Hands On
Do Powerful Politicians Cause Corporate Downsizing?
Lauren Cohen, Joshua Coval & Christopher Malloy
Journal of Political Economy, December 2011, Pages 1015-1060
Abstract:
This paper employs a new empirical approach for identifying the impact of government spending on the private sector. Our key innovation is to use changes in congressional committee chairmanships as a source of exogenous variation in state-level federal expenditures. We show that fiscal spending shocks appear to significantly dampen corporate investment activity. This retrenchment occurs within large and small states and is most pronounced among geographically concentrated firms. The effects are economically meaningful, and the mechanism - entirely distinct from interest rate and tax channels-suggests new considerations in assessing the impact of government spending on private-sector economic activity.
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The Causal Effects of an Industrial Policy
Chiara Criscuolo et al.
NBER Working Paper, February 2012
Abstract:
Business support policies designed to raise productivity and employment are common worldwide, but rigorous micro-econometric evaluation of their causal effects is rare. We exploit multiple changes in the area-specific eligibility criteria for a major program to support manufacturing jobs ("Regional Selective Assistance"). Area eligibility is governed by pan-European state aid rules which change every seven years and we use these rule changes to construct instrumental variables for program participation. We match two decades of UK panel data on the population of firms to all program participants. IV estimates find positive program treatment effect on employment, investment and net entry but not on TFP. OLS underestimates program effects because the policy targets underperforming plants and areas. The treatment effect is confined to smaller firms with no effect for larger firms (e.g. over 150 employees). We also find the policy raises area level manufacturing employment mainly through significantly reducing unemployment. The positive program effect is not due to substitution between plants in the same area or between eligible and ineligible areas nearby. We estimate that "cost per job" of the program was only $6,300 suggesting that in some respects investment subsidies can be cost effective.
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One-Time Transfers of Cash or Capital Have Long-Lasting Effects on Microenterprises in Sri Lanka
Suresh de Mel, David McKenzie & Christopher Woodruff
Science, 24 February 2012, Pages 962-966
Abstract:
Standard economic theory suggests that one-time business grants can have at most temporary effects, and accordingly, policies to increase incomes of the self-employed in developing countries typically rely on sustained engagement. In contrast, we found long-lasting impacts from one-time grants given in a randomized experiment to subsistence firms. Five years after we gave $100 or $200 to 115 of 197 male and 100 of 190 female Sri Lankan microenterprise owners, we found 10-percentage-point-higher enterprise survival rates, and $8-to-$12-per-month-higher profits for male-owned businesses that received the grants. Female-owned businesses showed no long-term (or short-term) impacts. Our follow-up investigation interviewed 94% of the original sample and collected survivorship data from the remaining 6%, demonstrating that tracking long-term outcomes is both feasible and worthwhile. The results suggest that one-off grants may have lasting impacts on some types of subsistence firms, challenging the view that sustained engagement is always required.
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Business Groups and the Natural State
Richard Langlois
Journal of Economic Behavior & Organization, forthcoming
Abstract:
Recent revisionist accounts of corporate governance in both business history and finance are challenging the tradition narrative, associated with Berle and Means (1932) and Alfred Chandler (1977), in which the American model of diffuse ownership and coherent diversification is both an inevitable outcome of economic development and perhaps a normative standard for the world to follow. This essay is an attempt to rethink that narrative in light of the continued significance of the pyramidal business group as a governance structure around the world. I argue that business groups arise in response both to inadequacies in arm's-length markets and to the needs of what North et al. (2009) call the "natural state." In this view, the quality of markets and the demands of the state are tightly interconnected phenomena. Such a perspective explains the emergence of business groups in developing countries as well as their persistence even in wealthy and sophisticated polities apart from the U. S. and the U. K. In the end, moreover, I endorse the view that the much-discussed and oft-misunderstood exceptionalism of the U. S. in corporate governance arises not purely from the sophistication of American markets but also importantly from government policies toward corporate taxation and securities regulation - policies that arose from the unique Public Choice problem posed by the differential effect on the U. S. of the collapse of globalization during the middle years of the twentieth century.
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The Production Impact of "Cash-For-Clunkers": Implications for Stabilization Policy
Adam Copeland & James Kahn
Economic Inquiry, forthcoming
Abstract:
Stabilization policies frequently aim to boost spending as a means to increase gross domestic product. Spending does not necessarily translate into production, however, especially when inventories are involved. We look at the "cash-for-clunkers" program that helped finance the purchase of nearly 700,000 vehicles in 2009. An analysis of auto sales and production movements reveals that the program did prompt a large spike in sales. But the program had only a modest and fleeting impact on production, as inventories buffered the movements in sales. These findings suggest caution in judging the efficacy of such policies by their impact on spending alone.
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Government Spending and Private Activity
Valerie Ramey
NBER Working Paper, January 2012
Abstract:
This paper asks whether increases in government spending stimulate private activity. The first part of the paper studies private spending. Using a variety of identification methods and samples, I find that in most cases private spending falls significantly in response to an increase in government spending. These results imply that the average GDP multiplier lies below unity. In order to determine whether concurrent increases in tax rates dampen the spending multiplier, I use two different methods to adjust for tax effects. Neither method suggests significant effects of current tax rate changes on the spending multiplier. In the second part of the paper, I explore the effects of government spending on labor markets. I find that increases in government spending lower unemployment. Most specifications and samples imply, however, that virtually all of the effect is through an increase in government employment, not private employment. I thus conclude that on balance government spending does not appear to stimulate private activity.
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Estimating the Incidence of Government Spending
Juan Carlos Suarez Serrato & Philippe Wingender
University of California Working Paper, November 2011
Abstract:
This paper analyzes the economic incidence of sustained changes in federal government spending at the local level. We use a new identification strategy to isolate geographical variation in formula-based federal spending and develop three sets of results. First, we find that sustained changes in federal spending have significant effects on migration, income, wages, and rents, as well as on local government revenues and expenditures. Second, we show that the effects of a government spending shock are qualitatively different from those of a local labor demand shock. We develop a spatial equilibrium model to show that when workers value publicly-provided goods, a change in government spending at the local level will affect equilibrium wages through shifts in both the labor demand and supply curves. We test the reduced-form predictions of the model and show that workers value government services as amenities. Finally, we estimate workers' marginal valuation of government services and find that unskilled workers have a higher valuation of government services than skilled workers. We use these estimates to decompose the demand and supply components of a government spending shock and to evaluate the impacts on welfare that are produced by increasing government spending in a given area. Our estimates conclude that an additional dollar of government spending increases welfare by $1.45 in the median county.
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Colin Hay
Cambridge Journal of Economics, March 2012, Pages 463-479
Abstract:
Judging solely by the continued prevalence of the term in policy-makers' discourse, Paul Krugman's now famous warnings as to the ‘dangerous obsession' of competitiveness have fallen on deaf ears. In this paper I argue that this is, at least in part, because policy-makers (as distinct, perhaps, from business school gurus) never understood competitiveness in quite the manner he assumed. I suggest that Krugman largely misdiagnosed the problem of competitiveness, directing us to the link between competitiveness and protectionism that was always less prevalent and more tenuous than he imagined. As a consequence he overlooked other more pertinent and problematic aspects of the discourse of competitiveness that persist relatively unchallenged in spite of his warnings. More specifically, I seek to show that Krugman's understanding of competitiveness is insufficiently differentiated and rests on inferences drawn from an overly stylised model of competition for market share in product markets that exhibit a high demand price elasticity and in which success is associated exclusively with strategies of cost containment. As I show through a series of extensions to his model, this leads him to fail to see that it is the privileging of cost competitiveness specifically, rather than the pursuit of competitiveness per se that is the dangerous obsession from which we most need protecting today.
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Soft Negligence Standards and the Strategic Choice of Firm Size
Juan José Ganuza & Fernando Gomez
Journal of Legal Studies, June 2011, Pages 439-466
Abstract:
In risky activities the extrinsic incentives for care are driven mainly by liability rules and by the asset levels of potential injurers. When the level of assets of the potential injurer is endogenous, we show that softer standards outperform the traditional standards based on first-best behavior, as well as strict liability: firms have incentives to choose to be larger, the lower the standards are. We also show that liability standards should increase in the costs of reducing assets and liability exposure. This means, counterintuitively, that when other instruments that restrict firms' size are relaxed, the optimal response is to relax, and not to tighten, liability standards. Also, in a regulatory competition setting we find that a country lowering its regulatory standards will not attract worse firms in terms of size. On the contrary, the best firms in terms of assets and care will be those benefiting from regulatory competition.
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Harald Uhlig
Journal of Macroeconomics, March 2012, Pages 29-41
Abstract:
This paper is a non-technical and somewhat philosophical essay, that seeks to investigate the relationship between economics and reality. More precisely, it asks how reality in the form of empirical evidence does or does not influence economic thinking and theory. In particular, which role do calibration, statistical inference, and structural change play? What is the current state of affairs, what are the successes and failures, what are the challenges? I shall tackle these questions moving from general to specific. For the general perspective, I examine the following four points of view. First, economics is a science. Second, economics is an art. Third, economics is a competition. Forth, economics is politics. I then examine four specific cases for illustration and debate. First, is there a Phillips curve? Second, are prices sticky? Third, does contractionary monetary policy lead to a contraction in output? Forth, what causes business cycles? The general points as well as the specific cases each have their own implication for the central question at hand. Armed with this list of implications, I shall then attempt to draw a summary conclusion and provide an overall answer.
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Ben Bernanke and the Zero Bound
Laurence Ball
NBER Working Paper, February 2012
Abstract:
From 2000 to 2003, when Ben Bernanke was a professor and then a Fed Governor, he wrote extensively about monetary policy at the zero bound on interest rates. He advocated aggressive stimulus policies, such as a money-financed tax cut and an inflation target of 3-4%. Yet, since U.S. interest rates hit zero in 2008, the Fed under Chairman Bernanke has taken more cautious actions. This paper asks when and why Bernanke changed his mind about zero-bound policy. The answer, at one level, is that he was influenced by analysis from the Fed staff that was presented at the FOMC meeting of June 2003. This answer raises another question: why did the staff's views influence Bernanke so strongly? I seek answers to this question in the social psychology literature on group decision-making.
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Was the Gold Standard Really Destabilizing?
Gabriel Fagan, James Lothian & Paul Mcnelis
Journal of Applied Econometrics, forthcoming
Abstract:
This paper investigates the extent to which the high macroeconomic volatility experienced in the classical Gold Standard era of US history can be attributed to the monetary policy regime per se as distinct from other shocks. For this purpose, we estimate a small dynamic stochastic general equilibrium model for the classical Gold Standard era. We use this model to conduct a counterfactual experiment to assess whether a monetary policy conducted on the basis of a Taylor rule characterizing the Great Moderation data would have led to different outcomes for macroeconomic volatility and welfare in the Gold Standard era. The counterfactual Taylor rule significantly reduces inflation volatility, but at the cost of higher real-money and interest-rate volatility. Output volatility is very similar.
The end result is no welfare improvement.
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Complexity, economics, and public policy
Steven Durlauf
Politics, Philosophy & Economics, February 2012, Pages 45-75
Abstract:
This article considers the implications of complex systems models for the study of economics and the evaluation of public policies. I argue that complexity can enhance current approaches to formal economic analysis, but does so in ways that complement current approaches. I further argue that while complexity can influence how public policy analysis is conducted, it does not delimit the use of consequentialist approaches to policy comparison to the degree initially suggested by Hayek and most recently defended by Gaus.
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How Does the FOMC Learn About Economic Revolutions? Evidence from the New Economy Era, 1994-2001
Richard Anderson & Kevin Kliesen
Business Economics, January 2012, Pages 27-56
Abstract:
Forecasting is a daunting challenge for business economists and policymakers, often made more difficult by pervasive uncertainty. One such uncertainty is the reaction of policymakers to major shifts in the economy. We explore the process by which the Federal Reserve Open Market Committee (FOMC) came to recognize and react to the productivity acceleration of the 1990s. Initial impressions were formed importantly by anecdotal evidence. Then, FOMC members - and chiefly Federal Reserve Board Chairman Alan Greenspan - came to mistrust the data and the forecasts. Eventually, revisions to published data confirmed initial impressions. Our main conclusion is that the productivity-driven positive supply side shocks of the 1990s were initially viewed favorably. However, over time they came to be viewed as posing a threat to the economy, chiefly through unsustainable increases in aggregate demand growth that threatened to increase inflation pressures. Perhaps nothing so complicates business planning and forecasting as policymakers who initially embrace an unanticipated shift and later come to abhor the same shift.
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Macroeconomic Effects of Corporate Default Crises: A Long-Term Perspective
Kay Giesecke et al.
NBER Working Paper, February 2012
Abstract:
Using an extensive new data set on corporate bond defaults in the U.S. from 1866 to 2010, we study the macroeconomic effects of bond market crises and contrast them with those resulting from banking crises. During the past 150 years, the U.S. has experienced many severe corporate default crises in which 20 to 50 percent of all corporate bonds defaulted. Although the total par amount of corporate bonds has often rivaled the amount of bank loans outstanding, we find that corporate default crises have far fewer real effects than do banking crises. These results provide empirical support for current theories that emphasize the unique role that banks and the credit and collateral channels play in amplifying macroeconomic shocks.
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Explaining the effects of government spending shocks
Morten Ravn, Stephanie Schmitt-Grohé & Martín Uribe
Journal of Monetary Economics, forthcoming
Abstract:
Using panel structural VAR analysis and quarterly data from four industrialized countries, we document that an increase in government purchases raises output and private consumption, deteriorates the trade balance, and depreciates the real exchange rate. This pattern of comovement poses a puzzle for both neoclassical and Keynesian models. An explanation based on the deep-habit mechanism is proposed. An estimated two-country model with deep-habits is shown to replicate well the observed responses of output, consumption, and the trade balance, and the initial response of the real exchange rate to an estimated government spending shock.
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World War II prime defence contractors: Were they favoured?
Fred Kaen
Business History, Winter 2011, Pages 1044-1073
Abstract:
Between 1940 and 1944 the US government placed $175.066 billion of prime defence contracts with US corporations. Two-thirds of these awards went to only 100 companies and 20% to only five companies leading to charges that the prime contractors were favoured. This article examines the common stock returns of World War II prime contractors relative to broad market indices and to the returns on the non-prime contractors in the same industry. The analysis begins in 1938 with the Anschluss and ends with the 1950 outbreak of the Korean War. Little evidence is found to support the charges.
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The Economic Impact of Stadiums and Teams: The Case of Minor League Baseball
Nola Agha
Journal of Sports Economics, forthcoming
Abstract:
This article uses an extensive unique data set to investigate the efficiency of government subsides for minor league baseball teams and stadiums by measuring pecuniary gains in a local economy. Specifically, a dynamic panel data model incorporating 238 Metropolitan Statistical Areas (MSAs) that hosted affiliated or independent minor league teams between 1985 and 2006 shows that AAA teams, A+ teams, AA stadiums, and rookie stadiums are all associated with significant positive effects on the change in local per capita income. The presence of positive effects is strikingly different from decades of nonpositive results at the major league level.
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Are Basketball Arenas Catalysts of Economic Development?
Geoffrey Propheter
Journal of Urban Affairs, forthcoming
Abstract:
Academic researchers continue to challenge the popular perception that new or renovated stadiums are catalysts of economic development. Despite basketball arenas generally having lower construction costs and being more multipurpose, past studies have disproportionately examined professional baseball and football stadiums. Using the most recent data, this study investigates the economic impact of professional basketball arenas. After controlling for a range of covariates past research has identified as possible predictors, I find little evidence that basketball arenas are primary catalysts of development. I conclude that the context of the city, not the facility, is what drives the economic development capacity of basketball arenas.
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Daniel Chatman, Nicholas Tulach & Kyeongsu Kim
Urban Studies, February 2012, Pages 467-487
Abstract:
Economic benefits are sometimes used to justify transport investments. Such was the case with the River Line of southern New Jersey, USA, which broke ground in 2000 and began operating in 2004. Recently, the line has been performing near full capacity and there is evidence that it has spurred development. Disaggregate data on owned-home appreciation are used to investigate the initial economic impacts of the line, looking carefully at non-linearity in the appreciation gradient, differential effects of station ridership and parking, redistribution of property appreciation gains and differences by property and neighbourhood type. At this time, the net impact of the line on the owned housing market is neutral to slightly negative. While lower-income census tracts and smaller houses seem to appreciate near the station, this may be a value transfer from farther-away properties not favoured with access. Few studies have previously looked for such effects.
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Private Enforcement and Judicial Discretion in the Evolution of Antitrust in the United States
Reza Rajabiun
Journal of Competition Law & Economics, March 2012, Pages 187-230
Abstract:
The role of private enforcers in the implementation of laws against anticompetitive practices remains a subject of considerable controversy. The economic approach to the analysis of crime and punishment suggests that private rights of action can complement the information and incentives of public agents in the identification and deterrence of costly market behavior. This article studies the complementarities between public and private enforcement mechanisms. Long-term data on case filings, administrative resources, and judicial outcomes from the United States reveal that mixed regimes allow for the specialization of tasks between public and private enforcers: competition authorities focus on the regulation of dominance, while private litigants tend to identify collusion in contractual relations. The analysis further documents how judicial discretion under the rule-of-reason approach to substantive interpretation limits the predictability and credibility of legal constraints against anticompetitive practices.
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Net Neutrality, Broadband Market Coverage, and Innovation at the Edge
Hong Guo, Hsing Kenneth Cheng & Subhajyoti Bandyopadhyay
Decision Sciences, February 2012, Pages 141-172
Abstract:
Net neutrality (NN) is a widely debated policy issue that has the potential to alter the dynamics of accessing online content. The focal point of the debate lies in whether broadband service providers (BSPs) should be allowed to charge content providers for the preferential delivery of their digital content. This decision will affect broadband market coverage for end consumers as well as the issues of long-term competition and innovation in the market of digital content. Our research aims to analyze and address these issues. We propose a game theoretical model with three players - the BSP, the content providers, and the consumers - where the BSP, in its capacity as a gatekeeper between the content providers and the consumers, is modeled as a two-sided market platform. We find that while abandoning the principle of NN might sometimes result in increased consumer surplus and broadband market coverage, it can also hinder the ability of startups to compete against established rivals and thus reduce innovation at the edge. The results should be of great interest to policymakers as they debate on this very crucial issue.
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The FTC, IP, And SSOs: Government Hold-Up Replacing Private Coordination
Richard Epstein, Scott Kieff & Daniel Spulber
Journal of Competition Law & Economics, March 2012, Pages 1-46
Abstract:
In its recent report entitled, "The Evolving IP Marketplace," the Federal Trade Commission (FTC) proposes a far-reaching regulatory approach (Proposal) that is likely to interfere with the intellectual property (IP) marketplace, decreasing both the innovation and commercialization of new technologies. The FTC Proposal relies on non-standard and misguided definitions of economic terms of art such as "ex ante" and "hold-up," and advocates new inefficient rules for calculating damages for patent infringement. The Proposal would so reduce the costs of infringement that the rate of infringement would increase as potential infringers find it in their interest to abandon the voluntary market in favor of judicial pricing. As the number of nonmarket transactions increases, courts will play an ever larger role in deciding the terms on which the patented technologies of one party may be used by another party. That will do more than reduce the incentives for innovation; it will upset the current set of well-functioning private coordination activities in the IP marketplace that are needed to accomplish the commercialization of new technologies. And that would seriously undermine capital formation, job growth, competition, and the consumer welfare the FTC seeks to promote. Like the FTC Proposal, we focus here within the context of standard-setting organizations (SSOs), whose activities are key to bringing standardized technologies to market. If the FTC's proposed definitions of "reasonable royalties" and "incremental damages" become the rules for calculating patent damages the FTC and private actors will be well poised to attack, after the fact, all standard pricing methods through some combination of antitrust litigation or direct regulation on the ground that even time-honored voluntary royalty arrangements result from some purportedly undue power of IP. The FTC's Proposal may encourage potential licensees to adopt the very holdout strategies the FTC purports to address and that well-organized SSOs routinely counteract today. The FTC's proposal for regulating IP by limiting the freedom of SSOs to set their own terms would thereby replace private coordination with government hold-up. We conclude that the FTC should abandon its Proposal and support the current set of licensing tools that have fueled effective innovation and dissemination in the IP marketplace. FTC forbearance will improve bargaining incentives, reduce administrative costs, and remove unnecessary elements of legal uncertainty in the IP system, thereby advancing consumer welfare.
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Joshua Woodard et al.
American Journal of Agricultural Economics, forthcoming
Abstract:
Can the availability of poorly-designed government insurance alter technology adoption decisions? A theoretical model of technology adoption and insurance incentive effects for a high- and low-risk technology is developed and explored empirically using a unique dataset of skip-row agronomic trial data. A multivariate nonparametric resampling technique is developed, which augments the trial data with a larger dataset of conventional yields to improve estimation efficiency. Skip-row adoption is found to increase mean yields and reduce risk in areas prone to drought. RMA insurance rules have incentive-distorting impacts which disincentivize skip-row adoption.