This paper addresses a longstanding puzzle involving the unbundling of services that has occurred over more than two decades in the U.S. advertising agency industry: How can the shift from the bundling to the unbundling of services be explained and what accounts for the slow pace of change? Using a cost-based theoretical framework of bundling due to Evans and Salinger (2005, 2008), we develop a simple model of an advertising agency's decision to unbundle its services as a tradeoff between the fixed cost to the advertiser of establishing and maintaining a relationship with an advertising agency and pecuniary economies of scale available in providing media services. The results from an econometric analysis of cross-sectional and pooled data collected by the U.S. Census Bureau for quinquenial censuses conducted between 1982 and 2002 support the key predictions of the model. We find that advertising agency establishments are more likely to unbundle if they are large and diversified in their service offerings and are less likely to do so with increasing age and greater geographical scope. We also find a strong trend toward unbundling over time, a result that is partially explained by increases in media prices over time.
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Concentration Levels in the U.S. Advertising and Marketing Services Industry: Myth vs. Reality
August 2009
Working Paper Number:
CES-09-16
We analyze changes in concentration levels in the U.S. Advertising and Marketing Services industry using data from the U.S. Census Bureau's quinquennial Economic Census and the Service Annual Survey. Heretofore largely ignored, these data allow us to redress some of the measurement problems surrounding estimates found in the existing literature Firm level concentration as measured by the Herfindahl-Hirschman Index varies across the sectors comprising the industry, but all are within the range generally considered as indicative of a competitive industry. At the holding company level, the four largest organizations account for about a quarter of the industry's total revenue, a share lower by an order of magnitude than that frequently cited in the trade press.
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Residual Claims and Incentives in Restaurant Chains
July 2006
Working Paper Number:
CES-06-18
I examine the relationship between ownership and production activities using a new dataset of restaurant chains. Production in restaurant chains provides an opportunity to examine the effects of residual claims on incentives because production is decentralized and fairly uniform across restaurants in the same chain. Yet the allocation of residual claims varies between company-owned and franchised units, affecting the strength of incentives for restaurantlevel activities. The decision to own or franchise each restaurant reflects the value of either withholding or allocating residual claims for performing these activities. I find that more complex production activities are systematically correlated with company ownership. Onsite food production raises the likelihood of company ownership by 28% relative to offsite food production. Table service raises the likelihood of company ownership by 26% relative to counter service. The results are not consistent with straightforward effort-promoting effects of residual claims in simple principal agent models. They are consistent with the view that residual claims can generate unbalanced incentives across diverse tasks.
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The Rise of Specialized Firms
February 2024
Working Paper Number:
CES-24-06
This paper studies firm diversification over 6-digit NAICS industries in U.S. manufacturing. We find that firms specializing in fewer industries now account for a substantially greater share of production than 40 years ago. This reallocation is a key driver of rising industry concentration. Specialized firms have displaced diversified firms among industry leaders'absent this reallocation concentration would have decreased. We then provide evidence that specialized firms produce higher-quality goods: specialized firms tend to charge higher unit prices and are more insulated against Chinese import competition. Based on our empirical findings, we propose a theory in which growth shifts demand toward specialized, high-quality firms, which eventually increases concentration. We conclude that one should expect rising industry concentration in a growing economy.
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NEW EVIDENCE ON EMPLOYER PRICE-SENSITIVITY OF OFFERING HEALTH INSURANCE
January 2014
Working Paper Number:
CES-14-01
Economic incentives such as the preferential tax treatment of premiums and economies of scale encourage employers to provide health insurance through the workplace. The employer's decision to offer health insurance depends on how much workers value insurance relative to wages, and that value is likely to vary, given the composition of the establishment's workforce. Using the 2008-2010 MEPS Insurance Component augmented with information from other data sources, we generate new estimates of employers' price-sensitivity of offering insurance. Our results suggest that employers are sensitive to changes in the tax price of insurance, with very small employers exhibiting the largest price-sensitivity. Employer size, workforce composition, and local labor market conditions also influence the employer's decision to offer insurance. New evidence can inform policy discussions about the implications of broad-based reforms that change marginal tax rates as well as targeted strategies that address the tax-exempt status of premiums.
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The Role of Agents and Brokers in the Market for Health Insurance
December 2013
Working Paper Number:
CES-13-58
Health insurance markets in the United States are characterized by imperfect information, complex products, and substantial search frictions. Insurance agents and brokers play a significant role in helping employers navigate these problems. However, little is known about the relation between the structure of the agent/broker market and access and affordability of insurance. This paper aims to fill this gap by investigating the influence of agents/brokers on health insurance decisions of small firms, which are particularly vulnerable to problems of financing health insurance. Using a unique membership database from the National Association of Health Underwriters together with a nationally representative survey of employers, we find that small firms in more competitive agent/broker markets are more likely to offer health insurance and at lower premiums. Moreover, premiums are less dispersed in more competitive agent/broker markets.
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Re-engineering Key National Economic Indicators
July 2019
Working Paper Number:
CES-19-22
Traditional methods of collecting data from businesses and households face increasing challenges. These include declining response rates to surveys, increasing costs to traditional modes of data collection, and the difficulty of keeping pace with rapid changes in the economy. The digitization of virtually all market transactions offers the potential for re-engineering key national economic indicators. The challenge for the statistical system is how to operate in this data-rich environment. This paper focuses on the opportunities for collecting item-level data at the source and constructing key indicators using measurement methods consistent with such a data infrastructure. Ubiquitous digitization of transactions allows price and quantity be collected or aggregated simultaneously at the source. This new architecture for economic statistics creates challenges arising from the rapid change in items sold. The paper explores some recently proposed techniques for estimating price and quantity indices in large scale item-level data. Although those methods display tremendous promise, substantially more research is necessary before they will be ready to serve as the basis for the official economic statistics. Finally, the paper addresses implications for building national statistics from transactions for data collection and for the capabilities and organization of the statistical agencies in the 21st century.
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Intra-Firm Spillovers? The Stock and Flow Effects of Collocation
January 2015
Working Paper Number:
CES-15-01
We examine the impact of collocation on local within-firm performance, or intra-firm spillovers, by decomposing spillovers into one-time stock and recurring flow effects. Stock effects include one-time learning effects. Flow effects include ongoing resource sharing as well as cannibalization. Using data on the population of U.S. hotels and restaurants from 1977-2007, we exploit changes in the number of collocated establishments owned by the same firm to estimate the relative importance of stock and flow benefits. We find that collocation improves the productivity of new and existing establishments by 1-2%, even when correcting for endogenous sorting into collocation. The results, in conjunction with our field work, suggest that collocation generally facilitates the transfer of knowledge within the firm, but that flow effects of collocation are more sensitive to the broader economic environment.
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Clusters and Entrepreneurship
September 2010
Working Paper Number:
CES-10-31
This paper examines the role of regional clusters in regional entrepreneurship. We focus on the distinct influences of convergence and agglomeration on growth in the number of start-up firms as well as in employment in these new firms in a given region-industry. While reversion to the mean and diminishing returns to entrepreneurship at the region-industry level can result in a convergence effect, the presence of complementary economic activity creates externalities that enhance incentives and reduce barriers for new business creation. Clusters are a particularly important way through which location-based complementarities are realized. The empirical analysis uses a novel panel dataset from the Longitudinal Business Database of the Census Bureau and the U.S. Cluster Mapping Project (Porter, 2003). Using this dataset, there is significant evidence of the positive impact of clusters on entrepreneurship. After controlling for convergence in start-up activity at the region-industry level, industries located in regions with strong clusters (i.e. a large presence of other related industries) experience higher growth in new business formation and start-up employment. Strong clusters are also associated with the formation of new establishments of existing firms, thus influencing the location decision of multiestablishment firms. Finally, strong clusters contribute to start-up firm survival.
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Where Do Manufacturing Firms Locate Their Headquarters?
October 2005
Working Paper Number:
CES-05-17
Firms' headquarters [HQ] support their production activity, by gathering information and outsourcing business services, as well as, managing, evaluating, and coordinating internal firm activities. In search of locations for these functions, firms often separate the HQ function physically from their production facilities and construct stand-alone HQs. By locating its HQ in a large, service oriented metro area away from its production facilities, a firm may be better able to out-source service functions in that local metro market and also to gather information about market conditions for their products. However if the firm locates the HQ away from its production activity, that increases the coordination costs in managing plant activities. In this paper we empirically analyze the trade-off of these two considerations.
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Scale Economies and Consolidation in Hog Slaughter
March 2000
Working Paper Number:
CES-00-03
We use establishment based panel data to estimate a cost function which identifies the role of scale economies in hog slaughter consolidation. We find modest by extensive technological scale economies in the 1990s, and they became more important over time. But wages rose sharply with plant size through the 1970s and those wage premiums generated a pecuniary scale diseconomy that largely offset the effects of technological scale economies. The size-wage relation disappeared in the 1980; with growing technological scale economies and disappearing pecuniary diseconomies, large plants realized growing cost advantages over smaller plants, and production shifted to larger plants.
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