A Simple Theory of Trade,Finance and Firm Dynamics

A stylized monopolistic competition model of international trade is proposed where firms differ with respect to the expected economic lifetime of their innovations. Upon entry, they receive a commonly observed signal which is updated over time. Jointly with partial irreversibility of investment, this generates heterogeneity in effective discount rates and, thus, in the cost of finance. In line with evidence, the model predicts a negative correlation between firms' financing costs and their age. Over a firm's life cycle, per period net profits and the export participation probability grow. Exporters are less likely to exit than purely domestic firms. Belief updating entails excessive financing of incumbents relative to entrants and too much exporting. Asymptotically, trade liberalization reduces overall general equilibrium exit rates, but it does not necessarily increase welfare. With multiple asymmetric export markets, firms gradually expand their market coverage and total sales. A confidence crisis modeled by belief reversion causes an over‐proportional decrease in exports, thereby offering a novel interpretation of the trade slump in 2008/09.     

Entry,market turbulence and industry employment growth

This paper investigates the relationship between industrial dynamics in terms of firm entry, market turbulence and employment growth. Do entry of firms, the composition of industry dynamics (net entry) and market turbulence (entry and exit) influence industrial employment growth? This paper provides an empirical investigation, using unique data for 42 disaggregated Swedish industrial sectors during the period 1997–2001. It is hypothesised that the importance of entering firms, net entry and market turbulence may differ significantly across industries. A quantile regression method is used in order to detect industrial differences in the response to industrial employment growth. The empirical evidence shows that, on the one hand, firm entry and market turbulence have a positive effect on employment for fast growing industries and that the effect is larger for high growth industries. On the other hand, the composition of industry dynamics in terms of net entry rates has a more dispersed effect across all industries, even though the effect of net entry is larger for high growth industries.     

TRAINING,TURNOVER, AND SEARCH*

This article explores a model of firm‐specific training in a job search environment with labor turnover. The main substantive finding is a positive association between training and wages (when dispersed). The article then precisely characterizes how both wage dispersion and firm profitability depend on the flow value b≥ 0 of workers' unmatched time. It is shown that: (i) for all high values b, no equilibrium exists; (ii) for intermediate values b, multiple equilibria arise, where firms earn zero profits, and choose from a general wage distribution; (iii) for all lower values b, there is a unique equilibrium, with firms earning positive profits, and choosing from an atomless set of wages.     

Privatization,Underpricing, and Welfare in the Presence of Foreign Competition

We analyze privatization in a differentiated oligopoly setting with a domestic public firm and foreign profit‐maximizing firms. In particular, we examine pricing below marginal cost by the public firm, the optimal degree of privatization, and the relationship between privatization and foreign ownership restrictions. When market structure is exogenous, partial privatization of the public firm improves welfare by reducing public sector losses. Surprisingly, even at the optimal level of privatization, the public firm's price lies strictly below marginal cost, resulting in losses. Our analysis also reveals a potential conflict between privatization and investment liberalization (i.e., relaxing restrictions on foreign ownership) in the short run. With endogenous market structure (i.e., free entry of foreign firms), partial privatization improves welfare through an additional channel: more foreign varieties. Furthermore, at the optimal level of privatization, the public firm's price lies strictly above marginal cost and earns positive profits.     

一个中国私营部门发展模型

为讨论民营化、市场化对中国私营部门发展的影响,本文根据中国企业行为模式建立了一个简单经济数学模型。该文认为,由于中国的国有企业、私营企业和其他经济实体具有偏离利润最大化的多重目标,与单纯追求利润最大化的企业比较,它们倾向于利用更多的劳动力和资本生产更多的产品,但是,它们却只能获得更低的利润甚至亏损。这是中国经济高增长低效率的原因。本文还讨论了非利润目标和“准入成本”对企业数量和规模的影响。另外,模型分析表明,企业的管理能力和企业规模之间存在匹配问题,是中国的渐进式改革成功与俄罗斯大爆炸式改革失败的部分原因     

A theory of competitive industry dynamics with innovation and imitation

Empirical evidence on industry life-cycle reveals a pattern in which innovation rates remain fairly stable or are perhaps even higher at early stages, while patenting increases sharply as the industry matures. This increase in patenting in later stages is accompanied by net exit and lower rates of output growth and price decline. In this paper, we develop a dynamic model of a competitive industry with innovation and imitation that is consistent with these stylized facts. We derive an equilibrium growth path, along which leading firms invest in increasing the stock of technological knowledge and choose not to prevent imitation by other firms as long as the industry remains relatively small. As the industry expands including new entry, the leaders' optimal amount of investment gradually declines. We show that under some rather general conditions, there would exist a scale of the industry where innovating firms would choose to start preventing free imitation, bringing further expansion of the industry through new entry to a halt and causing net exit.     

Irrationality and monopolistic competition: An evolutionary approach

This paper shows that a monopolistically competitive equilibrium can evolve without purposive profit maximization. Specifically, this paper formulates a precise evolutionary dynamic model of an industry where there is continuous entry of firms that randomly select their output levels on entry and fix their output levels thereafter. Firms exit the industry if they fail to pass the survival test of making nonnegative wealth. This paper shows that the industry converges in probability to the monopolistically competitive equilibrium as the size of each firm becomes infinitesimally small relative to the market, as the entry cost becomes sufficiently small, and as time gets sufficiently large. Consequently, in the limit, the only surviving firms are those producing at the tangency of the demand curve to the average cost curve and no potential entrant can make a positive profit by entry.     

Consumer myopia, standardization and aftermarket monopolization

In this paper, I show that the standard Bertrand competition argument does not apply when firms compete for myopic consumers who optimize period-by-period. I develop the model in the context of aftermarket. With overlapping-generations of consumers, simultaneous product offerings in the primary market and aftermarket establishes a price floor for the primary good. This constraint prevents aftermarket rents from being dissipated by the primary market competition. Duopoly firms earn positive profits despite price competition with undifferentiated products. Nonetheless, government interventions to reinforce aftermarket competition such as a standardization requirement may lead to the partial collapse of the primary market.     

企业社会责任标准国际化背景下企业进入策略研究*

本文通过构建博弈模型，对企业社会责任（CSR）标准国际化背景下企业进入策略进行研究。本文发现，企业最优进入策略受到进入成本影响，当进入成本较低时所有企业都适合选择进入高CSR标准市场，当进入成本较高时所有企业都不适合选择进入，当成本介于两者之间时适合部分企业选择进入。在对社会福利的分析中还发现，当进入是企业最优策略时，无论是部分进入还是全部进入，企业承担更高的社会责任能同时提升企业利润和社会福利水平。     

EXIT OPTIONS AND DIVIDEND POLICY UNDER LIQUIDITY CONSTRAINTS

We introduce a post‐entry liquidity constraint to the standard model of a firm with serially correlated profitability and an irreversible exit decision. We assume that firms with no cash holdings and negative cash flow must either exit or raise new cash at a transaction cost. This creates a precautionary motive for holding cash, which must be traded off against the liquidity cost of holding cash. We characterize the optimal exit and payout policy. The direct effect of financial frictions is to impose inefficient exit, but there is also an indirect effect through higher equilibrium price that leads to inefficient survival.     

Noncooperative Equilibrium and Chamberlinian Monopolistic Competition

This paper addresses the existence of equilibrium for a nonatomic Bertrand game in a Chamberlinian environment. We reformulate O. Hart′s model (Rev. Econ. Stud. 52, 1985, 529–546) as a nonatomic game and show that under dispersion of tastes and continuity of the tastes density, there exists a pure-strategies ε-equilibrium where prices exceed marginal cost. Unlike Hart′s model there is no need to impose uniformity (or even independence) on the distribution of the m-tuple of differential commodities that consumers care about. Moreover, demand curves are allowed to vary across firms and in equilibrium firms may earn profits. Journal of Economic Literature Classification Numbers: B21, D43, L13.     

On industry equilibrium under uncertainty

The paper considers an industry consisting of numerous firms that produce a homogeneous output, the demand for which is a random variable. Each firm belongs to one of K possible types, and each type is characterized by a U-shaped average cost curve. It is shown that: (i) the first-order necessary conditions for efficient investment and output are sufficient; accordingly, the set of competitive equilibria is non-empty and coincides with the set of efficient allocations; (ii) a dynamic process of free entry and exit of firms, guided by expected profits, is quasistable and every limit point is a competitive equilibrium. The paper also defines a sufficient condition for uniqueness of the competitive equilibrium, in which case it is stable.     

Equilibrium with capacity-constrained firms: A classroom experiment

The authors develop a two-stage classroom experiment to illustrate convergence to long-run equilibrium in a market where price-taking firms are capacity-constrained. Once equilibrium in the first stage is established, capacity constraints are introduced by imposing discontinuities in the fixed costs of several firms. The experiment demonstrates that this supply shock yields a higher market price and, under assumed parameterization, several higher-cost firms that otherwise are not able to survive in the long-run equilibrium enter the market and earn positive profits.     

Who Wants a Good Reputation?

We examine a market in which long-lived firms face a short-term incentive to exert low effort, but could earn higher profits if it were possible to commit to high effort. There are two types of firms, "inept" firms who can only exert low effort, and "competent" firms who have a choice between high and low effort. There is occasional exit, and competent and inept potential entrants compete for the right to inherit the departing firm's reputation. Consumers receive noisy signals of effort choice, and so competent firms choose high effort in an attempt to distinguish themselves from inept firms. A competent firm is most likely to enter the market by purchasing an average reputation, in the hopes of building it into a good reputation, than either a very low reputation or a very high reputation. Inept firms, in contrast, find it more profitable to either buy high reputations and deplete them or buy low reputations.     

Price competition,free entry,and welfare in congested markets

In this paper we study the problem of price competition and free entry in congested markets. In particular, we consider a network with multiple origins and a common destination node, where each link is owned by a firm that sets prices in order to maximize profits, whereas users want to minimize the total cost they face, which is given by the congestion cost plus the prices set by firms. In this environment, we introduce the notion of Markovian Traffic Equilibrium to establish the existence and uniqueness of a pure strategy price equilibrium, without assuming that the demand functions are concave nor imposing particular functional forms for the latency functions. We derive explicit conditions to guarantee existence and uniqueness of equilibria. Given this existence and uniqueness result, we apply our framework to study entry decisions and welfare, and establish that in congested markets with free entry, the number of firms exceeds the social optimum.     

The welfare effects of entry: the role of the input market

In a successive Cournot oligopoly, we show the welfare effects of entry in the final goods market with no scale economies but with cost difference between the firms. If the input market is very concentrated, entry in the final goods market increases welfare. If the input market is not very concentrated, entry in the final goods market may reduce welfare if the entrant is moderately cost inefficient. Hence, entry in the final goods market is more desirable if (1) the input market is very concentrated or (2) the cost difference between the incumbents and the entrant is either very small or very large. It follows from our analysis that entry increases the profits of the incumbent final goods producers if their marginal costs are sufficiently lower than the entrant’s marginal cost.     

Entry and market selection of firms: A laboratory study

We study how markets adjust to the entry of new firms under different conditions. Two incumbents face entry by three other firms. When firms’ costs are equal, entry always leads consumer surplus and profits to their equilibrium levels. When entrants are more efficient than incumbents, entry leads consumer surplus to equilibrium. With cost asymmetries, market behavior is satisfactory from the consumers’ standpoint but does not yield adequate signals to other potential entrants. Simultaneous entry is in the short run more favorable to consumers than sequential entry. A longer incumbency phase favors consumers after entry.     

Exit with incomplete information about cost

This paper presents a model of output decisions by competitive firms which have incomplete information about costs. Unlike other work on this topic, our model incorporates the possibility of exit from the market after a firm has observed its unit cost. At the equilibrium expected aggregate output and the likelihood of exit depend upon the opportunity cost of staying in the market, the number of informed firms, and the intensity of competition. Uninformed firms may be better off than informed firms if exit is feasible. As a result, even if all firms face the same cost of acquiring information, informed firms may coexist with uninformed firms.     

Environmental protection without loss of international competitiveness

We develop a two‐country Cournot oligopoly model with product differentiation across countries and production‐generated pollution. The abatement of pollution by the firms in response to emission taxes is endogenous, and the number of firms can be fixed or there may be free entry and exit of firms in both countries. We propose particular unilateral and multilateral piecemeal policy reforms of emission taxes and production subsidies such that domestic industries will not suffer any loss of international competitiveness (defined in terms of either market share or profits), emission levels will be lower, and welfare could be higher in both countries.     

What determines the level of IPO gross spreads? Underwriter profits and the cost of going public

This paper addresses three empirical findings of the literature on initial public offerings. (i) Why do investment banks earn positive profits in a competitive market? (ii) Why do banks receive lower gross spreads in venture capitalist (VC) backed than in non-VC backed IPOs? (iii) Why is underpricing more pronounced in VC than in non-VC backed IPOs? While each phenomenon can be explained by itself, there is no explanation yet why all three occur simultaneously. We propose an integrated theoretical framework to address this issue. The IPO procedure is modeled as a two-stage signaling game: In the second stage banks set offer prices given their private information and the level of the spread. Issuing firms anticipate their bank's pricing decision and, in the first stage, set spreads to maximize expected revenue. Investors are aware of this process and subscribe only if their expected profits are non-negative. Firms' equilibrium spreads are large so as to induce banks to set high prices, allowing banks to make profits. Superiorly informed VC backed firms impose smaller spreads but face larger underpricing than non-VC backed firms.