R&D intensity of domestic firms but its impact on R&D intensity of foreign firms is negative. The estimated results are found to be robust across balanced and unbalanced panels.     

Strictness of leniency programs and asymmetric punishment effect

We analyze the impact of leniency programs on the behavior of firms participating in illegal cartel agreements in a two-stage repeated game model. Our approach takes into account asymmetric punishment effect and allows to discuss the design of leniency programs in the setting with asymmetries. The main contribution of the paper is that we consider heterogeneous firms. This heterogeneity results in additional costs in case of disclosure of the cartel, which are caused by asymmetric punishments. Next, following current antitrust rules, we analyze effects of the strictness of leniency programs, which reflects the likelihood of getting a complete exemption from fine even in case many firms self-report simultaneously. Our main conclusion is that leniency programs work better for small companies, since a lower rate of law enforcement is needed in order to induce self-reporting by smaller firms, while big firms are less likely to start a cartel in the first place given the possibility of self-reporting in future. Finally, we analyze optimal enforcement strategies of the antitrust authority and conclude that the authority with limited resources should implement more generous leniency rules the more cartelized the economy is.     

State enforcement of federal standards: Implications for interstate pollution

This paper explores the relationship between interstate air pollution and the division of power between federal and state agencies in setting and enforcing standards. In the context of the US Clean Air Act we argue that the EPA is able to monitor the adoption of technology-based standards more closely than it can monitor state-level enforcement, and that this causes an effective division of control between federal and state agencies. Our analysis offers three main insights into the interstate pollution problem in this setting. First, states have an incentive to enforce standards less stringently on firms located close to downwind borders, and this leads to excessive interstate pollution in equilibrium. Second, there can arise an inherent substitutability in the regulatory problem between strict standards and compliance effort, and this creates a strategic linkage between the federal policy on standards and state policies on enforcement. In particular, a tighter federal standard can induce less selective enforcement but can also lead to less enforcement overall. Third, states will attempt to neutralize the impact of location-based federal standards (that specifically target interstate pollution) in a way that actually exacerbates the underlying enforcement problem.     

Going offshore or better staying in? Spatial relocation strategies and their impact on firm innovativeness

We analyse the short- to mid-run effects of spatial relocation strategies on firm innovativeness and productivity growth. Using conditional difference-in-difference estimation with multiple treatments, we find for a sample of German firms in 1999–2013 that offshoring has a statistically significant negative impact on the firms’ innovation activity and productivity growth vis-à-vis nonrelocating comparison firms. In contrast, we find a positive link between domestic relocation activities and the firms’ propensity to introduce a product innovation. Firms should thus carefully account for potentially distorting performance effects when deciding about the spatial scale of relocation strategies in the short to mid-run.     

International,intra-national and inter-firm knowledge diffusion and technological catch-up: the USA,Japan, Korea and Taiwan in the memory chip industry

Using data on US patent citations, this paper investigates the pattern of international, intranational and interfirm knowledge diffusion in the process of technological catch-up by Japanese, Korean and Taiwanese firms in the memory chip industry. First, regarding international diffusion, this paper finds that the ordering of citations is exactly the same as the order of entry into the industry: Taiwanese firms tend to cite Korean firms, Korean firms tend to cite Japanese firms and Japanese firms tend to cite US firms. Second, the degree of intranational knowledge diffusion is proportional to the level of technological capability or order of entry, although it is also affected by organisational differences among the firms. Third, the difference in patterns of interfirm knowledge reflects difference across organisations, such that big Korean group firms are less oriented toward interfirm knowledge diffusion compared with their Taiwanese small and medium enterprise (SME) counterparts. To explain such difference, the role of government research institutions has been highlighted, especially since the Industrial Technology Research Institute (ITRI) accounts for the lion's share of Taiwanese-held patents and in the spin-offs of many firms in the industry.     

Oil explains all: desirable organisation of the Russian fuel markets (on the data of three waves of antitrust cases against oil companies)

This article considers the mutual influence of antitrust enforcement in the petroleum product markets and competition legislation in Russia. An analysis of infringement decisions by the Russian competition authority allows us to understand the perceived goals of economic policy in this sector. The shift from antitrust investigations and infringement decisions to a very specific set of remedies is explained by the desire to maintain low retail prices under increasing concentration without price subsidisation or promotion of entry at the refining stage of the value chain. The article highlights the specific use of antitrust legislation to maintain low fuel prices and support independent retailing companies. We also note the limitation this policy faces. The goals and effects of antitrust enforcement in the industry explain, in turn, the specific path of competition legislation development in Russia.     

The micro-firm health insurance hypothesis

The objective of this study is to investigate the ‘micro-firm health insurance hypothesis’, a hypothesis that the greater the percentage of domestic firms that are ‘very small’, i.e. have four or fewer employees, the greater the percentage of the US population that will be without health insurance. The focus of this study is based on the premise that very small firms (as defined), ‘micro-firms’, which constitute 58.6% of all private sector firms in the US, face bargaining-power, financial, and competitive constraints that tend to limit their ability to provide group health insurance benefits to their employees, with the result being that employees at very small firms are relatively more likely than employees at larger firms to be without a health insurance fringe benefit. Weighted Least Squares (WLS) estimates provide strong empirical support for the hypothesis.     

Disentangling regulatory policy: The effects of state regulations on trucking rates

This paper combines state-level data on trucking rates with information on state-level regulations to estimate the independent effect on rates from three different types of motor carrier regulations: rate regulation; entry regulation; and the provision of antitrust immunity for decisions made jointly by motor carrier rate bureaus. The empirical results indicate that state-level motor carrier regulations generally increase trucking rates, with entry regulation having the largest effect in the LTL (less-than-truckload) sector and rate regulation having the largest effect in the TL (truckload) sector. The study also examines interaction effects among the three types of regulations and concludes that the combination of strict entry requirements and antitrust immunity leads to significant increases in trucking rates.This project was begun when both authors were in the Bureau of Economics of the Federal Trade Commission. The views expressed are those of the authors and do not necessarily reflect the views of the Commission or any individual Commissioner. We are grateful to Ed Rastatter of the Department of Transportation for granting us access to the data analyzed in this report, and to Bruce Allen of Wharton who provided them to us in machine readable form. We thank James MacDonald, Paul Pautler and Ed Rastatter for comments on an earlier draft. We also are grateful to Lynn Carpenter, Karen Condor, Effie Georges, Dolly Howarth, Andrew Kim, Georges Pascoe, and Carolyn Samuels for their research and programming assistance.     

Antitrust Enforcement and Non-Enforcement as a Barrier to Import in the Japanese Automobile Industry

Foreign automobile manufacturers long have found it difficult to compete in the Japanese automobile market. For decades, governmentally imposed restraints prevented foreign manufacturers from gaining a foothold in the Japanese market. In recent decades, these governmental restrictions have been replaced by private restraints which create equally formidable barriers to entry. Many private restraints persist despite repeated informal investigations and administrative guidance by the Japan Fair trade Commission (JFTC). The endurance of these private restraints raises the question of what mechanisms may be available to make the Japanese automobile market more contestable. While vigorous and transparent enforcement of Japan's Antimonopoly Law by the JFTC is the preferred mechanism, other mechanisms for alleviating these private restraints include the extraterritorial enforcement of U.S. antitrust laws by U.S. antitrust enforcement authorities, mediation by the OECD or the enforcement of an international competition code in an international forum.     

Employment in family managed firms: Less but safe? Analysing labour demand of German family managed firms with a treatment model for panel data

This paper analyses the differences in labour demand between family and non-family managed firms. These firms seem to have better employment performance than non-family controlled companies. Therefore, this study applies a treatment model for panel data controlling for endogeneities of being a family managed firm or not. The results of the estimations indicate that labour demand is possibly larger because of family members joining the firms as extra employees. Moreover, labour turnover is lower, supporting the assumption that family firms offer some kind of implicit labour contracts. However, in opposite to previous results, it seems that only small family managed firms show different employment behaviour.     

Regulating away competition: the effect of regulation on entrepreneurship and employment

Many scholars have worried that regulation deters entrepreneurship because it increases the cost of entry, reduces innovation in the regulated industry, and benefits large firms because they can overcome the costs of complying with regulations more easily than smaller firms. Using novel data on the extent of US federal regulations by industry and data on firm births and employment from the Statistics of US Businesses, we run fixed effects regressions to show that more-regulated industries experienced fewer new firm births and slower employment growth in the period 1998–2011. Large firms may even successfully lobby government officials to increase regulations to raise their smaller rivals’ costs. We also find that regulations inhibit employment growth in all firms and that large firms are less likely to exit a heavily regulated industry than small firms.     

Private enforcement,corruption, and antitrust design

We examine how the rationale for enabling versus precluding private antitrust enforcement depends on whether antitrust enforcement is corruption-free or plagued by corruption. Corruption in courts affects the incentives to bring forth private antitrust lawsuits. This, in turn, along with corruption in antitrust agency enforcement, alters the incentives to commit antitrust violations. The social welfare effect of enabling private antitrust enforcement in the presence of corruption depends on whether corrupt officials in the ensuing bribery contests favor a particular firm and if so which one and to what extent. Under some circumstances, corruption actually increases the social desirability of private antitrust enforcement relative to the no-corruption scenario. Our analysis highlights that the effects of a given legal arrangement for antitrust enforcement critically depend on the corruption environment and, thus, that the appropriate design of antitrust institutions is context-specific.     

Trade Policy and Antitrust: Do Consumers Matter to Legislators?

We provide one of the first efforts to measure the importance of consumer preferences in legislators' trade policy decisions by estimating the degree to which the level of antitrust enforcement in the legislator's state impacts his or her vote on free trade agreements. To the extent that antitrust and trade liberalization are both viewed as pro‐consumer in nature, we would expect to see a positive relationship between antitrust enforcement in their legislative district and Congressional votes in support of trade liberalization. We find evidence suggesting that consumer preferences do play a role in legislative decisions on trade policy.     

US shadow economies: a state-level study

Recent studies of shadow economies focus primarily on cross-country comparisons. Few have examined regional or state-level variations in underground economic activity. This paper presents estimates of the shadow economy for 50 US states over the period 1997–2008. Results suggest that tax and social welfare burdens, labor market regulations, and intensity of regulation enforcement are important determinants of the underground economy. Among the states, Delaware, on average, maintains the smallest shadow economy at 7.28 % of GDP; Oregon, on average, has the second smallest shadow economy at 7.41 % of GDP; followed by Colorado, averaging 7.52 % of GDP, rounding out the three smallest shadow economies in the US West Virginia and Mississippi, on average, have the largest shadow economies in the US as a percent of GDP (9.32 and 9.54 %, respectively).     

Reforms and Entry: Some Evidence from the Indian Manufacturing Sector

Traditional research in the context of product market entry has explored the strategic reactions of incumbent firms when threatened by the possibility of entry, and have identified industry-specific factors that affect entry rates. However, following de Soto (1989 ), there has been increasing emphasis on regulatory and institutional factors governing entry rates, especially in the context of developing countries. Using three-digit industry-level data from India, for the 1984–97 period, we examine the phenomenon of entry in the Indian context. Our empirical results suggest that during the 1980s industry-level factors largely explained variations in entry rates, but that, following the economic federalism brought about by the post-1991 reforms, variations in entry rates during the 1990s were explained largely by state-level institutional and legacy factors. Past productivity growth affects net entry rates as well.     

Does private security affect crime?: a test using state regulations as instruments

Private security is employed to deter criminals from attacking specific targets, presumably not to produce general deterrence. Indeed, private security generates negative spillovers as criminals substitute non-protected targets for protected targets. Specific deterrence efforts may generate positive spillovers too, however, by raising the expected cost of committing crimes, thereby reducing crime in an area. The hypothesis that private security deters crime at the state level is tested. The demand for private security in an area is expected to be simultaneously dependent on the level of crime; so, an instrumental variables approach is employed in a panel-data fixed-effect model using state-level data from 1998 to 2010. Instruments for the amount of private security are state-wide licensing regulations for firms specializing in providing security, since these regulations should influence entry. Some state-level measures of violent and property crime are shown to be negatively and significantly related to increases in private security, suggesting that private security generates a general deterrence effect.     

Tax Reform,Delocation, and Heterogeneous Firms*

The standard international tax model is extended to allow for heterogeneous firms when agglomeration forces are important, enabling us to study the relocation effects of taxes that vary according to firm size. We show that allowing for heterogeneity permits a given tax scheme to have an endogenously different effect on the location decision of small and big firms, with the biggest firms being endogenously more likely to relocate in reaction to high taxes. We show that a reform that flattens the tax–firm–size profile can raise tax revenue without inducing any relocation.