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Do Short-Term Incentives Affect Long-Term Productivity?
March 2020
Working Paper Number:
CES-20-10
Previous research shows that stock repurchases that are caused by earnings management lead to reductions in firm-level investment and employment. It is natural to expect firms to cut less productive investment and employment first, which could lead to a positive effect on firm-level productivity. However, using Census data, we find that firms make cuts across the board irrespective of plant productivity. This pattern seems to be associated with frictions in the labor market. Specifically, we find evidence that unionization of the labor force may prevent firms from doing efficient downsizing, forcing them to engage in easy or expedient downsizing instead. As a result of this inefficient downsizing, EPS-driven repurchases lead to a reduction in long-term productivity.
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Between Firm Changes in Earnings Inequality: The Dominant Role of Industry Effects
February 2020
Working Paper Number:
CES-20-08
We find that most of the rising between firm earnings inequality that dominates the overall increase in inequality in the U.S. is accounted for by industry effects. These industry effects stem from rising inter-industry earnings differentials and not from changing distribution of employment across industries. We also find the rising inter-industry earnings differentials are almost completely accounted for by occupation effects. These results link together the key findings from separate components of the recent literature: one focuses on firm effects and the other on occupation effects. The link via industry effects challenges conventional wisdom.
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Do Cash Windfalls Affect Wages? Evidence from R&D Grants to Small Firms
February 2020
Working Paper Number:
CES-20-06
This paper examines how employee earnings at small firms respond to a cash flow shock in the form of a government R&D grant. We use ranking data on applicant firms, which we link to IRS W2 earnings and other U.S. Census Bureau datasets. In a regression discontinuity design, we find that the grant increases average earnings with a rent-sharing elasticity of 0.07 (0.21) at the employee (firm) level. The beneficiaries are incumbent employees who were present at the firm before the award. Among incumbent employees, the effect increases with worker tenure. The grant also leads to higher employment and revenue, but productivity growth cannot fully explain the immediate effect on earnings. Instead, the data and a grantee survey are consistent with a backloaded wage contract channel, in which employees of financially constrained firms initially accept relatively low wages and are paid more when cash is available.
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Predictive Analytics and Organizational Architecture:
Plant-Level Evidence from Census Data
January 2019
Working Paper Number:
CES-19-02
We examine trends in the use of predictive analytics for a sample of more than 25,000 manufacturing plants using proprietary data from the US Census Bureau. Comparing 2010 and 2015, we find that use of predictive analytics has increased markedly, with the greatest use in younger plants, professionally-managed firms, more educated workforces, and stable industries. Decisions on data to be gathered originate from headquarters and are associated with less delegation of decision-making and more widespread awareness of quantitative targets among plant employees. Performance targets become more accurate, long-term oriented, and linked to company-wide performance, and management incentives strengthen, both in terms of monetary bonuses and career outcomes. Plants increasing predictive analytics become more efficient, with lower inventory, increased volume of shipments, narrower product mix, reduced management payroll and increased use of flexible and temporary employees. Results are robust to a specification based on increased government demand for data.
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An Economic Analysis of Privacy Protection and Statistical Accuracy as Social Choices
August 2018
Working Paper Number:
CES-18-35
Statistical agencies face a dual mandate to publish accurate statistics while protecting respondent privacy. Increasing privacy protection requires decreased accuracy. Recognizing this as a resource allocation problem, we propose an economic solution: operate where the marginal cost of increasing privacy equals the marginal benefit. Our model of production, from computer science, assumes data are published using an efficient differentially private algorithm. Optimal choice weighs the demand for accurate statistics against the demand for privacy. Examples from U.S. statistical programs show how our framework can guide decision-making. Further progress requires a better understanding of willingness-to-pay for privacy and statistical accuracy.
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Tax Preparers, Refund Anticipation Products, and EITC Noncompliance
December 2017
Working Paper Number:
carra-2017-10
This work examines whether the availability of tax refund anticipation products (either in the form of a loan or a temporary bank account) is associated with higher non-compliance rates for the Earned Income Tax Credit (EITC). Refund anticipation products are offered by tax preparers as a way for taxpayers to receive a refund faster or to have the tax preparation fee paid from the refund (or both). These products are, on average, costly for taxpayers compared with the average value of a refund, and they are often marketed to low-income taxpayers who may be liquidity constrained or unbanked. Both tax preparers and taxpayers have perverse incentives to use these products, and the temptation of a large refund (for the taxpayer) and added fees and interest (for the tax preparer) may induce erroneous claiming of credits. The paper examines the association between refund anticipation product use and the overpayment of EITC using tax records and survey data linked at the individual level. For taxpayers in the Current Population Survey Annual and Social Economic Supplement, EITC eligibility is estimated based on household characteristics and combined survey and administrative income information; the data include EITC credit receipt, the use of paid tax preparation or online filing, and the receipt of a refund anticipation product. Both the incorrect payment of EITC and the value of EITC overpayment are associated with preparer use, and to a lesser extent with the use of online filing, when compared with paper filing. Incorrect payment is exacerbated for preparer and online filing when a refund anticipation product is purchased. Finally, an exogenous price shock to the tax preparation industry occurred in 2010. This allows for separately identifying a 'preparer effect' on EITC noncompliance. The rate of incorrect payment and the dollar value of overpayment increased in the tax year of the shock for those using a preparer and buying a product.
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Labor Market Effects of the Affordable Care Act: Evidence from a Tax Notch
July 2017
Working Paper Number:
carra-2017-07
States that declined to raise their Medicaid income eligibility cutoffs to 138 percent of the federal poverty level (FPL) under the Affordable Care Act (ACA) created a "coverage gap'' between their existing, often much lower Medicaid eligibility cutoffs and the FPL, the lowest level of income at which the ACA provides refundable, advanceable "premium tax credits'' to subsidize the purchase of private insurance. Lacking access to any form of subsidized health insurance, residents of those states with income in that range face a strong incentive, in the form of a large, discrete increase in post-tax income (i.e. an upward notch) at the FPL, to increase their earnings and obtain the premium tax credit. We investigate the extent to which they respond to that incentive. Using the universe of tax returns, we document excess mass, or bunching, in the income distribution surrounding this notch. Consistent with Saez (2010), we find that bunching occurs only among filers with self-employment income. Specifically, filers without children and married filers with three or fewer children exhibit significant bunching. Analysis of tax data linked to labor supply measures from the American Community Survey, however, suggests that this bunching likely reflects a change in reported income rather than a change in true labor supply. We find no evidence that wage and salary workers adjust their labor supply in response to increased availability of directly purchased health insurance.
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Cogeneration Technology Adoption in the U.S.
January 2016
Working Paper Number:
CES-16-30
Well over half of all electricity generated in recent years in Denmark is through cogeneration. In U.S., however, this number is only roughly eight percent. While both the federal and state governments provided regulatory incentives for more cogeneration adoption, the capacity added in the past five years have been the lowest since late 1970s. My goal is to first understand what are and their relative importance of the factors that drive cogeneration technology adoption, with an emphasis on estimating the elasticity of adoption with respect to relative energy input prices and regulatory factors. Very preliminary results show that with a 1 cent increase in purchased electricity price from 6 cents (roughly current average) to 7 cents per kwh, the likelihood of cogeneration technology adoption goes up by about 0.7-1 percent. Then I will try to address the general equilibrium effect of cogeneration adoption in the electricity generation sector as a whole and potentially estimate some key parameters that the social planner would need to determine the optimal cogeneration investment amount. Partial equilibrium setting does not consider the decrease in investment in the utilities sector when facing competition from the distributed electricity generators, and therefore ignore the effects from the change in equilibrium price of electricity. The competitive market equilibrium setting does not consider the externality in the reduction of CO2 emissions, and leads to socially sub-optimal investment in cogeneration. If we were to achieve the national goal to increase cogeneration capacity half of the current capacity by 2020, the US Department of Energy (DOE) estimated an annual reduction of 150 million metric tons of CO2 annually ' equivalent to the emissions from over 25 million cars. This is about five times the annual carbon reduction from deregulation and consolidation in the US nuclear power industry (Davis, Wolfram 2012). Although the DOE estimates could be an overly optimistic estimate, it nonetheless suggests the large potential in the adoption of cogeneration technology.
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How Credit Constraints Impact Job Finding Rates, Sorting & Aggregate Output*
January 2016
Working Paper Number:
CES-16-25
We empirically and theoretically examine how consumer credit access affects dis- placed workers. Empirically, we link administrative employment histories to credit reports. We show that an increase in credit limits worth 10% of prior annual earnings allows individuals to take .15 to 3 weeks longer to find a job. Conditional on finding a job, they earn more and work at more productive firms. We develop a labor sorting model with credit to provide structural estimates of the impact of credit on employ- ment outcomes, which we find are similar to our empirical estimates. We use the model to understand the impact of consumer credit on the macroeconomy. We find that if credit limits tighten during a downturn, employment recovers quicker, but output and productivity remain depressed. This is because when limits tighten, low-asset, low- productivity job losers cannot self-insure. Therefore, they search less thoroughly and take more accessible jobs at less productive firms.
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Creditor Control Rights and Resource Allocation within Firms
November 2015
Working Paper Number:
CES-15-39
We examine the within-firm resource allocation effects of creditor interventions and their relationship to performance gains at firms violating financial covenants. By linking firm-level data to establishment-level data from the U.S. Census Bureau, we show that covenant violations are followed by large reductions in employment and more frequent establishment sales and closures. These operational cuts are concentrated in violating firms' noncore business lines and unproductive establishments. We conclude that refocusing activities and improving productive efficiency are important mechanisms through which creditors enhance violating firms' performance.
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