Using a difference-in-difference methodology, we find that the state-level deregulation of local U.S. banking markets leads to significant increases in the reallocation of labor within local industries towards small firms with higher marginal products of labor. Using plant-level data, we propose and examine an approach that quantifies the industry productivity gains from labor reallocation and find that these gains are economically important. Our analysis suggests that labor reallocation is a significant channel through which local banking markets affect the aggregate productivity and performance of local industries.
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REALLOCATION IN THE GREAT RECESSION: CLEANSING OR NOT?
August 2013
Working Paper Number:
CES-13-42
The high pace of output and input reallocation across producers is pervasive in the U.S. economy. Evidence shows this high pace of reallocation is closely linked to productivity. Resources are shifted away from low productivity producers towards high productivity producers. While these patterns hold on average, the extent to which the reallocation dynamics in recessions are 'cleansing' is an open question. That is, are recessions periods of increased reallocation that move resources away from lower productivity activities towards higher productivity uses? It could be recessions are times when the opportunity cost of time and resources are low implying recessions will be times of accelerated productivity enhancing reallocation. Prior research suggests the recession in the early 1980s is consistent with an accelerated pace of productivity enhancing reallocation. Alternative hypotheses highlight the potential distortions to reallocation dynamics in recessions. Such distortions might arise from many factors including, for example, distortions to credit markets. We find that in post-1980 recessions prior to the Great Recession, downturns are periods of accelerated reallocation that is even more productivity enhancing than in normal times. In the Great Recession, we find the intensity of reallocation fell rather than rose (due to the especially sharp decline in job creation) and the reallocation that did occur was less productivity enhancing than in prior recessions.
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Personal Bankruptcy Law and Entrepreneurship
January 2017
Working Paper Number:
CES-17-42R
We study the effect of debtor protection on firm entry and exit dynamics. We find that more lenient personal bankruptcy laws lead to higher firm entry, especially in sectors with low entry barriers. We also find that debtor protection increases firm exit rates and that this effect is independent of firm age. Our results overall indicate that changes in debtor protection affect firm dynamics.
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Do SBA Loans Create Jobs? Estimates from Universal Panel Data and Longitudinal Matching Methods
September 2012
Working Paper Number:
CES-12-27
This pape reports estimates of the effects of the Small Business Administration (SBA) 7(a) and 504 loan programs on employment. The database links a complete list of all SBA loans in these programs to universal data on all employers in the U.S. economy from 1976 to 2010. Our method is to estimate firm fixed effect regressions using matched control groups for the SBA loan recipients we have constructed by matching exactly on firm age, industry, year, and pre-loan size, plus kernel-based matching on propensity scores estimated as a function of four years of employment history and other variables. The results imply positive average effects on loan recipient employment of about 25 percent or 3 jobs at the mean. Including loan amount, we find little or no impact of loan receipt per se, but an increase of about 5.4 jobs for each million dollars of loans. When focusing on loan recipients and control firms located in high-growth counties (average growth of 22 percent), places where most small firms should have excellent growth potential, we find similar effects, implying that the estimates are not driven by differential demand conditions across firms. Results are also similar regardless of distance of control from recipient firms, suggesting only a very small role for displacement effects. In all these cases, the results pass a "pre-program" specification test, where controls and treated firms look similar in the pre-loan period. Other specifications, such as those using only matching or only regression imply somewhat higher effects, but they fail the pre-program test.
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How Big is Small? The Economic Effects of Access to Small Business Subsidies
June 2024
Working Paper Number:
CES-24-28
Industry size standards that determine eligibility for small business subsidies have vastly increased
over the past decade. We exploit quasi-random variation in the implementation of size standard
increases to study the effects on small firms, subsidy allocation, and industry outcomes using
Census Bureau microdata. Following size standard increases, revenues decline for an industry's
smallest firms, and they are less likely to survive. We link these effects to a reallocation of
government procurement contracts from smaller to larger firms. Consequently, industries become
more concentrated and growth declines. These findings highlight the broad economic effects of
changing eligibility for small business subsidies.
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How Firms Respond to Business Cycles: The Role of Firm Age and Firm Size
June 2013
Working Paper Number:
CES-13-30
There remains considerable debate in the theoretical and empirical literature about the differences in the cyclical dynamics of firms by firm size. This paper contributes to the debate in two ways. First, the key distinction between firm size and firm age is introduced. The evidence presented in this paper shows that young businesses (that are typically small) exhibit very different cyclical dynamics than small/older businesses. The second contribution is to present evidence and explore explanations for the finding that young/small businesses were hit especially hard in the Great Recession. The collapse in housing prices accounts for a significant part of the large decline of young/small businesses in the Great Recession.
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Entrant Experience and Plant Exit
August 2004
Working Paper Number:
CES-04-12
Producers entering a market can differ widely in their prior production experience, ranging from none to extensive experience in related geographic or product markets. In this paper, we quantify the nature of prior plant and firm experience for entrants into a market and measure its effect on the plant's decision to exit the market. Using plant-level data for seven regional manufacturing industries in the U.S., we find that a producer's experience at the time it enters a market plays an important role in the subsequent exit decision, affecting both the overall probability of exit and the method of exit. After controlling for observable plant and market profit determinants, there remain systematic differences in failure patterns across three groups of plants distinguished by their prior experience: de novo entrants, experienced plants that enter by diversifying their product mix, and new plants owned by experienced firms. The results indicate that the exit decision cannot be treated as determined solely by current and future plant, firm, and market conditions, but that the plant's history plays an important independent role in conditioning the likelihood of survival.
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The Human Factor in Acquisitions: Cross-Industry Labor Mobility and Corporate Diversification
September 2015
Working Paper Number:
CES-15-31
Internal labor markets facilitate cross-industry worker reallocation and collaboration, and the resulting benefits are largest when the markets include industries that utilize similar worker skills. We construct a matrix of industry pair-wise human capital transferability using information obtained from more than 11 million job changes. We show that diversifying acquisitions occur more frequently among industry pairs with higher human capital transferability. Such acquisitions result in larger labor productivity gains and are less often undone in subsequent divestitures. Moreover, acquirers retain more high skill workers and they exploit the real option to move workers from the target firm to jobs in other industries inside the merged firm. Overall, our results identify human capital as a source of value from corporate diversification and provide an explanation for seemingly unrelated acquisitions.
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How Does State-Level Carbon Pricing in the United States Affect Industrial Competitiveness?
June 2020
Working Paper Number:
CES-20-21
Pricing carbon emissions from an individual jurisdiction may harm the competitiveness of local firms, causing the leakage of emissions and economic activity to other regions. Past research concentrates on national carbon prices, but the impacts of subnational carbon prices could be more severe due to the openness of regional economies. We specify a flexible model to capture competition between a plant in a state with electric sector carbon pricing and plants in other states or countries without such pricing. Treating energy prices as a proxy for carbon prices, we estimate model parameters using confidential plant-level Census data, 1982'2011. We simulate the effects on manufacturing output and employment of carbon prices covering the Regional Greenhouse Gas Initiative (RGGI) in the Northeast and Mid-Atlantic regions. A carbon price of $10 per metric ton on electricity output reduces employment in the regulated region by 2.7 percent, and raises employment in nearby states by 0.8 percent, although these estimates do not account for revenue recycling in the RGGI region that could mitigate these employment changes. The effects on output are broadly similar. National employment falls just 0.1 percent, suggesting that domestic plants in other states as opposed to foreign facilities are the principal winners from state or regional carbon pricing.
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HUMAN CAPITAL LOSS IN CORPORATE BANKRUPTCY
July 2013
Working Paper Number:
CES-13-37
This paper quantifies the 'human costs of bankruptcy' by estimating employee wage losses induced by the bankruptcy filing of employers using employee-employer matched data from the U.S. Census Bureau's LEHD program. We find that employee wages begin to deteriorate one year prior to bankruptcy. One year after bankruptcy, the magnitude of the decline in annual wages is 30% of pre-bankruptcy wages. The decrease in wages persists (at least) for five years post-bankruptcy. The present value of wage losses summed up to five years after bankruptcy amounts to 29-49% of the average pre-bankruptcy market value of firm. Furthermore, we find that the ex-ante wage premium to compensate for the ex-post wage loss due to bankruptcy can be of similar magnitude with that of the tax benefits of debt.
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Misallocation and Manufacturing TFP in China and India
February 2009
Working Paper Number:
CES-09-04
Resource misallocation can lower aggregate total factor productivity (TFP). We use micro data on manufacturing establishments to quantify the potential extent of misallocation in China and India compared to the U.S. Compared to the U.S., we measure sizable gaps in marginal products of labor and capital across plants within narrowly-defined industries in China and India. When capital and labor are hypothetically reallocated to equalize marginal products to the extent observed in the U.S., we calculate manufacturing TFP gains of 30-50% in China and 40-60% in India.
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