Technological Progress, Downsizing and Unemployment

This paper presents a model where the form of innovations is endogenous. It is shown that with labour market imperfections, which raise the wage above the shadow price of labour, firms over-invest in innovations cutting labour costs and under-invest in increasing quality. As a result, the market outcome features lower long run growth, higher unemployment and lower welfare than the social optimum. It is further shown that a firm's incentives to cut labour costs are increased as wages rise and as the firm declines. Finally, a rise in competition increases incentives to downsize for firms with below average quality performance.     

A dual economy model of endogenous growth with R&D and market structure

This paper develops a dual economy endogenous growth model to consider the effects of market structure and innovation on the rate of growth of an economy. There is an innovative goods sector where firms consistently invest in research and development to produce new products within a framework of monopolistic competition. Firms in the traditional goods sector produce a homogenous good, compete in a form of oligopoly (quantity competition), and seek to reduce their production costs. It is shown that growth is increasing in the market power that firms in the innovative goods sector obtain but decreasing in the equilibrium number of firms in the traditional goods sector.     

Deregulation with consensus

We analyze the problem of eliminating an inefficient regulation, such as protection, in a dynamic model in which there is incomplete information and unanimous approval from all parties involved is necessary. Existing firms have heterogeneous cost, and efficiency requires some of them to shut down when the inefficient regulation is eliminated. The government can set up a revelation mechanism, giving subsidies and requiring firms to exit the market at a given time depending on the information collected. Under full commitment the optimal policy prescribes that some inefficient firms remain active and are subsidized. The optimal policy takes a simple form, with at most two times at which the firms are allowed to exit. We are very grateful to Matt Mitchell whose comments substantially improved the paper.     

New technology and the economic organization of the clothing industry

The economic organization of an industry is ultimately determined by the cost functions of its component firms. The costs that matter for the competitive state of an industry are not just long-run variable costs but also the costs of entry to and exit from the industry, and the joint costs of different products that the firms in the industry produce. In the clothing industry the costs of creating and implementing new designs is a further important factor affecting competition between firms. Since costs are largely determined by technology, we expect repercussions on the organization of the industry when technology changes. Application of the new information technologies in the clothing industry will encourag agglomerations by growth and by merger, with larger firms producing a wider range of products and introducing new products faster than hitherto. Trends in the geographic organization of production will also be reversed.     

Some thoughts on the Sutton approach

I analyze the relation between market size and number of firms when an endogenous number of firms chooses the market strategy and (simultaneously or sequentially) an R&D investment. I generalize the linear Cournot model with an endogenous cost-reducing activity and show that, as long as exogenous fixed costs are positive, the market structure is naturally characterized by an inverted-U relation between market size and number of firms, in line with the celebrated hypothesis of Sutton. However, the increase of the market size reduces the prices and expands individual investment and production exactly as in endogenous market structure only with exogenous fixed costs.     

QUALITY CHOICE AND MARKET STRUCTURE: A DYNAMIC ANALYSIS OF NURSING HOME OLIGOPOLIES

This article develops a dynamic model of entry and exit to analyze quality choice and oligopoly market structure in the nursing home industry. I find significant heterogeneity in the competitive effects across market structures: Firms of similar quality levels compete more strongly than dissimilar firms. Sunken entry costs are extremely large, and quality adjustment behavior is governed by significant fixed adjustment costs. A proposal to eliminate low‐quality nursing homes is found to cause a large supply‐side shortage, and another proposal to lower entry costs has offered a perverse incentive to provide low quality of care.     

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.     

Wage bargaining and turnover costs with heterogenous labor and perfect history screening

We study effects of mobility costs in a model of (Nash) wage bargaining between workers and firms, with instantaneous matching, heterogeneous workers, identical firms and free firm entry, and where firms can screen workers perfectly according to their previous work history but not their actual productivity. We derive the employment level and the minimum worker quality standard, in the market solution, and in the efficient solution established by a social planner. When workers have positive bargaining power, there is always some inefficient unemployment among desired workers in the market solution. The lowest hiring standard chosen by firms is higher than the planner's standard when firing costs are high relative to hiring costs, but may be lower in the opposite case. We show that any higher established hiring standard corresponds to a market equilibrium. The model explains a tendency for a high initial unemployment rate to remain high, particularly for low-skilled workers.     

Sequential Entry in a Vertically Differentiated Market

This paper considers a sequential entry game of homogeneous firms in a vertically differentiated market. A firm can choose any variety of products, with a fixed cost per product. Each product can be withdrawn afterwards without exit costs. Then each firm chooses one product at most in equilibrium because of a commitment problem. The first firm chooses the highest quality if the fixed cost is so large that subsequent entry is blockaded. It chooses middle quality to deter entry of a low–quality firm if the fixed cost decreases. Hence everyone becomes worse off as the entrant becomes more dangerous. JEL Classification Numbers: D43, L13.     

Endogenous fluctuations in a cournotian monopolistic competition model with free entry and market power variability

The purpose of this article is to show that there is a link between imperfections of competition and occurrence of endogenous fluctuations. We consider a two-sector model in which a perfectly competitive final good sector uses inputs that are produced in a Cournot monopolistic competition market. We show that when inputs are not perfect substitutes, and the depreciation rate of capital is sufficiently small, Neimark bifurcations are susceptible to emerge. This is a consequence of additional variability in the dynamical system generated by the dependence of the markup on the number of firms. This number changes over time because firms can enter and exit the market without costs. Moreover, a fixed cost in the technology ensures that the number of active firms at a given date is finite provided that the elasticity of substitution between inputs is bounded from above.     

Business cycle in an oligopolistic economy with entry and exit

In this paper we introduce a microfounded macromodel with endogenous market structure, where macroeconomic fluctuations may be determined by firms’ strategic interactions, entry and exit. All the agents have the same preferences but may differ in their budget constraints and change their social status according to idiosyncratic stochastic shocks that trigger entry, while exit is caused by firms’ bankruptcies. Our numerical simulations show that birth and death of firms (associated with entry and exit) can generate macroeconomic fluctuations without technology shocks.     

Firm exit,technological progress and trade

The dynamics of export market exit and firm closure have found limited attention in the new heterogeneous-firms trade literature. In fact, several of the predictions on firm survival and exit stemming from this new class of models are at odds with the stylized facts. Empirically, higher productivity firms survive longer, most firm closures are young firms, higher productivity exporters are more likely to continue to export compared to less productive exporters and market exits as well as firm closures are typically preceded by periods of contracting market shares. The present paper shows that the simple inclusion of exogenous economy wide technological progress into the standard Melitz (2003) model generates a tractable dynamic framework that generates endogenous exit decisions of firms in line with the stylized facts. Furthermore, we derive the effects of faster technological progress and trade liberalization on export market exit and firm closure.     

Industry shakeouts and product strategies: lessons from the US laser printer industry

Many industries experience a shakeout, which occurs when, after an initial increase, the number of firms drops significantly in a short period of time. A shakeout drives changes in the market structure and, thus, accompanying changes in firms’ strategies. In this paper, we explore differences in firms’ product strategies (i.e. product quality improvement, product line management, and product market strategy) before and after the initiation of an industry shakeout, focusing on the role of product exit. In analyzing a sample of US laser printer manufacturers and their products for the period between 1983 and 2002, we find clear differences in firms’ product exit decisions before and after the initiation of a shakeout. With these findings, our study contributes to the understanding of the link between industry shakeouts and firms’ product strategies.     

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.     

A contest model of liberalizing government procurements

This paper models liberalization of government procurements as admitting entry of foreign firms in a contest among potential rent seekers. It contributes to the literature on how institutions influence socially desirable outcomes. Liberalizing procurements reduces wasteful domestic lobbying but also increases the likelihood that a foreign firm will capture the rent. A main result is that the domestic welfare change is not monotonic in the foreign firms' abilities. Furthermore, we show that domestic liberalization policies can be inefficient from the global point of view because foreign lobbying costs can outweight productive efficiency.     

Beyond the need to boast: Cost concealment incentives and exit in Cournot oligopoly

This paper studies the incentives for production cost disclosure in an asymmetric Cournot oligopoly. Whereas the efficient firm (consumers) prefers information sharing (concealment) when the firms choose accommodating strategies in the product market, the firm (consumers) may prefer information concealment (sharing) when it can exclude its competitors from the market. Hence, the rankings of expected profit and consumer surplus can be reversed if exit of the inefficient firms is possible. Although the efficient firm has stronger incentives to share information when it shares strategically, there remain cases in which the firm conceals information in equilibrium to induce exit.     

The Allocation of Scientific Talent*

I consider a model in which firms produce new knowledge by building laboratories and hiring researchers in a competitive market. I show that, for a given distribution of laboratories, the allocation of researchers to firms can be efficient or inefficient, depending on how fast the firms’ marginal return on the knowledge produced decreases with the amount of knowledge produced. I then argue that the allocation of researchers to laboratories is likely to be inefficient if firms invest in research and development primarily to increase their absorptive capacity (i.e., their ability to use the stock of publicly available knowledge). When the distribution of laboratories is endogenous, a second source of inefficiency arises: firms’ underinvestment in laboratories. Policies subsidizing investment in laboratories are ineffective at restoring the first best, unless policies aimed at reallocating researchers to firms are also put in place.     

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.

     

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.     

INCENTIVES AND THE COST OF FIRING IN AN EQUILIBRIUM LABOR MARKET MODEL WITH ENDOGENOUS LAYOFFS*

I study the effects of firing costs in an equilibrium model of the labor market with moral hazard. Layoff is an incentive device, modeled as termination of the optimal long‐term contract. When the economy’s stock of firms is fixed, firing costs could reduce layoffs and increase worker welfare. In the long run when firms are free to enter and exit the market, firing costs generate not only lower employment, longer unemployment durations, and lower aggregate output, but also lower welfare for both employed workers and new labor market entrants.