Entry costs, industry structure, and cross-country income and TFP differences

Entry costs vary dramatically across countries. To assess their impact on cross-country differences in output and TFP, we construct a model with endogenous entry and operation decisions by firms. We calibrate the model to match the U.S. distribution of employment and firms by size. Higher entry costs lead to greater misallocation of productive factors and lower TFP and output. In the model, countries in the lowest decile of the entry costs distribution have 1.32 to 1.45 times higher TFP and 1.52 to 1.75 times higher output per worker than countries in the highest decile. As in the data, higher entry costs are associated with lower entry rates and business density.     

Culture and the regulation of entry

Does culture affect the manner in which a society regulates the entry of new firms? Our results suggest it does. We find more individualistic countries regulate entry more lightly. We investigate how culture matters presenting evidence of significant interactions between individualism and formal legal and political institutions. Individualism has a greater impact on entry regulation in societies with democratic political institutions or a common law tradition. This outcome is consistent with the idea that culture influences social preference for regulation, and political and legal institutions determine the degree to which those preferences are expressed as policy outcomes.     

Entry, Prices, and Investment in Regulated Industries

The paper studies how the optimal regulatory policy is affected by the possibility of unregulated firms entering the market. In such cases, the regulator may prefer to limit price and cost reductions in the regulated incumbent. The extent to which this happens is shown to depend on the extent of the regulator's commitment: if it commits to a chosen policy, then the market outcome following entry is less competitive than it would be without commitment: price and production costs are both higher. We also show that, unlike the natural monopoly case, incentives for cost reducing investment are stronger when the regulatory policy has a short regulatory interval.     

Domestic entry, optimum-welfare and maximum-revenue tariffs

In this paper, we examine the ranking of the maximum-revenue tariff and the optimum-welfare tariff under a linear Cournot oligopoly model without and with free entry of domestic firms. We demonstrate that in a regulated entry oligopoly with asymmetric costs, when the marginal cost of the domestic firms exceeds a critical value, the maximum-revenue tariff is higher than the optimum-welfare tariff. We then show that under free entry of domestic firms with asymmetric costs, when the fixed cost gets larger and the domestic firms become fewer, the difference between the optimum-welfare tariff and the maximum-revenue tariff becomes larger.     

Institutions and concentration

In a new dataset of 1.3 million firms from over 100 countries, I establish a number of regularities in cross-country differences in economic concentration. Concentration of sales and employment is substantially higher in smaller countries and in less-developed countries; these two factors alone explain roughly half the cross-country variation in concentration. Nevertheless, a number of institutional factors offer additional explanatory power for concentration. Concentration is higher in countries with higher entry costs for new firms, in countries with weaker antitrust policy, in countries with less financial development, in countries with weaker rule of law, and in countries with more burdensome regulation. Weak institutions are associated with higher concentration especially in industries that do not have naturally high levels of concentration. In addition, the relationships between institutions and concentration are more pronounced in nontradable and investment-intensive industries, suggesting that natural barriers to competition facilitate the monopolization of sectors especially when institutions are weak.     

The trade-offs from pattern bargaining with uncertain production costs

Pattern bargaining is a negotiating strategy that is often employed by industry-wide unions in oligopolistic industries to set wages. The conventional wisdom is that pattern bargaining “takes labor out of competition” and therefore softens bargaining between the union and firms, resulting in higher industry wide wages. However, this does not explain why firms agree to pattern bargaining. We introduce a model in which the agents face uncertainty about the relative product-market positions of the firms and compare the trade-offs involved in adopting different bargaining mechanisms. We show that with sufficient heterogeneity in non-labor costs, there are situations in which both the union and the firms prefer pattern bargaining. We also show that in such situations, the adoption of pattern bargaining harms consumers. This provides an explanation as to how pattern bargaining can arise in equilibrium and why there is often strong political opposition to it.     

国内市场分割与中国的出口贸易扩张

本文将国内市场分割和边际成本与固定成本之间的反向关系引入Melitz(2003)的模型,构建了一个开放经济模型。文章证明了国内市场分割导致不同生产技术的企业都首选进入国外市场。这似乎解释了中国出口贸易的强劲增长其实是严重的国内市场分割导致企业无法依托巨大的国内需求、发挥规模经济而被迫出口的扭曲现象。     

Protection and employment under uncertainty: a real option approach

The paper explores the effect of protection lobbying by solving a firm's dynamic optimization problem where there is uncertainty about future demand, the success of lobbying and non-zero entry/exit costs. It is found that firms in declining industries tend to lobby to prevent shutting down factories during economic turndowns. In contrast, firms in growing industries tend to lobby to prevent other firms from entering the market. The degree of this effect depends on the ratio of exit costs to entry costs. It is shown that the higher the ratio, the stronger the effect.     

Preemptive entry in differentiated product markets

Summary. Models of spatial competition are typically static, and exhibit multiple free-entry equilibria. Incumbent firms can earn rents in equilibrium because any potential entrant expects a significantly lower market share (since it must fit into a niche between incumbent firms) along with fiercer price competition. Previous research has usually concentrated on the zero-profit equilibrium, at which there is normally excessive entry, and so an entry tax would improve the allocation of resources. At the other extreme, the equilibrium with the greatest rent per firm normally entails insufficient entry, so an entry subsidy should be prescribed. A model of sequential firm entry (with an exogenous order of moves) resolves the multiplicity problem but raises a new difficulty: firms that enter earlier can expect higher spatial rents, and so firms prefer to be earlier in the entry order. This tension disappears when firms can compete for entry positions. We therefore suppose that firms can commit capital early to the market in order to lay claim to a particular location. This temporal competition dissipates spatial rents in equilibrium and justifies the sequential move structure. However, the policy implications are quite different once time is introduced. An atemporal analysis of the sequential entry process would prescribe an entry subsidy, but once proper account is taken of the entry dynamics, a tax may be preferable. Received: April 26, 1999; revised version: September 22, 1999     

Market size and entry in international trade: Product versus firm fixed costs

This paper develops a theoretical framework to infer the nature of fixed costs from the relationship between entry patterns in international markets and destination market size. If fixed costs are at the firm level, firms take advantage of an intrafirm spillover by expanding firm‐level product range (scope). Few firms enter with many products and dominate international trade. If fixed costs are at the product level, an interfirm spillover reduces the fixed costs to export for all firms producing the product. The resulting entry pattern consists of many firms exporting different varieties of the same product. Using cross‐country data on firm and product entry, I find empirical evidence consistent with product‐level costs. More firms than products enter in larger markets offering their consumers lower prices and a greater variety of goods within the product category.     

Financing constraints,firm dynamics,export decisions,and aggregate productivity

We present a dynamic model in which firms accumulate wealth to avoid bankruptcy and to overcome financing constraints that affect their fixed operational costs and the costs of becoming an exporter. Financing constraints not only affect firms directly when they are binding, but also indirectly, through precautionary saving and the selection of firms via entry and exit of the domestic and export markets. We calibrate the model and test some of its predictions using a rich dataset of Italian manufacturing firms for the period 1995–2003. Financing constraints reduce the aggregate productivity gains induced by trade liberalization by 25 percent by distorting the incentives of the most productive firms to self-select into exporting.     

Opportunity Costs,Competition, and Firm Selection

Abstract

The paper questions the standard economic assumptions that competing economic agents have identical reservation utility levels, and that when differences in opportunity costs exist, they can be conveniently represented by fixed costs. Asymmetries in opportunity costs are considered in relation to current efficiency. The effect of this interchangeability of skills is studied in the context of the effect of entry on firm selection in a Cournot setting. It is found that inefficient firms are more likely to crowd out efficient ones when the relationship between current efficiency and opportunity costs is strong, and when the fixed costs of changing markets are high. Moreover, in the long-run, firms with intermediate cost levels are likely to induce the exit of low and high cost firms. The model sheds light on the benefits of diversification by multiproduct and multinational firms, and their relationship to skill transferability.     

ASYMMETRIC INFORMATION AND EXCHANGE OF INFORMATION ABOUT PRODUCT DIFFERENTIATION

We introduce asymmetric information about consumers’ transportation costs (i.e., the degree of product differentiation) in the model of Hotelling. When transportation costs are high, both firms have lower profits with asymmetric information than with perfect information. Contrarily, if transportation costs are low, both firms may prefer the asymmetric information scenario (the informed firm always prefers the informational advantage, while the uninformed firm may or may not prefer to remain uninformed). Information exchange is ex‐ante advantageous for both firms, but ex‐post damaging if transportation costs turn out to be low. If the information is unverifiable, the informed firm does not represent a reliable source of information, since it always prefers to announce that transportation costs are high and there is no contract that induces truthful revelation.     

Harvesting Preemption, Industrial Concentration and Enclosure of National Marine Fisheries

This paper explores how harvesting technology can affect firms' internalisation of common pool externalities and the incentives for expanding firm's size. Focusing on supply side non-pecuniary externalities, our closed-entry harvesting competition model suggests that when marginal harvesting costs are weakly sensitive to common pool externalities, atomistic competition is likely to remain, other things equal, as the predominant industrial structure in the fishery. The avenue for increasing industrial concentration is modelled via Stackelberg leadership which offers the option of preempting rivals' production. In our static modelling, a fishery subject to Stackelberg signalling results in higher overfishing versus the case of a highly decentralised harvesting sector (proxied by the use of Nash conjectures). Given that static optimising behaviour could be interpreted as a result of entry controls and other fishing regulations being widely perceived as ineffective controls, the obtained overfishing ranking suggests that in fisheries where strategic preemption in production is feasible, but where entry controls and other important regulations on fishing effort are considered to be ineffective, overfishing is likely to remain the predominant outcome, even if other incentives promote evolution towards a more concentrated industry structure. When the fishery is already overpopulated by numerous small firms, whatever advantages large firms may have in terms of profitability, numerous small-scale fishermen tend to make up for in the political arena. This imposes constraints on the politically feasible fishing regulations. We use a second best welfare benchmark to illustrate resulting policy trade-offs.     

RESOURCE CURSE,POLITICAL ENTRY,AND DEADWEIGHT COSTS

A simple model of political entry in a two‐sector economy is developed to analyze the effects of natural resource wealth on economic policy, political development, and civil insurrection. The model emphasizes the role of political entry and deadweight costs of taxation on the joint determination of these economic and political outcomes. Contrary to popular belief, my model shows that natural resource abundance is an economic blessing even in a rent‐seeking society, although resource dependence can be negatively associated with economic performance. In a contested political market, dictators care about popular support and hence resource wealth can help reduce the deadweight cost of taxation (and hence the cost of public good provision). On the other hand, natural resource wealth can be a political curse, because it encourages political entry and hence it induces incumbent dictators to run more repressive regimes. With constant returns counterinsurgent technology, however, the equilibrium number of insurgents is independent of the size of resource wealth. The onset of civil war, therefore, depends on the counterinsurgent technology and whether the costs of entry deterrence are affected by resource wealth. This helps clarify the two seemingly contradictory hypotheses that “resource wealth enhances regime durability” and “resource wealth fuels conflict.”     

Bank ownership,performance, and the politics: Evidence from Taiwan

This paper investigates the effects of politics on the performances of financial institutions in Taiwan over the period from 1994 through 2009 using the two-stage generalized method of moments approach. We argue that politics and financial institutions are related and this relationship varies with the ownership of financial institutions. Our main findings are, firstly, during election years, the private financial institutions earned higher ROA and loan growth than the government- and foreign-owned. Secondly, government-owned institutions are not affected by current elections for all measures of performance, while foreign institutions significantly earned lower ROA, higher interest margin, and spent higher overhead costs. The finding that lendings of government-owned institutions are no longer subject to political pressures across time implies partial success of financial reforms in Taiwan.     

Sunk Costs,Firm Heterogeneity,Export Market Entry and Exit: Evidence from India

This paper analyses the role of sunk costs and firm heterogeneity in firm decision to enter and exit export markets. Employing rich firm-level data on Indian manufacturing firms, the study points out that sunk costs in terms of previous export experience significantly explain entry and exit decisions of firms in the export market. The first set of analysis involves estimation of dynamic discrete choice model using random effects probit correcting for initial conditions problem. We find evidence that previous export experience (sunk costs) matters for export decision. However, importance of sunk costs is found to depreciate rapidly. Further, analysis across sub-sample of firms accounting for firm heterogeneity factors like size and product level information supports the hypothesis of sunk costs. Second set of analysis involving firm survival in export markets using discrete-time hazard models shows evidence of negative duration dependence. We observe that those firms which continue to export for few years are less likely to exit from export markets.

     

INTERNATIONALIZATION STRATEGIES IN OLIGOPOLY WITH HETEROGENEOUS FIRMS

This paper examines the foreign direct investment (FDI) versus exports decision of foreign oligopolistic firms under cost heterogeneity. An additional motivation for firms to invest abroad is the technological sourcing via spillovers, which flow from the host more efficient firm to foreign less advantaged firms. For intermediate values of the set‐up costs associated with FDI entry, it is shown that foreign firms choose opposite entry strategies. An equilibrium where the less efficient foreign firm exports whereas the more efficient invests is more likely to happen when foreign firms become more heterogeneous, the larger the trade costs and not too big oligopolistic profitability. Interestingly, the opposite may also be an equilibrium thus finding that the more efficient firm does not choose to invest, a result that emphasizes the relevance of the strategic setting under consideration. The latter result identifies a market failure since welfare in the host market is higher when both firms undertake FDI; a finding that calls attention to how appropriate are host government policies towards internationalization strategies.     

Dimensions of international expansions by US firms to China: Wealth effects,mode selection,and firm-specific factors

China's recent efforts to attract foreign investment have been viewed favorably by US firms, who have explored a variety of strategies for expanding to China. This paper provides evidence related to a comprehensive set of strategies used by US firms to expand to China. For the 302 announcements of expansion by US firms into the Chinese market, several firm-specific factors are found to affect both the choice of mode entry and the reaction of investors to the announcement of the expansion. The results suggest that firms with a high investment in proprietary assets prefer foreign direct investment (FDI) modes to non-FDI modes, as do firms with high levels of geographic diversification. Firms entering the Chinese market utilize non-FDI modes, while those who have established a presence in China prefer FDI modes. The reaction of the stock market to expansions to China is positive; average excess returns of 0.75% are observed for the two days surrounding the announcement. Both FDI and non-FDI categories of expansion have statistically significant excess returns. Analysis by mode of expansion shows that expansions through joint ventures (JVs) and contracts are the most desirable alternatives. Other modes of expansion do not result in significant excess returns. Finally, a firm's prior financial performance has a significant influence on its ability to profitably expand to China.     

Coordination in Oligopoly

The private and social efficiency of two "behavioral" coordination mechanisms is examined in this paper. In Cournot oligopoly, firms prefer immediate coordination on the Nash equilibrium (interpreted as a preplay communication) over the best-reply dynamics (and fictitous play) which converge to the equilibrium, but with delay (interpreted as a decentralized learning process). In Bertrand oligopoly, firms prefer the learning process. These results indicate that firms have incentives to create institutions, such as trade associations or informal meetings, to facilitate coordination of production capacities, but not prices. Moreover, quantity agreements may even increase social welfare.