Exit, sunk costs and the selection of firms

Summary. This paper aims to identify the cost characteristics of exiting firms whenever firms are playing an infinite horizon supergame with time-invariant cost and demand functions. With more than two firms, the problem of which firms exit is quite similar to a coalition formation one. Solving this coalition formation problem, we obtain that the exiting firms are those with higher average cost functions whenever reentry is costless while, whenever reentry is unprofitable, the exiting firms are those with lower marginal (and possibly average) cost functions. Since reentry costs are typically sunk, our analysis points out that the presence of sunk costs affects not only the size (as it is well known) but also the composition of the industry. Received: April 5, 1995; revised version: January 28, 1998     

Foreign direct investment in services and manufacturing productivity: Evidence for Chile

This paper examines the impact of substantial foreign direct investment (FDI) inflows in producer service sectors on the total factor productivity (TFP) of Chilean manufacturing firms. Positive effects are obtained in firm fixed effects instrumental variables regressions and show that forward linkages from FDI in services explain 7% of the observed increase in Chile's manufacturing users' TFP. Our findings also suggest that service FDI fosters innovation activities in manufacturing. Moreover, we show that service FDI offers opportunities for laggard firms to catch up with industry leaders.     

Ownership,Access, and Sequential Investment

We extend the property‐rights framework to allow for a separation of the ownership rights of access and veto and for sequential investment. Parties investing first do so before contracting is feasible. It is possible, however, that parties investing second can share (at least some of) their investment costs. Along with this cost‐sharing effect, the incentive to invest is affected by a strategic effect generated by sequential investment. Together these effects can overturn some of the predictions of the property‐rights literature. For example, the most inclusive ownership structure might not be optimal, even if all investments are complementary.     

How enterprise strategies are related to innovation and productivity change: an empirical study of Japanese manufacturing firms

This study analyzes the total factor productivity of 1067 Japanese manufacturing firms. In production estimation, we employ the directional distance function and Luenberger productivity indicator. Research and development strategy survey data are used to analyze the determinant factors related to improvements in innovation and productivity. Our results indicate that increasing technology and knowledge through a ‘black box’ process is related to an increase in productivity. Furthermore, the protection and management of production knowledge and expertise is a valid method of increasing global technical change.     

A general equilibrium analysis of software development: Implications of copyright protection and contract enforcement

We develop a general equilibrium model to study the implications of a legal environment on the organization of software production. We show that contract enforcement determines the organizational mode (i.e., in-house versus outsourcing) of customized software development while copyright protection affects both packaged software as well as customized software development. We obtain some testable results: when copyright protection is weak, only customized software will be developed; when copyright protection is strong, both customized software and packaged software will be developed; environment changes in one software market affect the equilibrium in the other software market.     

Incentives,supervision, and sharecropper productivity

Though sharecropping remains widespread, its determinants are still poorly understood and the debate over the extent of moral hazard is far from settled. We address both issues by analyzing the role of landlord supervision. When landlords vary in their cost of supervision, otherwise identical share-tenants can have different productivity. Unique data on monitoring frequency collected from share-tenants in rural Pakistan confirms that, controlling for selection, ‘supervised’ tenants are significantly more productive than ‘unsupervised’ ones. Also, landlords' decisions regarding monitoring and incentives offered to tenants depend importantly on the cost of supervision.     

In-house competition, organizational slack, and the business cycle

Multiplant firms pit their facilities against each other for production assignments. The present paper studies the consequences of this practice in a model where production is limited by capacity constraints and asymmetric information allows facilities to accumulate slack. It shows the amount of slack per unit of output to be pro-cyclical. Indeed, as capacity constraints become more acute in economic booms, the power of in-house competition for quota assignments is reduced and slack per unit of output increases, while the opposite is true in downturns. Moreover, in downturns firms may use higher cost facilities even when lower cost plants are not running at capacity since this boosts X-efficiency in low-cost plants.     

Vertical integration, raising rivals’ costs and upstream collusion

This paper analyzes the impact vertical integration has on upstream collusion when the price of the input is linear. As a first step, the paper derives the collusive equilibrium that requires the lowest discount factor in the infinitely repeated game when one firm is vertically integrated. It turns out this is the joint-profit maximum of the colluding firms. The discount factor needed to sustain this equilibrium is then shown to be unambiguously lower than the one needed for collusion in the separated industry. While the previous literature has found it difficult to reconcile raising-rivals’-costs strategies following a vertical merger with equilibrium behavior in the static game, they are subgame perfect in the repeated game studied here.     

Multinational companies and indigenous development: An empirical analysis

This paper presents an empirical study of the effect of foreign multinational companies on the development of indigenous firms in the host country. Our starting point is a recent paper by Markusen and Venables (European Economic Review 43 (1999) 335-356) that shows formally that multinationals, through the creation of linkages with indigenous suppliers, can exert positive effects on the development of indigenous firms. Based on the literature on entry in industrial organisation, we estimate empirically a model describing the entry of indigenous firms using data for the Irish manufacturing sector. Our results indicate that there is a positive effect of multinational companies on the entry of indigenous firms for a variety of alternative specifications.     

Caste discrimination and transaction costs in the labor market: Evidence from rural North India

This paper is an empirical attempt to quantify caste-based discrimination in the labor market using household data taken from rural North India. In the regression analysis, transaction costs associated with entry into the labor market and reservation wages are estimated simultaneously along with market wages. The estimation results provide evidence of the existence of transaction costs in the labor market and discrimination against backward classes with regard to access to regular employment. In line with previous studies, the results suggest that the achievements of India's reservation policy so far have at best been limited. In addition, a comparison between the estimates from the model employed in this paper and conventional (reduced-form) approaches shows that discrimination in labor market entry is likely to be underestimated in the conventional reduced-form approaches.     

Testing for the Presence of Moral Hazard Using the Regulatory Reform in the Car Insurance Market: Case of Korea

The aim of this paper is to investigate the presence of the moral hazard phenomenon in the Korean car insurance market. In the context of natural experiment, I examine whether the regulatory reform introduced in 2000 generates significant difference in accident probability between before and after the reform. Further, I analyse the different effects of regulatory reform on different parts of the outcome distribution. In any case, I do not find the significant effects of regulatory reform on accident probability.     

Socially responsible firms and endogenous choice of strategic incentives

In this paper we are analyzing a mixed quantity-setting duopoly consisting of a socially concerned firm and a profit-maximizing firm. The socially concerned firm considers one group of stakeholders in its objective function and maximizes its profit plus a share of consumer surplus. Both firms have the option to hire a manager who determines the production quantity on behalf of the firm's owner. We find that in the subgame-perfect equilibrium of this game both firms hire a manager and delegate the production choice. If the unit production costs of the firms are similar, then the socially concerned firm has a higher market share and even higher profit. Interestingly, we observe that the relationship between the share of consumer surplus taken into account by the socially concerned firm and its profit is non-monotonic. As the share increases, the socially concerned firm's profit first increases and then decreases. The conclusion is that it pays off to take stakeholder interests into account, but not too much.     

Markets and the non‐monotonic relation between productivity and establishment size

Abstract A model of monopolistic competition is presented in which the relation between the productivity and input size of producers is non‐monotonic and bell‐shaped. The model predicts that markets matter and the average size of the producers is directly scaled by the size of the market. An indirect effect increases the cutoff productivity, making the bell narrower in larger markets or when the transportation cost falls. Empirical evidence from the concrete industry and a few other 4‐digit industries supports the model’s predictions. The bell‐shaped relation has especially important implications on how size distributions are formed across localized versus globalized market industries.     

Changes in job security and their causes: An empirical analysis for France, 1982-2002

In this paper, we analyze the changes in the risks of involuntary job loss in France between 1982 and 2002. We find that these risks are higher in the 1990s than they were in the 1980s. We develop an econometric analysis to separate the effects of institutional changes from the effects of new technologies. Our estimates show that the rise in job loss rates is significantly more pronounced in industries that have the largest share of R&D workers and the largest rate of new technologies’ users. These findings suggest that technological changes contribute to decreasing the incentive to keep workers for long period of time and to increasing job insecurity.     

Another look at the linear q model: an empirical analysis of aggregate business capital spending with maintenance expenditures

Abstract .  The paper revisits the empirical investment literature, which has established that aggregate business fixed investment is not found to be related linearly to marginal or average Tobin's q . The theoretical background is extended here by developing a supply-side model where the depreciation rate of private capital is determined endogenously. The firm can either invest in 'new' capital, which adds directly to the existing capital stock at the presence of convex adjustment costs, or extend the durability of installed capital through maintenance expenditure, which affects its depreciation rate. The model shows that Tobin's q is then a positively related sufficient statistic for both components of aggregate capital expenditures. This central implication is tested empirically using aggregate time-series survey data from Canada on 'new' investment and maintenance expenditures covering the period 1956–93. The estimated relationships produce significant and plausible parameter estimates for the structural parameters of the q model.     

Patents, firm size and financial constraints: an empirical analysis for a panel of Italian manufacturing firms

The paper empirically investigates the issue of financial constraintsto investment, focusing on its relationship with innovationactivities. The study is based on the analysis of a cross-industriespanel of 804 Italian companies, observed through the years 1995–2000.The main objective of the study is to highlight whether thereare financial determinants underlying the strong bias of patentingactivity towards larger companies in the Italian economy. Byapplying a dynamic panel analysis, we found that only the firmsshowing lower financial constraints are able to keep a sustainedpatenting profile through time. Our evidence suggests the existenceof an imperfect capital market in the Italian economy, particularlyin the case of medium-sized companies, which tend to delay inefficientlythe start of in-house R&D activities.     

ICT services and small businesses’ productivity gains: An analysis of the adoption of broadband Internet technology

We analyse the impact of the adoption of broadband Internet technology on the productivity performance of small and medium enterprises (SMEs). We distinguish access to the broadband infrastructure from the adoption of complementary services, i.e., different types of broadband software applications. The empirical analysis considers a sample of 799 firms observed from 1998 to 2004 that are representative of the population of Italian SMEs. Our econometric estimates indicate that the impact of the adoption by SMEs of basic broadband applications is negligible (or even negative). Conversely, SMEs are found to benefit from adopting selected advanced broadband applications depending on several contingent factors: (i) their industry of operations (services vs. manufacturing); (ii) the relevance of the specific broadband software applications for SMEs’ industry of operation; and (iii) the undertaking of complementary strategic and organisational changes.     

Understanding the size and profitability of firms: The role of a biological factor

In a large sample of entrepreneurs, 2D:4D (second-to-fourth digit) ratio and managerial performance are studied. Entrepreneurs with lower ratio manage larger firms, manage larger firms when acquire control and experience faster average growth. Firms run by high prenatal testosterone entrepreneurs have lower profitability as measured by return on assets and return on sales. Prenatal testosterone is correlated with elicited measures of entrepreneurial skills, like work effort and optimism and the latter are correlated with firm size. This evidence suggests entrepreneurial ability has a biological component and is consistent with models of the size distribution of firms based on entrepreneurial ability.     

Corporate Restructuring in Japan Part I: Can M‐Form Organization Manage Diverse Businesses?

The purpose of this paper is to examine the recent organizational restructuring in Japan in the framework of organizational economics, assuming that the product/market portfolio of the firm is fixed. How does a firm set about organizing its internal divisions? I first summarize some stylized facts on corporate diversification strategy and multi‐divisional (M‐form) organization in large Japanese firms from different perspectives. I then analyse the problem of choosing an organizational form. In particular, I argue that, precisely because of its related diversification, the multi‐business Japanese firm adopting the M‐form finds it difficult to differentiate its diverse businesses internally.