Firm Heterogeneity Research Articles

Bounded support: Success and limitations of liquidity support during times of crisis

AbstractOur paper sheds light on the complexity of liquidity injection programs by showing unintended consequences that arise when firm heterogeneity is overlooked. Utilizing firm‐level data from the Paycheck Protection Program, we find government lending effectively reduced closures, particularly if received during the first two weeks. However, we find significant heterogeneity in the effectiveness of funds, resulting from broad‐brush eligibility guidelines and differences in how firms process information. The implementation relied on the banking system, which exacerbated the distributional effects by favoring firms with stronger customer capital. Our findings highlight the importance of thoughtful liquidity distribution design to maximize its benefits.

CANVAS: A Canadian behavioral agent-based model for monetary policy

We develop the Canadian behavioral Agent-Based Model (CANVAS) that complements traditional macroeconomic models for forecasting and monetary policy analysis. CANVAS represents a next-generation modeling effort featuring enhancements in three dimensions: introducing household and firm heterogeneity, departing from rational expectations, and modeling price and quantity setting heuristics within a production network. The expanded modeling capacity is achieved by harnessing large-scale Canadian micro- and macroeconomic datasets and incorporating adaptive learning and simple heuristics. The out-of-sample forecasting performance of CANVAS is found to be competitive with a benchmark vector auto-regressive (VAR) model and a DSGE model. When applied to analyze the COVID-19 pandemic episode, our model helps explain both the macroeconomic movement and the interplay between expectation formation and cost-push shocks. CANVAS is one of the first macroeconomic agent-based models applied by a central bank to support projection and alternative scenarios, marking an advancement in the toolkit of central banks and enriching monetary policy analysis.

Innovation Concentration and Patent Market Structure

Two empirical facts concerning the increase in innovation concentration levels of U.S. industries over the last two decades have been established: innovating firms with larger market shares invest more in R&D and enter into more industries. This paper presents a model of an imperfectly competitive patent market with heterogeneous firms to show that R&D itself increases industry concentration. In the context of an imperfectly competitive patent market structure, firms generate endogenous variable markups. In particular, the price of firms' newly invented knowledge, the profit and survival rate of the innovating firms depend on the market share of the knowledge stock. Firms pay a random fixed cost in each period which together with market share determine the decision on whether to innovate in different sectors. Firms enter different sectors sequentially: they start developing new varieties in a sector with minimal competition, building up private knowledge, and then venturing into other sectors using R&D investment and accumulated knowledge. Finally, we prove that the stationary firm innovation size distribution exhibits a Pareto tail in the steady state.

Reducing the replication time for structural estimations: A successful replication of “An Anatomy of International Trade” using GPU computing

AbstractEaton, Kortum, and Kramarz (2011) (EKK) discovered empirical patterns from French manufacturing firms that a baseline firm heterogeneity model could not explain. The authors proposed and estimated a model that closely matches the patterns observed in French data. This paper successfully replicates their findings using author‐provided data, re‐implementing their algorithms in Python and leveraging graphics processing unit computing to significantly boost computational speed. Applying the model to Chinese manufacturing data, despite differences in context, showed that the model explains most observed patterns well.

FIRM SIZE AND BUSINESS CYCLES WITH CREDIT SHOCKS

AbstractI study the macroeconomic implications of firm heterogeneity in the presence of financial frictions. I build a business cycle model in which firm size is jointly determined by idiosyncratic productivity and collateral constraints. I estimate skewed idiosyncratic shocks and align the model with the evidence on firm size, leverage, and investment moments. The extent of resource misallocation is driven by a small number of highly productive but financially constrained firms. A credit shock severely affects such firms, further constraining their ability to borrow. This generates a large and persistent economic downturn that is comparable to the Great Recession.

Firm heterogeneity and export behavior: evidence from Tunisia

ABSTRACT We use unique enterprise survey data to explore the export behavior of firms in Tunisia, a small, trade-dependent country with a complex policy environment regarding exporting. Firms may export directly or indirectly through intermediaries, and can also sell to ‘offshore’ firms, which are export manufacturing firms with special legal status. Firm size, a proxy for productivity, is strongly associated with exporting of either type as well as with sales to offshore firms. In contrast to some studies, exporting is not positively associated with firm age (i.e., experience). Domestic-owned firms are more likely to use intermediaries to export while foreign-owned firms as well as those with more educated managers are more likely to export directly. Multinomial logit results reject the hypothesis of progression from indirect exports through direct plus indirect exporting and then to direct-only exporting as firm size increases; instead, the largest exporting firms are more likely to combine direct and indirect exporting, possibly to reduce risk. The findings from this study – the first to examine the heterogeneity of exporting behavior in Tunisia – reveal a complex picture of such behavior and confirm the importance of trade intermediaries for less sophisticated firms (those with lower manager education and internet access), pointing to potential measures to encourage exporting among such enterprises. The findings also suggest that efforts to encourage exporting may also improve firms’ ability to sell to ‘offshore’ firms, enhancing the so far elusive linkages of that sector with the rest of the economy.

Firm Heterogeneity and India’s Manufacturing Exports: Lessons on Protection and Trade Theory

ABSTRACT Empirical examinations of heterogeneity among Indian manufacturing firms provide helpful lessons for trade theories and policies. Using descriptive statistics of cross-section data for 2011, 2015, and 2019, the asymptotic Wilcoxon-Mann-Whitney test, and regression analysis, the study reveals that firms are heterogeneous within each 4-digit National Industrial Classification (NIC) category, exporting firms are more productive than non-exporters, and exporter premia decline with trading activities. The study concludes that recent protectionist policies reduced extensive trade margins, firm heterogeneity, and productivity in the Indian manufacturing sector.

Computing Capital Stocks in the German Social Security Records and Quantifying Their Role for Wage Inequality

Abstract We develop a method to impute capital stocks from investments for a sub-sample of firms in the German social security records and implement a machine-learning algorithm to predict capital stocks for the universe of firms. These capital stocks explain 40% of the variation in capital stocks of the Bureau van Dijk data. We make our data available for other researchers. We find that these capital stocks explain a sizeable fraction of wage inequality by extending the variance decomposition of Card et al. (2013), suggesting that rising firm heterogeneity in capital intensity may further amplify wage inequality. (JEL codes: C81, D24, and J31)

Border carbon adjustment (BCA) and heterogeneous firms trade

Border carbon adjustment (<scp>BCA</scp>) and heterogeneous firms trade

Firms heterogeneity and intraindustry reallocation: Beyond dichotomous partitioning

AbstractThis paper studies the trade‐induced reallocation of resources beyond the conventional partition in trade models. It challenges the typical partition of firms into domestic‐only and trading entities. The paper demonstrates that reallocation across heterogeneous firms can occur without such dichotomous partitioning. For reallocation to happen, firms must have different exposure to international markets. The paper uses offshoring models with labor market frictions to illustrate this principle. The offshoring model reveals that labor market frictions induce variations in wage and offshoring intensity. These variations then lead to differential impacts from offshoring cost shifts, resulting in reallocation across heterogeneous firms without partition.

INTERNATIONAL SPILLOVERS OF QUALITY REGULATIONS

AbstractThis article investigates the international spillover effects of nondiscriminatory product regulations, for example, quality standards, in a multicountry general equilibrium framework with firm heterogeneity. In the presence of variable markups, when regulations are applied as a fixed cost consistent with stylized facts, they generate a positive spillover on the rest of the world as they induce entry of high‐quality firms and improve the terms of trade of the nonimposing countries. The benefits of such regulations are not fully realized under noncooperative policy settings, rationalizing international cooperation. We estimate our model to quantify the effects of regulations on various welfare‐relevant outcomes.

Returns to workplace connectivity: evidence from Brazil

ABSTRACT We empirically investigate the quantitative effect of workplace connectivity on workers’ wages. Connectivity measures a worker’s rank within the workplace’s connection hierarchy, considering the number of co-workers in the same occupation and firm (workplace) and the relative tenure of immediate co-workers. We construct a connectivity index as the ratio of a worker’s tenure-weighted connections to the total number of connections in the workplace, using a worker’s job tenure and the connections formed over time to obtain a relative measurement of their connectivity. Using a unique dataset from the Brazilian Annual Social Information Report (RAIS), we estimate the (fixed effect) wage equation, controlling for work and firm heterogeneity. Our results show positive and statistically significant returns to connectivity. The effect is particularly pronounced for workers in administrative services and industrial goods production, those at the bottom of the connectivity distribution, and those in medium-sized firms. We also find that a worker’s connectivity is more relevant for wages than their tenure.

A simple model of buyer–seller networks in international trade

The recent literature on firm-to-firm trade has documented salient empirical regularities of the buyer–seller network. We show that surprisingly many of these regularities emerge by superimposing the stochastic balls-and-bins structure of Armenter and Koren (2014) to firms in a classical Krugman (1980) model. Our approach amounts to a re-interpretation of Krugman (1980) and relies on randomized bundling of Krugman-varieties into heterogeneous firms, economically neutral ‘sales units’ that import foreign varieties but belong to local firms, and a statistical reporting threshold that applies to firm-to-firm transactions. We argue that our model provides an important benchmark for the assessment of theoretical models that aim to identify the determinants of firm-to-firm networks.

Pharmaceutical innovation collaboration, evaluation, and matching

This paper theoretically studies pharmaceutical innovation collaborations, where heterogeneous firms compete for heterogeneous academics. At an interim stage, the firm evaluates the project, which allows it to monitor academics and decide whether to terminate the project to avoid the loss from a future failure. This paper explores the contract, project termination strategy, and collaboration matching. The firm’s innovation strategy (exploitations or explorations) determines the evaluation structure, which may affect the market equilibrium. By considering different innovation strategies, this paper shows that in each case, the equilibrium matching is unique (either positive or negative assortative). Consequently, the chosen innovation strategy plays a pivotal role in shaping equilibrium matching outcomes. These findings provide theoretical insights into pharma-academic alliances, shed light on the observed positive or negative assortative properties in the market, and advocate for the consideration of innovation strategies and evaluation structures in future research endeavors. Moreover, this paper also provides several empirical and policy implications.

Technological progress, fiscal policy, and economic fluctuations in China: Evidence from the heterogeneous firm DSGE model during the COVID-19 pandemic

Against the backdrop of the global COVID-19 pandemic and the deepening structural changes in the Chinese economy, this study presents a four-sector dual Dynamic Stochastic General Equilibrium (DSGE) model that incorporates households, heterogeneous firms, capitalists, and the government, taking into account the current domestic "dual economic structure." The model is used to simulate and analyze the impacts of fiscal policies and technological progress on diverse economic entities during the pandemic. The study reveals several key findings: (1) the pandemic outbreak has a significant short-term impact on the economy, disproportionately affecting small and microenterprises but with higher natural recovery rates compared with large and medium-sized enterprises; (2) unbiased fiscal policies have positive effects on output and capital, with larger output recovery effects observed for large and medium-sized enterprises, while capital recovery effects are less favorable; (3) technological progress contributes to rapid and stable economic growth, yielding overall benefits for large and medium-sized enterprises, but leading to significant crowding-out effects on small and microenterprises; and (4) solely increasing tax support for small and microenterprises, assuming constant tax revenue sources, does not enhance the overall resilience of the economy. These research findings provide policymakers with a dynamic microeconomic foundation within a macroeconomic framework, thereby enhancing the efficacy and precision of policies.

Style over substance? Advertising, innovation, and endogenous market structure

While firms use both innovation and advertising to boost profits, markups, and market shares, their broader social implications vary substantially. We study their interaction and analyze their implications for competition, industry dynamics, growth, and welfare. We develop an oligopolistic general-equilibrium growth model with firm heterogeneity. Market structure is endogenous, and firms’ production, innovation, and advertising decisions interact strategically. We find advertising reduces static misallocation, but also depresses growth through a substitution effect with R&D. Although advertising is found to be socially useful, taxing it could simultaneously increase dynamic efficiency, contain excessive advertising spending, and raise revenue, while still reducing misallocation.

An evolutionary dynamical analysis of low-carbon technology diffusion among enterprises in the complex network

The diffusion of low-carbon technologies (LCTs) is a critical channel to mitigate carbon emissions. The government plays an important role in guiding the proliferation of LCTs among enterprises, but due to issues such as regulatory costs, unequal resource distribution, and inefficient regulation it is inevitable that there will be inadequate supervision. Therefore, this study incorporates the government’s probabilistic regulation into the research framework and constructs a networked evolutionary game model in which the government, enterprises, and consumers play a role together. Based on the constructed game model, we explore the impact of carbon taxes, subsidies, probabilistic government supervision, market demand, initial fixed investment cost, network size, and firm heterogeneity on the diffusion of LCTs. In addition, we extend the model to consider scenarios involving dynamic market demands and government policies The results demonstrate that factors such as subsidies, probabilistic government supervision, market demand, network size, and firm heterogeneity promote the diffusion of LCTs, while carbon taxes and initial fixed investment cost under a small total demand inhibit the spread of LCTs. Our exploration sheds some light on the diffusion of LCTs from the perspective of demand and supply sides, which provides an effective reference for the formulation of relevant policies.

Transformative firm-level agency: A case study of small and medium-sized enterprises (SMEs) in the Swiss wood-processing industry

This paper investigates different enterprise types as potential agents of transformative change in the wood-processing industry. To do so, it combines the concept of transformative enterprise with recent accounts of agency in evolutionary economic geography. We examine small and medium-sized enterprises (SMEs) in the wood-processing industry because by using a renewable resource that stores CO2 and has the potential to replace polluting materials, they could become frontrunners in sustainability transformations through a wood-based bioeconomy. Empirically, we draw on a qualitative case study with 24 wood-processing SMEs in the Canton of Bern, Switzerland. Based on the concept of transformative enterprise, we identify five enterprise types: silent ecologists, social pioneers, visionary nonconformists, ambitious entrepreneurs, and pragmatist traditionalists. The first four types show many characteristics indicating transformative firm-level agency while only the ambitious entrepreneurs seem capable of inducing changes at the system-level. This is due to several limits of change agency, which we also illuminate. Overall, our study sheds light on the heterogeneity of firms as change agents in the context of sustainability transformation.

Firm Heterogeneity and Regional Choice of China's Outward Foreign Direct Investment: A Review

This literature review focuses on the impact of firm heterogeneity on China's foreign direct investment (OFDI) region selection. The research shows that enterprise heterogeneity, such as productivity, technology and capital structure, significantly affects the OFDI decision and regional choice of Chinese enterprises. These findings not only enrich the understanding of the theory of enterprise heterogeneity, but also provide practical guidance for Chinese enterprises to formulate more effective internationalization strategies, optimize the layout of production networks, and improve OFDI efficiency and risk management capabilities. Looking forward to the future, the academic community can further study the evolution trend of enterprise heterogeneity, the role of emerging markets, the specific impact of policy environment changes on OFDI, and how digital transformation affects the role of enterprise heterogeneity in OFDI decision-making.

Forward contracting and the endogenous activity of heterogeneous firms

AbstractForward contracting in an ‐firm quantity‐setting oligopoly with heterogeneous costs introduces the possibility that relatively efficient firms deter the activity of inefficient rivals by reducing their margins. The equilibrium number of firms producing positive quantities can be any of depending on the level of demand relative to firm‐specific activity thresholds, with more firms active at higher demand levels. If only one firm is active, the Bertrand outcome is obtained. This potential reduction of the number of active firms may lessen the procompetitive effect of forward sales, but does not eliminate it entirely. We explore the competition policy implications of the endogenous activity of firms, in particular for merger analysis.