SHOULD I STAY OR SHOULD I GO? CAREER CHOICES FOR YOUNG WORKERS IN LATIN AMERICA

This paper presents the first estimates of the returns to formal labor market experience and tenure in a developing country context. We take advantage of rich matched employer–employee data from Brazil and Chile, exploiting job displacement as a source of identification. We find positive returns to both dimensions in these countries, with larger returns to tenure in Brazil and larger returns to experience in Chile. Our findings suggest the more rigid Brazilian labor legislation may encourage firms to invest in young workers' specific skills. Chile's institutions, on the contrary, might promote the acquisition of general skills. (JEL J24, J31, M50)     

WORKFORCE COMPOSITION AND FIRM PRODUCTIVITY: EVIDENCE FROM TAIWAN

We study the relationship between workforce composition and firm productivity based on a new employee‐employer‐matched data set, using an array of workforce characteristics and three alternative measures of firm productivity. While firm age is not essential for the performance of firms, those of smaller size and those in the steel and transportation industries outperform others. Moreover, labor quality, particularly the middle‐aged with higher education, contributes significantly to firms' productivity. Furthermore, economic incentives and market competition both play important roles in the performance of firms. Finally, there is an employer‐size premium with larger firms paying higher wages and nonwage benefits. (JEL C33, D20, J30)     

DIVIDEND POLICY IN REGULATED NETWORK INDUSTRIES: EVIDENCE FROM THE EU

We study the dividend policy of firms in regulated network industries, focusing on the impact of different regulatory regimes and government control. We link payout and smoothing decisions to different regulatory mechanisms (cost‐based vs. incentive regulation) and state versus private ownership. We test our predictions on a panel of listed European electric utilities, accounting for potential endogeneity of the choice of regulatory and ownership patterns. We find that incentive‐regulated firms smooth their dividends less than cost‐based regulated firms and that they report higher target payout ratios. Consistent with the interest group theory of regulation, we find that incentive regulation schemes are less likely when the state is still an important shareholder in the sector. Additionally, our results show that government control undermines the efficiency‐enhancing effects of incentive regulation on dividend policy, for example, lower smoothing is only due to private firms. (JEL G35, L51, L32, L9)     

The institutional antecedent to firms’ interorganizational network portfolios: Evidence from China

Although the amount of research on interorganizational networks has increased significantly in recent years, few studies have examined the antecedents to interorganizational network portfolios—organizations’ configuration of their relationship networks with other organizations. To address this gap, this study examines how firms’ interorganizational network portfolios vary across three types of ownership structures (i.e., state-owned, private, and multinational enterprises) in China. Cluster analysis of the data on 212 leading firms operating in China revealed two types of network portfolios firms maintain. Specifically, firms maintaining robust cross-sector portfolios had more extensive networks with organizations in the nonprofit and public sectors than firms maintaining limited cross-sector portfolios. Moreover, regression results suggested that firms across different ownership structures had distinct numbers and types of organizational partners, particularly nongovernmental organization (NGO) partners. Theoretical and practical implications are derived from the findings.     

SURVIVING CREDIT MARKET COMPETITION*

Empirical studies have documented that improvements in credit supply have important effects on entry in nonfinancial industries. This article shows that changes in credit supply conditions have much deeper effects on firms' population dynamics, well above and beyond the experience of entry. I explore the hypothesis that changes in credit supply have important effects on the demand side as well. I conjecture that when financial capital is difficult to obtain, while fewer firms may enter, those entering are drawn from a population with a better distribution of entrepreneurial quality. In an environment where financial capital is easily obtainable instead, the population of loan applicants changes as well, including those in a tougher environment who would not have tried entrepreneurship in the first place. These changes in the population of applicants imply significant effects on firms' life expectancy profile, and these effects are heterogeneous across firms of different vintage. Modifications in life expectancy are likely to affect firms' incentives in undertaking future capital investment and likewise investments in technological innovation. Hence, these changes in overall firms' population dynamics characterize an explicit mechanism through which finance can affect real economic activity. (JEL G21, L11, L16)     

BENIGN NEGLECT OF COVENANT VIOLATIONS: BLISSFUL BANKING OR IGNORANT MONITORING?

Theoretically, bank's loan monitoring activity hinges critically on its capitalization. To proxy for monitoring intensity, we use changes in borrowers' investment following loan covenant violations, when creditors can intervene in the governance of the firm. Exploiting granular bank‐firm relationships observed in the syndicated loan market, we document substantial heterogeneity in monitoring across banks and through time. Better capitalized banks are more lenient monitors that intervene less with covenant violators. Importantly, this hands‐off approach is associated with improved borrowers' performance. Beyond enhancing financial resilience, regulation that requires banks to hold more capital may thus also mitigate the tightening of credit terms when firms experience shocks. (JEL G21, G32, G33, G34)     

OFFSHORE OUTSOURCING DECISION AND CAPITAL INTENSITY: FIRM‐LEVEL RELATIONSHIPS

In offshore sourcing, a firm chooses outsourcing to independent suppliers or in‐sourcing from own foreign direct investment (FDI) subsidiaries. Based on the firm‐level data on offshore make‐or‐buy decision covering all manufacturing industries, this paper compares averages, documents inter‐firm distributions, and estimates multinomial logit models of the firm's sourcing mode choice. As predicted by previous theoretical models, this paper directly confirms at the firm level that outsourcing firms tend to be substantially labor‐intensive compared with firms in‐sourcing from the same region, even after the firm's R&D intensity, firm size, or industry is controlled for. (JEL F23, L23, L24, L14)     

DPR Debate: Growth Identification and Facilitation: The Role of the State in the Dynamics of Structural Change

This DPR Debate is based on the contribution by Justin Lin, Chief Economist at the World Bank, and his colleague Célestin Monga, on ‘Growth Identification and Facilitation: The Role of the State in the Dynamics of Structural Change’. The article under consideration is important and timely as it articulates a number of new policy implications from Justin Lin's earlier work on New Structural Economics, which was discussed in a previous DPR debate (Lin and Chang, 2009). This symposium contains the article and comments on it from five distinguished specialists, and closes with a rejoinder by Lin and Monga. This introduction discusses the article, the comments and the rejoinder. The historical record indicates that, in all successful economies, the state has always played an important role in facilitating structural change and helping the private sector sustain it across time. This article puts forward a new approach to help policy‐makers in developing countries identify those industries that may hold latent comparative advantage, and recommends ways of removing binding constraints to facilitate private firms' entry into those industries. Two types of government interventions are distinguished: first, policies that facilitate structural change by overcoming information, co‐ordination and externality issues, which are intrinsic to industrial upgrading and diversification; and second, policies aimed at protecting certain selected firms and industries that defy the comparative advantage determined by the existing endowment structure.     

TRADE LIBERALIZATION AND CORPORATE INCOME TAX AVOIDANCE

We identify the effect of trade liberalization on corporate income tax avoidance in a sample of Chinese manufacturing firms, taking advantage of China's entry into the World Trade Organization (WTO). We find that firms engage in more tax avoidance in industries with larger tariff reductions. Further analysis shows that firms with a lack of cash or a high demand for cash before WTO entry tend to engage in more tax avoidance after WTO entry. Our study also provides evidence that manipulating costs is one way that firms avoid corporate income tax. (JEL D22, F61, F63, H26)     

HOW IMPORTANT IS SOCIAL CLASS IDENTIFICATION IN TAIWAN?

Data from a 1992 survey (N = 2,377) of the population of Taiwan show that class identification is rooted in the objective stratification system: the higher one's education, occupational status, power, and income, the more likely one is to identify with the middle or upper classes rather than the working or lower classes. Class interest theory predicts that the higher a person's objective position and subjective class identification, the more likely s/he is to hold a conservative ideology concerning class issues (e.g., do large firms have too much power? Should employees protest against their employer's personnel practices, and go on strike?). Multiple regression analysis provides only partial confirmation for class interest theory. The finding that the most educated and those in professional and technical occupations are the least conservative on class issues is interpreted as supporting a “new class” form of class interest theory. While the Taiwan respondents are not generally conservative on these class issues, their class identification appears to have little to do with whether they are conservative or nonconservative, either before or after objective position in the stratification system is held constant.     

THE RESPONSE OF FIRMS' LEVERAGE TO RISK: EVIDENCE FROM UK PUBLIC VERSUS NONPUBLIC MANUFACTURING FIRMS

This article empirically investigates the effects of macroeconomic and firm‐specific risk on firms' leverage. The analysis is carried out for a large panel of public and nonpublic UK manufacturing firms over the period 1999–2008. Our investigation provides evidence that UK manufacturing firms use less short‐term debt during periods of high risk. However, the leverage of nonpublic manufacturing firms is more sensitive to firm‐specific risk in comparison to their public counterparts while macroeconomic risk affects both types of firms similarly. Our investigation also shows that firms with high liquid assets reduce their leverage more (less) during periods of heightened firm‐specific (macroeconomic) risk. (JEL C23, G32)     

BROADBAND INTERNET,FIRM PERFORMANCE,AND WORKER WELFARE: EVIDENCE AND MECHANISM

This paper examines the effect of high-speed internet on firm's productivity and worker's wage in China. We exploit a national policy reform and devise a difference-in-difference strategy to address the endogeneity. We find that high-speed internet significantly increases firm's productivity and worker's wage, and the estimate is larger for firms in industries with high skill intensity and for more educated workers. We provide suggestive evidence that the mechanism is likely from firm's increased use of skill-biased technology and the flattened management organization. (JEL O2, O3, J3)     

FROM HONEYMOON TO DIVORCE: INSTITUTION QUALITY AND FOREIGN INVESTORS' OWNERSHIP CONSOLIDATION IN CHINA

In China, joint ventures (JVs) between foreign investors and Chinese local firms were the most popular form of foreign affiliates before 2001. Over time, with policy space to operate as foreign wholly owned (WOs), many foreign investors in JVs chose to consolidate ownership and turned JVs into their WOs. Here, we examine how institution quality affects foreign investors' JV‐to‐WO ownership consolidation odds. For each province‐year, we construct an institution quality index from the business and judicial quality indicators, and further compute a relative quality index to highlight provincial variations. Using more than 43,000 JVs operating in China's 30 provinces over 1998–2007, we find that increases in institution quality decrease the odds of foreign investors to divorce their Chinese local partners. The odds for foreign investors in JVs to consolidate ownerships are significantly higher if they operate in provinces with relatively weaker institution quality. The odds of foreign investors' JV‐to‐WO decision vary with JVs' local firms being state‐owned enterprises (SOEs) and non‐SOEs, with foreign investors' origins from Hong Kong, Macao, and Taiwan (HMT) and other regions (Foreign), and with foreign investors' initial equity positions. Our results are not driven by foreign direct investment policy shocks, and are robust to alternative measures of institution quality. (JEL F23, L23)     

TRADE,GEOGRAPHY AND THE SKILL PREMIUM IN U.S. MANUFACTURING

A number of studies have suggested that countries (or regions) with access to larger markets have higher wages. In this paper, we examine whether access to larger markets affects skilled and unskilled workers differently. We develop a model relating two key measures of market size, market and supplier access, to industry value added prices. We then estimate the effects of growth in these measures on factor returns in U.S. manufacturing industries between 1984 and 1996. We find that growth in these measures can explain around 5% of the rise in the skill premium over the sample period. (JEL F12, F16, L60)     

THE NATURE OF OUTSOURCING RELATIONSHIPS: EVIDENCE FROM OAP PRICES

This paper studies the extent and variation in production cost pass‐through for U.S. outsourcing imports. Data from 4,676 products imported through the U.S. overseas assembly program show that outsourcing imports were characterized by incomplete pass‐through of production and trade costs to import prices. Notably, pass‐through was higher for products assembled in high education countries while the response of outsourcing import prices to competing suppliers' prices was largest for products sold by firms in capital‐intense industries. The reasons for these cross‐country and cross‐industry differences, as they relate to theories of outsourcing and trade, are explored. (JEL F1, F2)     

QUANTITATIVE EASING AND THE UK STOCK MARKET: DOES THE BANK OF ENGLAND INFORMATION DISSEMINATION STRATEGY MATTER?

We use intraday aggregate stock market data and an event‐study framework to assess the UK's equity market reaction to the unexpected element of the Bank of England Monetary Policy Committee's (MPC) asset purchase announcements for the 2009–2017 period. We assess the reactions of equity returns and their volatility over various time frames, both preceding and following the MPC announcements. Our results show that the UK unconventional monetary policy shocks have a significant impact on domestic equity returns and volatilities. The strength of this impact depends on the Bank's information dissemination through inflation reports and the publication of the MPC's voting records. (JEL G14, E44, E52)     

ANTI‐POACHING AGREEMENTS IN LABOR MARKETS

We analyze competition for experienced workers among wage‐setting firms. The firms can design poaching offers with higher wages to workers who switch from rivals relative to wages paid to their own existing employees. We evaluate the profit and welfare effects of anti‐poaching agreements that eliminate poaching offers as a recruiting method. Anti‐poaching agreements increase industry profits, whereas workers are made worse off. We show that the effects of anti‐poaching agreements on total welfare are determined by the magnitude of workers' switching costs and the productivity change associated with switching employers. (JEL L41, L40, J42)     

DETERMINANTS OF REVENUE IN SPORTS LEAGUES: AN EMPIRICAL ASSESSMENT

This study investigates determinants of revenue in North America's four major professional sports leagues. Revenue is positively associated with on‐field success in baseball (MLB), basketball (NBA), and hockey (NHL), but not in football (NFL). The returns to success are not diminishing as commonly assumed, which casts doubt on the uncertainty of outcome hypothesis, and differences across leagues are consistent with revenue sharing arrangements. Estimates indicate a strong negative but diminishing relationship between stadium age and revenue. Teams in larger markets generate more revenue than smaller markets, but the returns to success do not differ according to market size. (JEL Z21)     

INFORMATION VALUE UNDER DEMAND UNCERTAINTY AND ENDOGENOUS MARKET LEADERSHIP

In an oligopoly model with firms choosing to produce in one of two periods, we identify the circumstance under which a firm's having early information regarding stochastic demand results in market leadership. High demand volatility leads to Stackelberg competition with the information‐advantaged firm leading. In the N‐firm case an equilibrium with multiple leaders and multiple followers emerges endogenously. In a duopoly information acquisition game we identify conditions that determine whether neither, one, or both firms will pay to acquire early information and note that one firm's obtaining early information may generate a positive externality benefitting its competitor. Both symmetric and asymmetric outcomes are possible and Stackelberg market leadership may occur in equilibrium, but only when firms have different costs of information. Our finding that an information advantage may convey leadership which then affects the value of information to the players applies to other settings exhibiting first‐mover advantage such as certain public good provision games. (JEL C72, D82, L13)     

CHAINED CREDIT CONTRACTS AND FINANCIAL ACCELERATORS

Sufficiently high net worth of financial intermediaries (FIs) is considered a necessary condition for financial and macroeconomic stability. In this paper, we explore why the net worth of FIs is important as compared to that of nonfinancial firms using a dynamic general equilibrium model, in which both FIs and nonfinancial firms rely on costly external debt. We find that an exogenous disruption of the FIs' net worth has a greater aggregate impact than does the same‐sized disruption of the nonfinancial firms' net worth. The key reason is that the net worth of the FIs in the United States is small. (JEL E22, E44, G21)