I develop a theory of joint production to quantify aggregate economies of scope. In US manufacturing data, increased export demand in one industry raises a firm's sales in its other industries that share knowledge inputs like R&D and software. I estimate that knowledge inputs contribute to economies of scope through their scalability and partial non-rivalry within the firm. On average a 10 percent increase in output in one industry lowers prices in other industries by 0.4 percent. Such economies of scope manifest disproportionately among knowledge proximate industries and imply large spillover impacts of recent US-China trade policy on producer prices.
-
Global Sourcing and Multinational Activity: A Unified Approach
September 2022
Working Paper Number:
CES-22-36
Multinational firms (MNEs) accounted for 42 percent of US manufacturing employment, 87 percent of US imports, and 84 of US exports in 2007. Despite their disproportionate share of global trade, MNEs' input sourcing and final-good production decisions are often studied separately. Using newly merged data on firms' trade and FDI activity by country, we show that US MNEs are more likely to import not only from the countries in which they have affiliates, but also from other countries within their affiliates' region. We rationalize these patterns in a unified framework in which firms jointly determine the countries in which to produce final goods, and the countries from which to source inputs. The model generates a new source of scale economies that arises because a firm incurs a country specific fixed cost that allows all its assembly plants to source inputs from that country. This shared fixed cost across plants creates interdependencies between firms' assembly and sourcing locations, and leads to non-monotonic responses in third markets to bilateral trade cost changes.
View Full
Paper PDF
-
The Location of Industrial Innovation: Does Manufacturing Matter?
March 2013
Working Paper Number:
CES-13-09
What explains the location of industrial innovation? Economists have traditionally attempted to answer this question by studying firm-external knowledge spillovers. This paper shows that firm-internal linkages between production and R&D play an equally important role. I estimate an R&D location choice model that predicts patents by a firm in a location from R&D productivity and costs. Focusing on large R&D-performing firms in the chemical industry, an average-sized plant raises the firm's R&D productivity in the metropolitan area by about 2.5 times. The elasticity of R&D productivity with respect to the firm's production workers is almost as large as the elasticity with respect to total patents in the MSA, while proximity to academic R&D has no significant effect on R&D productivity in this sample. Other manufacturing industries exhibit similar results. My results cast doubt on the frequently-held view that a country can divest itself of manufacturing and specialize in innovation alone.
View Full
Paper PDF
-
Are firm-level idiosyncratic shocks important for U.S. aggregate volatility?
January 2016
Working Paper Number:
CES-16-47
This paper assesses the quantitative impact of firm-level idiosyncratic shocks on aggregate volatility in the U.S. economy and provides a microfoundation for the negative relationship between firm-level volatility and size. I argue that the role of firm-specific shocks through the granular channel plays a fairly limited role in the U.S. economy. Using a novel, comprehensive data set compiled from several sources of the U.S. Census Bureau, I find that the granular com-ponent accounts at most for 15.5% of the variation in aggregate sales growth which is about half found by previous studies. To bridge the gap between previous findings and mine, I show that my quantitative results require deviations from Gibrat's law in which firm-level volatility and size are negatively related. I find that firm-level volatility declines at a substantially higher rate in size than previously found. Hence, the largest firms in the economy cannot be driving a sub-stantial fraction of macroeconomic volatility. I show that the explanatory power of granularity gets cut by at least half whenever the size-variance relationship, as estimated in the micro-level data, is taken into account. To uncover the economic mechanism behind this phenomenon, I construct an analytically tractable framework featuring random growth and a Kimball aggrega-tor. Under this setup, larger firms respond less to productivity shocks as the elasticity of demand is decreasing in size. Additionally, the model predicts a positive (negative) relationship between firm-level mark-ups (growth) and size. I confirm the predictions of the model by estimating size-varying price elasticities on unique product-level data from the Census of Manufactures (CM) and structurally estimating mark-ups using plant-level information from the Annual Survey of Manufactures (ASM).
View Full
Paper PDF
-
Are firm-level idiosyncratic shocks important for U.S. aggregate volatility?
January 2017
Working Paper Number:
CES-17-23
This paper quantitatively assesses whether firm-specific shocks can drive the U.S. business cycle. Firm-specific shocks to the largest firms can directly contribute to aggregate fluctuations whenever the firm size distribution is fat-tailed giving rise to the granular hypothesis. I use a novel, comprehensive data set compiled from administrative sources that contains the universe of firms and trade transactions, and find that the granular hypothesis accounts at most for 16 percent of the variation in aggregate sales growth. This is about half of that found by previous studies that imposed Gibrat's law where all firms are equally volatile regardless of their size. Using the full distribution of growth rates among U.S. firms, I find robust evidence of a negative relationship between firm-level volatility and size, i.e. the size-variance relationship. The largest firms (whose shocks drive granularity) are the least volatile under the size-variance relationship, thus their influence on aggregates is mitigated. I show that by taking this relationship into account the effect of firm-specific shocks on observed macroeconomic volatility is substantially reduced. I then investigate several plausible mechanisms that could explain the negative sizevariance relationship. After empirically ruling out some of them, I suggest a 'market power' channel in which large firms face smaller price elasticities and therefore respond less to a givensized productivity shock than small firms do. I provide direct evidence for this mechanism by estimating demand elasticities among U.S. manufactures. Lastly, I construct an analytically tractable framework that is consistent with several empirical regularities related to firm size.
View Full
Paper PDF
-
U.S. Market Concentration and Import Competition
August 2022
Working Paper Number:
CES-22-34
Many studies have documented that market concentration has risen among U.S. firms in recent decades. In this paper, we show that this rise in concentration was accompanied by tougher product market competition due to the entry of foreign competitors. Using confidential census data covering the universe of all firm sales in the U.S. manufacturing sector, we find that rising import competition increased concentration among U.S. firms by reallocating sales from smaller to larger U.S. firms and by causing firm exit. However, this increase in concentration was counteracted by the expansion of foreign firms, which reduced domestic firms' share of the U.S. market inclusive of foreign firms' sales. We find that once the sales of foreign exporters are taken into account, U.S. marketconcentration in manufacturing was stable between 1992 and 2012.
View Full
Paper PDF
-
Import Competition and Firms' Internal Networks
September 2021
Working Paper Number:
CES-21-28
Using administrative data on U.S. multisector firms, we document a cross-sectoral propagation of the import competition from China ('China shock') through firms' internal networks: Employment of an establishment in a given industry is negatively affected by China shock that hits establishments in other industries within the same firm. This indirect propagation channel impacts both manufacturing and non-manufacturing establishments, and it operates primarily through the establishment exit. We explore a range of explanations for our findings, highlighting the role of within-firm trade across sectors, scope of production, and establishment size. At the sectoral aggregate level, China shock that propagates through firms' internal networks has a sizable impact on industry-level employment dynamics.
View Full
Paper PDF
-
The Modern Wholesaler: Global Sourcing, Domestic Distribution, and Scale Economies
December 2018
Working Paper Number:
CES-18-49
Nearly half of all transactions in the $6 trillion market for manufactured goods in the United
States were intermediated by wholesalers in 2012, up from 32 percent in 1992. Seventy percent of this increase is due to the growth of 'superstar' firms - the largest one percent of wholesalers. Structural estimates based on detailed administrative data show that the rise of the largest wholesalers was driven by an intuitive linkage between their sourcing of goods from abroad and an expansion of their domestic distribution network to reach more buyers. Both elements require scale economies and lead to increased wholesaler market shares and markups. Counterfactual analysis shows that despite increases in wholesaler market power, intermediated international trade has two benefits for buyers: directly through buyers' valuation of globally sourced products, and indirectly through the passed-through benefits of wholesaler economies of scale and increased quality.
View Full
Paper PDF
-
HOW IMPORTANT ARE SECTORAL SHOCKS
September 2014
Working Paper Number:
CES-14-31
I quantify the contribution of sectoral shocks to business cycle fluctuations in aggregate output. I develop a multi-industry general equilibrium model in which each industry employs the material and capital goods produced by other sectors, and then estimate this model using data on U.S. industries sales, output prices, and input choices. Maximum likelihood estimates indicate that industry-specific shocks account for nearly two-thirds of the volatility of aggregate output, substantially larger than previously assessed. Identification of the relative importance of industry-specific shocks comes primarily from data on industries intermediate input purchases, data that earlier estimations of multi-industry models have ignored.
View Full
Paper PDF
-
Climate Change, The Food Problem, and the Challenge of Adaptation through Sectoral Reallocation
September 2021
Working Paper Number:
CES-21-29
This paper combines local temperature treatment effects with a quantitative macroeconomic model to assess the potential for global reallocation between agricultural and non-agricultural production to reduce the costs of climate change. First, I use firm-level panel data from a wide range of countries to show that extreme heat reduces productivity less in manufacturing and services than in agriculture, implying that hot countries could achieve large potential gains through adapting to global warming by shifting labor toward manufacturing and increasing imports of food. To investigate the likelihood that such gains will be realized, I embed the estimated productivity effects in a model of sectoral specialization and trade covering 158 countries. Simulations suggest that climate change does little to alter the geography of agricultural production, however, as high trade barriers in developing countries temper the influence of shifting comparative advantage. Instead, climate change accentuates the existing pattern, known as 'the food problem,' in which poor countries specialize heavily in relatively low productivity agricultural sectors to meet subsistence consumer needs. The productivity effects of climate change reduce welfare by 6-10% for the poorest quartile of the world with trade barriers held at current levels, but by nearly 70% less in an alternative policy counterfactual that moves low-income countries to OECD levels of trade openness.
View Full
Paper PDF
-
Multi-Product Firms and Product Switching
August 2008
Working Paper Number:
CES-08-24
This paper examines the frequency, pervasiveness and determinants of product switching by U.S. manufacturing firms. We find that one-half of firms alter their mix of five-digit SIC products every five years, that product switching is correlated with both firm- and firm-product attributes, and that product adding and dropping induce large changes in firm scope. The behavior we observe is consistent with a natural generalization of existing theories of industry dynamics that incorporates endogenous product selection within firms. Our findings suggest that product switching contributes to a reallocation of resources within firms towards their most efficient use.
View Full
Paper PDF