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Two-sided Search in International Markets
January 2022
Working Paper Number:
CES-22-02
We develop a dynamic model of international business-to-business transactions in which sellers and buyers search for each other, with the probability of a match depending on both individual and aggregate search effort. Fit to customs records on U.S. apparel imports, the model captures key cross-sectional and dynamic features of international buyer-seller relationships. We use the model to make several quantitative inferences. First, we calculate the search costs borne by heterogeneous importers and exporters. Second, we provide a structural interpretation for the life cycles of importers and exporters as they endogenously acquire and lose foreign business partners. Third, we pursue counterfactuals that approximate the phaseout of the Agreement on Textiles and Clothing (the 'China shock") and the IT revolution. Lower search costs can significantly improve consumer welfare, but at the expense of importer pro ts. On the other hand, an increase in the population of foreign exporters can congest matching to the extent of dampening or even reversing the gains consumers enjoy from access to extra varieties and more retailers.
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Downsizing, Layoffs and Plant Closure: The Impacts of Import Price Pressure and Technological Growth on U.S. Textile Producers
April 2006
Working Paper Number:
CES-06-10
Downsizing, layoffs and plant closure are three plant-level responses to adverse economic conditions. I provide a theoretical and empirical analysis that illustrates the sources of each phenomenon and the implications for production and employment in the textiles industry. I consider two potential causes of these phenomena: technological progress and increased import competition. I create a micro-founded model of plant-level decision-making and combine it with conditions for dynamic market equilibrium. Through use of detailed plant-level information available in the US Census of Manufacturers and the Annual Survey of Manufacturers for the period 1982-2001, along with price data on imports, I examine the relative contribution of technology and import competition to the decline in output, employment and number of plants in textiles production in the US in recent years. The market-clearing domestic price of textiles is identified as a crucial channel in transmitting technology or import price shocks to downsizing, layoffs and plant closure. The model is estimated on two 4-digit sectors of textiles production (SIC 2211, broadwoven cotton and SIC 2221, broadwoven man-made fiber). The results validate modeling the production sectors as monopolistically competitive, and the elasticity of substitution between foreign and domestic varieties is found to be quite high. The coefficients on the productive technology are sensible, as are the estimated parameters of the plant exit, entry and investment decision rules. In simulations for the broadwoven cotton industry, the effects of technological progress are shown to have a much larger impact on layoffs than on plant closure, with plant size as measured by output actually increasing. Falling foreign prices lead to greater relative magnitudes of plant closure than of downsizing or layoffs.
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Import Price Pressure on Firm Productivity and Employment: The Case of U.S. Textiles
March 2006
Working Paper Number:
CES-06-09
Theoretical research has predicted three different effects of increased import competition on plant-level behavior: reduced domestic production and sales, improving average efficiency of plants, and increased exit of marginal firms. In empirical work, though, such effects are difficult to separate from the impact of exogenous technological progress (or regress). I use detailed plant-level information available in the US Census of Manufacturers and the Annual Survey of Manufacturers for the period 1983-2000 to decompose these effects. I derive the relative contribution of technology and import competition to the increase in productivity and the decline in employment in textiles production in the US in recent years. I then simulate the impact of removal of quota protection on the scale of operation of the average plant and the incentive to plant closure. The methodology employs a number of important innovations in examining the impact of falling import prices on the domestic production of an import-competing good. First, import competition is modeled directly through its impact on the relative prices of monopolistically competitive goods along the lines suggested by Melitz (2000). Second, the effect of technology is incorporated through structural estimation of plant-level production functions in four factors (capital, labor, energy and materials). Solutions to econometric difficulties related to missing capital data and unobserved productivity are incorporated into the estimation technique. The model is estimated for plants with primary product in SIC 2211 (broadwoven cotton cloth). Results validate modeling demand as for differentiated products. Technological coefficients are sensible, with exogenous technological progress playing a large role. In the simulations run, the effects of foreign price competition are orders of magnitude higher than those of technological progress for the period after quotas on imports are removed. The large-scale reduction in employment and output in the US is shown to be a combination of reduced employment and output at plants in continuous operation and of plant closures that exceed new entries.
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Survival of the Best Fit: Exposure to Low-Wage Countries and the (Uneven) Growth of U.S. Manufacturing Plants
October 2005
Working Paper Number:
CES-05-19
This paper examines the role of international trade in the reallocation of U.S. manufacturing within and across industries from 1977 to 1997. Motivated by the factor proportions framework, we introduce a new measure of industry exposure to international trade that focuses on where imports originate rather than on their overall level. We find that plant survival and growth are negatively associated with industry exposure to low-wage country imports. Within industries, we show that manufacturing activity is disproportionately reallocated towards capital-intensive plants. Finally, we provide the first evidence that firms adjust their product mix in response to trade pressures. Plants are more likely to switch industries when exposure to low-wage countries is high.
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Marshall's Scale Economies
December 2001
Working Paper Number:
CES-01-17
In this paper, using panel data, I estimate plant level production functions that include variables that allow for two types of scale externalities which plants experie nce in their local industrial environments. First are externalities from other plants in the same industry locally, usually called localization economies or, in a dynamic context, Marshall, Arrow, Romer [MAR] economies. Second are externalities from the scale or diversity of local economic activity outside the own industry involving some type of cross- fertilization, usually called urbanization economies or, in a dynamic context, Jacobs economies. Estimating production functions for plants in high tech industries and in capital goods, or machinery industries, I find that local own industry scale externalities, as measured specifically by the count of other own industry plants locally, have strong productivity effects in high tech but not machinery industries. I find evidence that single plant firms both benefit more from and generate greater external benefits than corporate plants. On timing, I find evidence that high tech single plant firms benefit from the scale of past own industry activity, as well as current activity. I find no evidence of urbanization economies from the diversity of local economic activity outside the own industry and limited evidence of urbanization economies from the overall scale of local economic activity.
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The Diffusion of Modern Manufacturing Practices: Evidence from Retail-Apparel Sectors
February 1997
Working Paper Number:
CES-97-11
As in many industries, firms in the apparel industry exhibit substantial heterogeneity in the adoption of "modern manufacturing" practices. Based on detailed business-unit level data, we show that this heterogeneity can be explained firm inputs. We show that the interaction between these explanatory factors means that complementarities between inputs may emerge over time rather than all at once as is often assumed in other studies of complementarities.
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Productivity Races I: Are Some Productivuty Measures Better Than Others?
January 1997
Working Paper Number:
CES-97-02
In this study we construct twelve different measures of productivity at the plant level and test which measures of productivity are most closely associated with direct measures of economic performance. We first examine how closely correlated these measures are with various measures of profits. We then evaluate the extent to which each productivity measure is associated with lower rates of plant closure and faster plant growth (growth in employment, output, and capital). All measures of productivity considered are credible in the sense that highly productive plants, regardless of measure, are clearly more profitable, less likely to close, and grow faster. Nevertheless, labor productivity and measures of total factor productivity that are based on regression estimates of production functions are better predictors of plant growth and survival than factor share-based measures of total factor productivity (TFP). Measures of productivity that are based on several years of data appear to outperform measures of productivity that are based solely on data from the most recent year.
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Whittling Away At Productivity Dispersion Futher Notes: Persistent Dispersion or Measurement Error?
November 1996
Working Paper Number:
CES-96-11
This note considers several hypotheses regarding measurement error as a source of observed cross-sectional dispersion in plant-level productivity in the US textile industry. The hypotheses that reporting error and/or price rigidity in either materials and/or output account for a substantial portion of the observed dispersion in productivity are consistent with the data. Similarly, the hypothesis that transitory product niches or fashion effects lead to differential markups and consequently dispersion in observed productivity is consistent with the data. The hypothesis that transfer pricing problems lead to persistent differences in plant-level productivity, in contrast, does not appear to be consistent with the data. Finally, the hypothesis that some plants have permanent product niches that lead to dispersion in observed productivity does not appear to be consistent with data. In order to avoid imposing a strong functional form on the data, this note follows a non-parametric methodology developed in the early paper.
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ARE FIXED EFFECTS FIXED? Persistence in Plant Level Productivity
May 1996
Working Paper Number:
CES-96-03
Estimates of production functions suffer from an omitted variable problem; plant quality is an omitted variable that is likely to be correlated with variable inputs. One approach is to capture differences in plant qualities through plant specific intercepts, i.e., to estimate a fixed effects model. For this technique to work, it is necessary that differences in plant quality are more or less fixed; if the "fixed effects" erode over time, such a procedure becomes problematic, especially when working with long panels. In this paper, a standard fixed effects model, extended to allow for serial correlation in the error term, is applied to a 16-year panel of textile plants. This parametric approach strongly accepts the hypothesis of fixed effects. They account for about one-third of the variation in productivity. A simple non-parametric approach, however, concludes that differences in plant qualities erode over time, that is plant qualities f-mix. Monte Carlo results demonstrate that this discrepancy comes from the parametric approach imposing an overly restrictive functional form on the data; if there were fixed effects of the magnitude measured, one would reject the hypothesis of f-mixing. For textiles, at least, the functional form of a fixed effects model appears to generate misleading conclusions. A more flexible functional form is estimated. The "fixed" effects actually have a half life of approximately 10 to 20 years, and they account for about one-half the variation in productivity.
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Technology Locks, Creative Destruction And Non-Convergence In Productivity Levels
April 1995
Working Paper Number:
CES-95-06
This paper presents a simple solution to a new model that seeks to explain the distribution of plants across productivity levels within an industry, and empirically confirms some key predictions using the U.S. textile industry. In the model, plants are locked into a given productivity level, until they exit or retool. Convex costs of adjustment captures the fact that more productive plants expand faster. Provided there is technical change, productivity levels do not converge; the model achieves persistent dispersion in productivity levels within the context of a distortion free competitive equilibrium. The equilibrium, however, is rather turbulent; plants continually come on line with the cutting edge technology, gradually expand and finally exit or retool when they cease to recover their variable costs. The more productive plants create jobs, while the less productive destroy them. The model establishes a close link between productivity growth and dispersion in productivity levels; more rapid productivity growth leads to more widespread dispersion. This prediction is empirically confirmed. Additionally, the model provides an explanation for S-shaped diffusion.
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