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The Effects of Environmental Regulation on the Competiveness of U.S. Manufacturing
January 2011
Working Paper Number:
CES-11-03
Whether and to what extent environmental regulations influence the competitiveness of firms remains a hotly debated issue. Using detailed production data from tens of thousands of U.S. manufacturing plants drawn from Annual Survey of Manufactures, we estimate the effects of environmental regulations'captured by the Clean Air Act Amendments' division of counties into pollutant-specific nonattainment and attainment categories'on manufacturing plants' total factor productivity (TFP) levels. We find that among surviving polluting plants, a nonattainment designation is associated with a roughly 2.6 percent decline in TFP. The regulations governing ozone have particularly discernable effects on productivity, though effects are also seen among particulates and sulfur dioxide emitters. Carbon monoxide nonattainment, on the other hand, appears to increase measured TFP, though this appears to be concentrated among refineries. When we apply corrections for two likely sources of positive bias in these estimates (price mismeasurement and sample selection on survival), we estimate that the total TFP loss for polluting plants in nonattaining counties is 4.8 percent. This corresponds to an annual lost output in the manufacturing sector of roughly $14.7 billion in 1987 dollars ($24.4 billion in 2009 dollars). These costs have important implications for both the intensity and location of firm expansions.
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Local Environmental Regulation and Plant-Level Productivity
September 2010
Working Paper Number:
CES-10-30R
This paper examines the impact of environmental regulation on the productivity of manufacturing plants in the United States. Establishment-level data from three Censuses of Manufactures are used to estimate 3-factor Cobb-Douglas production functions that include a measure of the stringency of environmental regulation faced by manufacturing plants. In contrast to previous studies, this paper examines effects on plants in all manufacturing industries, not just those in 'dirty' industries. Further, this paper employs spatial-temporal variation in environmental compliance costs to identify effects, using a time-varying county-level index that is based on multiple years of establishment-level data from the Pollution Abatement Costs and Expenditures survey and the Annual Survey of Manufactures. Results suggest that, for the average manufacturing plant, the effect on productivity of being in a county with higher environmental compliance costs is relatively small and often not statistically significant. For the average plant, the main effect of environmental regulation may not be in the spatial and temporal dimensions.
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The Impact of Plant-Level Resource Reallocations and Technical Progress on U.S. Macroeconomic Growth
December 2009
Working Paper Number:
CES-09-43
We build up from the plant level an "aggregate(d) Solow residual" by estimating every U.S. manufacturing plant's contribution to the change in aggregate final demand between 1976 and 1996. We decompose these contributions into plant-level resource reallocations and plant-level technical efficiency changes. We allow for 459 different production technologies, one for each 4- digit SIC code. Our framework uses the Petrin and Levinsohn (2008) definition of aggregate productivity growth, which aggregates plant-level changes to changes in aggregate final demand in the presence of imperfect competition and other distortions and frictions. On average, we find that aggregate reallocation made a larger contribution than aggregate technical efficiency growth. Our estimates of the contribution of reallocation range from 1:7% to2:1% per year, while our estimates of the average contribution of aggregate technical efficiency growth range from 0:2% to 0:6% per year. In terms of cyclicality, the aggregate technical efficiency component has a standard deviation that is roughly 50% to 100% larger than that of aggregate total reallocation, pointing to an important role for technical efficiency in macroeconomic fluctuations. Aggregate reallocation is negative in only 3 of the 20 years of our sample, suggesting that the movement of inputs to more highly valued activities on average plays a stabilizing role in manufacturing growth.
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IT for Information-Based Partnerships: Empirical Analysis of Environmental Contingencies to Value Co-Creation
December 2009
Working Paper Number:
CES-09-42
We empirically examine IT value co-creation in supply chains, incorporating key contingencies of the competitive environment. Prior research suggests that IT used for strategic informationbased partnerships may benefit supply chains facing higher volatility, enabling tightly coupled integration and enhanced strategic response to changing consumer preferences. Analyzing a unique dataset comprising over 6,000 U.S. manufacturing plants, we obtain three principal results. First, value co-creation using either IT for strategic information-based partnerships (ITIP) or merely IT for transaction efficiency (ITT) is positive and significant. Second, the co-created value from ITIP is larger than that for (ITT), suggesting that information-based partnerships, while perhaps requiring a greater investment, yield a higher return. Third and most importantly, co-created value from using IT for information-based partnerships is positively moderated by demand volatility, i.e., value is greater in higher demand volatility environments. However, we find the opposite is true for using IT for efficient transactions. This is a new contribution to the literature and has important theoretical and practical implications.
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Earnings Inequality and Coordination Costs: Evidence from U.S. Law Firms
September 2009
Working Paper Number:
CES-09-24
Earnings inequality has increased substantially since the 1970s. Using evidence from confidential Census data on U.S. law offices on lawyers' organization and earnings, we study the extent to which the mechanism suggested by Lucas (1978) and Rosen (1982), a scale of operations effect linking spans of control and earnings inequality, is responsible for increases in inequality. We first show that earnings inequality among lawyers increased substantially between 1977 and 1992, and that the distribution of partner-associate ratios across offices changed in ways consistent with the hypothesis that coordination costs fell during this period. We then propose a 'hierarchical production function' in which output is the product of skill and time and estimate its parameters, applying insights from the equilibrium assignment literature. We find that coordination costs fell broadly and steadily during this period, so that hiring one's first associate leveraged a partner's skill by about 30% more in 1992 than 1977. We find also that changes in lawyers' hierarchical organization account for about 2/3 of the increase in earnings inequality among lawyers in the upper tail, but a much smaller share of the increase in inequality between lawyers in the upper tail and other lawyers. These findings indicate that new organizational efficiencies potentially explain increases in inequality, especially among individuals toward the top of the earnings distribution.
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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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Cementing Relationships: Vertical Integration, Foreclosure, Productivity, and Prices
December 2008
Working Paper Number:
CES-08-41
This paper empirically investigates the possible market power effects of vertical integration proposed in the theoretical literature on vertical foreclosure. It uses a rich data set of cement and ready-mixed concrete plants that spans several decades to perform a detailed case study. There is little evidence that foreclosure is quantitatively important in these industries. Instead, prices fall, quantities rise, and entry rates remain unchanged when markets become more integrated. These patterns are consistent, however, with an alternative efficiency-based mechanism. Namely, higher productivity producers are more likely to vertically integrate and are also larger, more likely to survive, and charge lower prices. We find evidence that integrated producers' productivity advantage is tied to improved logistics coordination afforded by large local concrete operations. Interestingly, this benefit is not due to firms' vertical structures per se: non-vertical firms with large local concrete operations have similarly high productivity levels.
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Manufacturing Plants' Use of Temporary Workers: An Analysis Using Census Micro Data
December 2008
Working Paper Number:
CES-08-40
Using plant-level data from the Plant Capacity Utilization (PCU) Survey, we examine how manufacturing plants' use of temporary workers is associated with the nature of their output fluctuations and other plant characteristics. We find that plants tend to hire temporary workers when their output can be expected to fall, a result consistent with the notion that firms use temporary workers to reduce costs associated with dismissing permanent employees. In addition, we find that plants whose future output levels are subject to greater uncertainty tend to use more temporary workers. We also examine the effects of wage and benefit levels for permanent workers, unionization rates, turnover rates, seasonal factors, and plant size and age on the use of temporary workers; based on our results, we discuss various views of why firms use temporary workers.
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Linking Investment Spikes and Productivity Growth: U.S. Food Manufacturing Industry
October 2008
Working Paper Number:
CES-08-36
We investigate the relationship between productivity growth and investment spikes using Census Bureau's plant-level data set for the U.S. food manufacturing industry. We find that productivity growth increases after investment spikes suggesting an efficiency gain or plants' learning effect. However, efficiency and the learning period associated with investment spikes differ among plants' productivity quartile ranks implying the differences in the plants' investment types such as expansionary, replacement or retooling. We find evidence of both convex and non-convex types of adjustment costs where lumpy plant-level investments suggest the possibility of non-convex adjustment costs and hazard estimation results suggest the possibility of convex adjustment costs. The downward sloping hazard can be due to the unobserved heterogeneity across plants such as plants' idiosyncratic obsolescence caused by different R&D capabilities and implies the existence of convex adjustment costs. Food plants frequently invest during their first few years of operation and high productivity plants postpone investing due to high fixed costs.
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Productivity Dispersion and Input Prices: The Case of Electricity
September 2008
Working Paper Number:
CES-08-33
We exploit a rich new database on Prices and Quantities of Electricity in Manufacturing (PQEM) to study electricity productivity in the U.S. manufacturing sector. The database contains nearly 2 million customer-level observations (i.e., manufacturing plants) from 1963 to 2000. It allows us to construct plant-level measures of price paid per kWh, output per kWh, output per dollar spent on electric power and labor productivity. Using this database, we first document tremendous dispersion among U.S. manufacturing plants in electricity productivity measures and a strong negative relationship between price per kWh and output per kWh hour within narrowly defined industries. Using an IV strategy to isolate exogenous price variation, we estimate that the average elasticity of output per kWh with respect to the price of electricity is about 0.6 during the period from 1985 to 2000. We also develop evidence that this price-physical efficiency tradeoff is stronger for industries with bigger electricity cost shares. Finally, we develop evidence that stronger competitive pressures in the output market lead to less dispersion among manufacturing plants in price per kWh and in electricity productivity measures. The strength of competition effects on dispersion is similar for electricity productivity and labor productivity.
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