CREDIT CONSTRAINTS AND THE CYCLICALITY OF R&D INVESTMENT: EVIDENCE FROM FRANCE

We use a French firm‐level data set containing 13,000 firms over the period 1994–2004 to analyze the relationship between credit constraints and firms’ R&D behavior over the business cycle. Our main results can be summarized as follows: (i) R&D investment is countercyclical without credit constraints, but it becomes procyclical as firms face tighter credit constraints; (ii) this result is only observed for firms in sectors that depend more heavily upon external finance, or that are characterized by a low degree of asset tangibility; (iii) in more credit‐constrained firms, R&D investment plummets during recessions but does not increase proportionally during upturns.     

UNDER PRESSURE: GENDER DIFFERENCES IN OUTPUT QUALITY AND QUANTITY UNDER COMPETITION AND TIME CONSTRAINTS

Gender gaps in the workplace are widespread. One explanation for gender inequality stems from the effects of the interaction between competition and two pressure sources, namely, task stereotypes and time constraints. This study uses a laboratory experiment to find that the gender gap in performance under competition and preferences for competition can be partly explained by the differential responses of men and women to the above pressures. In particular, while women underperform the men in a high‐pressure math‐based tournament, women greatly increase their performance levels and their willingness to compete in a low‐pressure verbal environment, such that they actually surpass the men. This effect appears largely due to the fact that extra time in a verbal competition improves the quality of women’s work, reducing their mistake share. On the other hand, men use this extra time to increase only the quantity of work, which results in a greater relative number of mistakes. A labor market study suggests that the nature of the job and the stress level are correlated with the gender gap in the labor market in a manner consistent with the results of my experiment.     

FINANCIAL DEVELOPMENT AND VERTICAL INTEGRATION: THEORY AND EVIDENCE

Existing evidence is mostly inconclusive on the relevance of financial development as a determinant of vertical integration. This paper presents evidence that, once industry heterogeneity in firm size distribution is taken into account, financial development is an important determinant of cross‐country differences in vertical integration. Financial development fosters entry of firms and increases competition in the industry. This reduces vertical integration of larger firms, but also leads smaller, non‐integrated, firms to exit the industry. As a result, higher financial development reduces vertical integration in industries where a high share of output is produced by small firms. The positive effect of financial development on entry also reduces vertical integration by fostering the development of input markets.     

PRODUCTION SMOOTHING UNDER ENVIRONMENTAL CONSTRAINTS

This is an investigation into how optimal production rates and optimal price levels react to the introduction of an environmental tax on emissions. While, in the case of perfect competition, a linear tax has no effect, I show that in the monopolistic case the optimal production and emissions rates decrease in all instances-without an additional smoothing effect. The desirable effect, emissions peaks being cut off, is only achieved when a progressive tax is imposed.     

PUBLIC DEBT UNDER LIMITED PRIVATE CREDIT

There is a conventional wisdom in economics that public debt can serve as a substitute for private credit if private borrowing is limited. The purpose of this paper is to show that, while a government could in principle use such a policy to fully relax borrowing limits, this is not generally optimal. In our economy, agents invest in a short‐term asset, a long‐term asset, and government bonds. Agents are subject to idiosyncratic liquidity shocks prior to the maturity of the long‐term asset. We show that a high public debt policy fully relaxes private borrowing limits and is suboptimal. This is because agents expecting such a policy respond by investing less than is socially optimal in the short asset which can protect them in the event of a liquidity shock. The optimal policy is more constrained and it induces a wedge between the technological rate of return on the long asset and the rate of return on bonds. In such a regime, agents subject to liquidity shocks are also borrowing constrained, and this expectation of being borrowing constrained induces them to invest the optimal level in the short asset.     

SOCIAL NETWORKS IN THE BOARDROOM

This paper provides evidence that social networks strongly affect board composition and are detrimental to corporate governance. Our empirical investigation relies on a large data set of executives and outside directors of French public firms. This data source is a matched employer–employee data set that provides detailed information on directors/CEOs as well as information about the firm employing them. We find a strong and robust correlation between the CEO's network and that of his directors. Networks of former high‐ranking civil servants are the most active in shaping board composition. Our identification strategy takes into account not only firm and directors’ fixed effects but also the matching of firms and director in terms of one observable and one unobservable characteristic. Turning to the direct effects of such network activity, we find that firms in which these networks are most active pay their CEOs more, are less likely to replace a CEO who underperforms, and engage in less value‐creating acquisitions. These findings suggest that social networks are active in the boardroom and have detrimental effects on firms’ governance.     

FINANCIAL CONSTRAINTS AND INNOVATION: WHY POOR COUNTRIES DON'T CATCH UP

This paper examines micro‐level channels through which financial development can affect such macroeconomic outcomes as level of income. Specifically, we investigate theoretically and empirically how financial constraints affect a firm's innovation activities. Theoretical predictions are tested using unique firm survey data, which provide direct measures for innovations and firm‐specific financial constraints, as well as information on shocks to firms' internal funds that serve as firm‐level instruments for financial constraints. We find unambiguous evidence that financial constraints restrain the ability of domestically owned firms to innovate and hence to catch up to the technological frontier.     

BUYER POWER AND INTRABRAND COORDINATION

We analyze the competitive effects of various contractual provisions in a situation where rival retailers make offers to a common manufacturer. In contrast to Marx and Shaffer (2007 , Rand Journal of Economics, 38(3), 823–843), who find that a strong retailer can use slotting allowances (that is, upfront payments from manufacturers) to exclude its weaker rival, we show that foreclosure is no longer inevitable once retailers' offers can be contingent on the relationship being exclusive or not. There then exist equilibria that sustain the industry monopoly outcome; moreover, as long as retailers can use non‐linear tariffs, such equilibria exist irrespectively of whether slotting allowances are allowed or banned. Non‐contingent contracts, on the other hand, necessarily lead to exclusion, with or without slotting allowances. A ban on slotting allowances may therefore prove ineffective, while a ban on exclusive dealing options in supply contracts leads to foreclosure.     

UNEMPLOYMENT INSURANCE IN WELFARE STATES: THE IMPACTS OF SOFT DURATION CONSTRAINTS

Abstract Based on a major reform of Norwegian unemployment insurance (UI), we examine the behavioral impacts of soft and hard UI duration constraints. A constraint is interpreted as hard if a claimant cannot rely on any form of income support after exhaustion, and as soft if UI is replaced by follow‐on benefits or participation in active labor market programs (ALMP). We find that both hard and soft constraints raise the job hazard significantly, with surprisingly similar spikes at UI exhaustion. Participation in ALMP raises the probability of eventually finding a job, but at the cost of lengthening the overall job‐search period.     

SOVEREIGNS VERSUS BANKS: CREDIT,CRISES, AND CONSEQUENCES

Two separate narratives have emerged in the wake of the Global Financial Crisis. One interpretation speaks of private financial excess and the key role of the banking system in leveraging and deleveraging the economy. The other emphasizes the public sector balance sheet and worries about the risks of lax fiscal policy. However, the two may interact in important and understudied ways. This paper examines the co‐evolution of public and private sector debt in advanced countries from 1870 to 2012. We find that in advanced economies financial crises are not preceded by public debt build‐ups nor are they more likely when public debt is high. However, history shows that high levels of public debt tend to exacerbate the effects of private sector deleveraging after financial crises. The economic costs of financial crises rise substantially if large private sector credit booms are unwound at times when the public sector has little capacity to pursue macroeconomic and financial stabilization.     

OUTSOURCING WHEN INVESTMENTS ARE SPECIFIC AND INTERRELATED

Using the universe of large Canadian manufacturing firms in 1988 and 1996, we investigate to what extent outsourcing patterns concord with the predictions of a simple property rights model. The unique availability of disaggregate information on outputs as well as inputs permits the construction of a detailed measure of vertical integration. We rely on five measures of technological intensity to proxy for investments that are likely to be specific to a buyer–seller relationship. A theoretical model that allows for varying degrees of investment specificity and interrelatedness—externalities between buyer and supplier investments—guides the analysis. Property rights predictions on the link between investment intensities and optimal ownership are strongly supported, but only for transactions with low interrelatedness. High specificity and low risk of appropriation strengthen the predictions in the model and in the data.     

MATERIALS PRICES AND PRODUCTIVITY

There is substantial within‐industry variation in the prices that plants pay for their material inputs. Using plant‐level data from the US Census Bureau, I explore the consequences and sources of this variation in materials prices. For a sample of industries with relatively homogeneous products, the standard deviation of plant‐level productivity would be 7% smaller if all plants faced the same materials prices. Moreover, plant‐level materials prices are persistent, spatially correlated, and positively associated with the probability of exit. The contribution of entry and exit to aggregate productivity growth is smaller for productivity measures that are purged of materials price variation. After documenting these patterns, I discuss three potential sources of materials price variation: geography, differences in suppliers' marginal costs, and within‐supplier markup differences. Together, these variables explain 15% of the variation of materials prices.     

MANAGING CREDIT BUBBLES

We study a dynamic economy where credit is limited by insufficient collateral and, as a result, investment and output are too low. In this environment, changes in investor sentiment or market expectations can give rise to credit bubbles, that is, expansions in credit that are backed not by expectations of future profits (i.e., fundamental collateral), but instead by expectations of future credit (i.e., bubbly collateral). Credit bubbles raise the availability of credit for entrepreneurs: this is the crowding‐in effect. However, entrepreneurs must also use some of this credit to cancel past credit: this is the crowding‐out effect. There is an “optimal” bubble size that trades off these two effects and maximizes long‐run output and consumption. The equilibrium bubble size depends on investor sentiment, however, and it typically does not coincide with the “optimal” bubble size. This provides a new rationale for macroprudential policy. A credit management agency (CMA) can replicate the “optimal” bubble by taxing credit when the equilibrium bubble is too high and subsidizing credit when the equilibrium bubble is too low. This leaning‐against‐the‐wind policy maximizes output and consumption. Moreover, the same conditions that make this policy desirable guarantee that a CMA has the resources to implement it.     

COMPETITION AND GENDER PREJUDICE: ARE DISCRIMINATORY EMPLOYERS DOOMED TO FAIL?

According to Becker's famous theory on discrimination (Gary Becker, 1957 , The Economics of Discrimination, University of Chicago Press), entrepreneurs with a strong prejudice against female workers forgo profits by submitting to their tastes. In a competitive market their firms lack efficiency and are therefore forced to leave. We present new empirical evidence for this prediction by studying the survival of start‐up firms in longitudinal matched employer–employee data. We find that firms with strong preferences for discrimination approximated by a low share of female employees relative to the industry average have significantly shorter survival rates. This is especially relevant for firms starting out with female shares in the lower tail of the distribution. Competition at the industry level additionally reduces firm survival and accelerates the rate at which prejudiced firms are weeded out. We also find evidence for employer learning as highly discriminatory start‐up firms that manage to survive submit to market powers and increase their female workforce over time.     

PRODUCT MARKET REGULATION,FIRM SELECTION,AND UNEMPLOYMENT

This paper analyzes the effect of product market regulation (PMR) on unemployment in a search model with heterogeneous multiple‐worker firms. In our setup, PMR modifies the distribution of firm productivities, thereby affecting the equilibrium rate of unemployment. We distinguish between PMR related to entry costs and PMR that generates recurrent fixed costs. We find that: (i) higher entry costs raise the rate of unemployment mainly through our novel selection effect, (ii) higher fixed costs decrease unemployment through the selection effect and increase it through the competition effect analyzed in Blanchard and Giavazzi (2003, Quarterly Journal of Economics, 118, 879–907). Firm heterogeneity magnifies the impact of both types of regulatory costs. We propose econometric evidence consistent with the unemployment effects of sunk versus recurring costs.     

INTELLECTUAL PROPERTY RIGHTS POLICY,COMPETITION AND INNOVATION

To what extent and in what form should the intellectual property rights (IPR) of innovators be protected? Should a company with a large technology lead over its rivals receive the same IPR protection as a company with a more limited advantage? In this paper, we develop a dynamic framework for the study of the interactions between IPR and competition, in particular to understand the impact of such policies on future incentives. The economy consists of many industries and firms engaged in cumulative (step‐by‐step) innovation. IPR policy regulates whether followers in an industry can copy the technology of the leader. We prove the existence of a steady‐state equilibrium and characterize some of its properties. We then quantitatively investigate the implications of different types of IPR policy on the equilibrium growth rate and welfare. The most important result from this exercise is that full patent protection is not optimal; instead, optimal policy involves state‐dependent IPR protection, providing greater protection to technology leaders that are further ahead than those that are close to their followers. This is because of a trickle‐down effect: providing greater protection to firms that are further ahead of their followers than a certain threshold increases the R&D incentives also for all technology leaders that are less advanced than this threshold.     

CAPACITATED REMANUFACTURING WITH SERVICE LEVEL CONSTRAINTS*

This research examines production planning and control for a remanufacturer that can sell returned items on a graded as‐is basis or remanufacture the returned items. Using a GI/G/1 queuing network, we model the firms decision to remanufacture an optimal product mix over the long run that maximizes profits while maintaining a desired service level. We further use simulation to explore dispatching heuristics that can be used at the shop‐floor level to achieve the desired optimal product mix, while meeting the service level constraint. Our research is grounded in actual practice and the results provide key insights into the decision‐making process required to maximize profits and minimize average flow times for remanufactured products.     

JEEA‐FBBVA LECTURE 2013: THE NEW EMPIRICAL ECONOMICS OF MANAGEMENT

Over the last decade the World Management Survey (WMS) has collected firm‐level management practices data across multiple sectors and countries. We developed the survey to try to explain the large and persistent total factor productivity (TFP) differences across firms and countries. This review paper discusses what has been learned empirically and theoretically from the WMS and other recent work on management practices. Our preliminary results suggest that about a quarter of cross‐country and within‐country TFP gaps can be accounted for by management practices. Management seems to matter both qualitatively and quantitatively for performance at the level of the firm and the nation. Competition, governance, human capital, and informational frictions help account for the variation in management. We make some suggestions for both policy and future research.     

CONDITIONAL INVESTMENT–CASH FLOW SENSITIVITIES AND FINANCING CONSTRAINTS

We study the sensitivity of investment to cash flow conditional on measures of q in an adjustment costs framework with costly external finance. We present a benchmark model in which this conditional investment–cash flow sensitivity increases monotonically with the cost premium for external finance, for firms in a financially constrained regime. Using simulated data, we show that this pattern is found in linear regressions that relate investment rates to measures of both cash flow and average q. We also derive a structural equation for investment from the first‐order conditions of our model, and show that this can be estimated directly.     

COMPONENT COMMONALITY: MODELS WITH PRODUCT‐SPECIFIC SERVICE CONSTRAINTS*

Common components are used extensively for reasons including product postponement and expediting new product development. We consider a two‐stage assemble‐to‐order system with two products having uniformly distributed demand, one common component, and product‐specific components. We develop optimization models in which the cost‐minimizing inventory of the components must be determined and allocated to products in order to meet product‐specific service level constraints. We compare two different commonality models based on whether or not the products are prioritized. A distinctive feature of our study is the use of product‐specific service levels. We compare our results with models using aggregate service levels.