Negative Demand Research Articles

The impact of asset specificity on corporate tax avoidance: Do financial constraints and product market power matter?

Our findings reveal that asset specificity significantly enhances corporate tax avoidance, with firms exhibiting lower cash effective tax rates. Firms with higher asset specificity also engage in more aggressive tax avoidance strategies, including tax dodging and long-term tax planning. Additionally, our analysis indicates that the positive impact of asset specificity on tax avoidance is less pronounced in firms with lower ESG performance but is more pronounced in those facing negative demand shocks or operating during periods of economic policy uncertainty. We also find that financial constraints and product market power mediate the relationship between asset specificity and tax avoidance, with financial constraints serving as the dominant economic channel. These findings offer new insights into the factors driving corporate tax avoidance and highlight the complex interplay between asset specificity, financial constraints, product market power, and tax planning strategies.

Demand Information Forecasting and Sharing in a Remanufacturing Closed‐Loop Supply Chain

ABSTRACTWe delve into the incorporation of demand information forecasting and the subsequent information sharing in a closed‐loop supply chain (CLSC). We consider the competition between an original equipment manufacturer (OEM) and an independent remanufacturer (IR). The OEM autonomously determines whether to forecast demand information and further considers whether to disseminate the realized demand signal to the IR. We find that the IR adopts either a partial‐ or a full‐remanufacturing strategy to compete with the OEM. The OEM shares negative demand signals with the IR, as such signals decrease the retail prices and increase the production quantity of all‐new products. Additionally, the sharing of negative demand signals helps alleviate the cannibalization effect caused by the introduction of remanufactured products. When examining the optimal sharing strategy in equilibrium, the OEM only invests in forecasting demand if the forecasting cost is relatively low. Furthermore, the numerical studies reveal that, in equilibrium, the OEM does not necessarily benefit from possessing more precise demand information. Additionally, we assess the influence of consumers' environmental awareness on the production decisions of both companies. The findings indicate that heightened environmental awareness prompts the IR to adopt a full‐remanufacturing strategy, and the information management strategies remain robust.

Commissioning of Evening Dental Clinics to overcome Negative Demand

Commissioning of Evening Dental Clinics to overcome Negative Demand

Furloughing Employees with Uncertain Return? Management of Labor Frictions and Inventory Under Demand Shock

We assess how a retailer can manage inventories and labor under an extreme condition such as a temporary negative demand shock due to a pandemic or an economic turmoil. This analysis incorporates labor market frictions whereby firms incur deadweight costs associated with hiring and firing employees, as well as the option to furlough labor. We examine the impact of these frictions on a retail firm's optimal operating policies around inventory level, furlough, and layoffs. We find that labor market frictions condition the inventory and the level of employment in two ways. First, they lead to underinvestment in inventories, which limits recovery and employment in the postshock period. Second, high labor market frictions motivate the firm to conservatively downsize workforce during the negative demand period leading to higher employment, when compared to downsizing without friction. A significant contribution of our study lies in delineating the optimal furlough decisions and quantifying the impact of the furlough option on inventory and labor decisions. We demonstrate the conditions under which it is optimal for the retailer to either (i) fully downsize labor and leverage the furlough option in the labor market, or (ii) maintain excess labor while also opting to furlough a portion of the workforce. During an extreme event such as a temporary negative demand shock, our results highlight the need for a coordinated effort when implementing governmental subsidy policies on alleviating labor and inventory reductions by accounting for labor market frictions and furlough support.

Weather-related disasters and inflation in the euro area

This article investigates the impact of weather-related disasters on inflation in the euro area over the period 1996–2021. Using a panel structural vector autoregression approach, we explore whether weather-related disasters have a significant and persistent effect on inflation, as well as the role that demand-side and supply-side channels play as drivers of inflation. We also analyse the heterogeneous effects of inflation on different product categories. Our results suggest that weather-related disasters have a positive, non-persistent effect on inflation. This reflects the prevalence of negative supply shock channels and positive demand shock channels over negative demand shock channels. We also find that weather-related disasters have more pronounced effects on the inflation of product categories that represent a higher proportion of the spending of low-income households, implying that disasters reinforce inflation inequality. Overall, our results suggest that, as the climate crisis deepens, it might become increasingly challenging for the European Central Bank to control inflation and its inequality effects.

Executive compensation and worker wages during the global trade collapse: Evidence from Japanese firms

Widening income inequality is a serious social concern in many countries. We examine the causal effect of a negative demand shock on executive compensation and worker wages using a quasi-natural experiment, considering Japanese firms that experienced a sudden and substantial export decline following the global financial crisis in the late 2000s. Worker wages tended to decline significantly more relative to executive compensation after the crisis in firms depending more on exports, causing a wider pay differential. We establish the robustness of our difference-in-difference results by considering selection into exporters, excluding sporadic exporters, and controlling for foreign ownership or liquidity.

Nonlinear effects of uncertainty shocks: State dependency and asymmetry

AbstractThe nonlinear effects of uncertainty shocks on U.S. macroeconomy are examined using a smooth transition VAR model in which the dynamic relationship between the variables changes with the level of economic policy uncertainty. Our results show that the nonlinear effects of uncertainty shocks depend on the current level of uncertainty, with uncertainty shocks behaving more like stronger demand shocks in the high‐uncertainty period than in the low period. Hence, we can conclude that the negative demand shock channel of uncertainty shocks, documented in the literature, is valid especially in the high‐uncertainty period.

Business cycles and healthcare employment.

Is healthcare employment recession-proof? We examine the long-standing hypothesis that healthcare employment is stable across the business cycle. We explicitly distinguish between negative aggregate demand and supply shocks in studying how healthcare employment responds to recessions, and show that this response depends largely on the type of the exogenous shock triggering the recession. First, aggregate healthcare employment responds procyclically during demand-induced recessions but remains stable during supply-induced recessions. Second, healthcare utilization drops significantly during demand-induced recessions, explaining the decline in healthcare employment during these periods. Finally, there is significant heterogeneity in the employment responses of the healthcare sub-sectors. While healthcare employment in most sub-sectors responds procyclically during recessions caused by both negative demand and supply shocks, it responds countercyclically in nursing-dominant sectors. Importantly, by isolating the recessionary impact of negative aggregate demand shocks from supply shocks on healthcare employment, we provide new empirical evidence that healthcare employment, in general, is not recession-proof.

The opportunities and challenges of crisis cartel during demand disruptions: A game theoretic study

AbstractCrisis cartel refers to the collaboration between organisations during unprecedented conditions to counter the effect of disruption during an economic crisis. Despite its prevalence, scholarly attention to this phenomenon remains scant. Employing a dual‐channel framework involving manufacturers, online retailers (ORs) and traditional brick‐and‐mortar retailers (BMRs), the authors scrutinised the efficacy of crisis cartels in mitigating the impact of negative demand disruptions. Three distinct game theoretic frameworks were applied to model the interactive dynamics between the supply chain partners, namely, the horizontal Nash game, the Stackelberg game and the collusion game. It was observed that, during disruption under crisis cartels, the optimal price and profit of both the downstream channel partners increased, whereas the optimal order quantity decreased. Manufacturers and consumers are worse off in terms of profit and consumer surplus, respectively, during the crisis cartel engagement between BMR and OR. Nonetheless, a crisis cartel emerged as a potential solution to address negative demand disruptions. In evaluating post‐disruption cartels, the study finds the necessity of regulating crisis cartels. The findings offer valuable insights for policymakers, market regulators and practitioners, suggesting the need for strategic regulatory adjustments to effectively manage disruptions through the prudent utilisation of crisis cartel as a proactive management tool. The study expands existing theory by providing novel insights into the strategic interactions and dynamics within collaborative responses to demand disruptions, thus offering a pioneering approach to crisis management research.

Family-Leave Mandates and Female Labor at U.S. Firms: Evidence from a Trade Shock

Abstract We examine how the 1993 Family and Medical Leave Act (FMLA) impacts the gender composition at U.S. firms experiencing a negative demand shock. Combining changes in Chinese imports across industries between 2000 and 2003 and a sharp regression discontinuity to identify FMLA status, we find that an increase in import competition decreases the share of female employment, earnings, and promotions at FMLA relative to non-FMLA firms. This effect is driven by women in prime childbearing ages and without college degrees; and is pronounced at firms with all male managers. These results suggest that job-protected leave mandates may exacerbate gender inequalities in response to adverse shocks.

Trust and monetary policy

AbstractWe analyze how trust affects the transmission of negative demand and supply shocks using a behavioral macroeconomic model. We define trust to have two dimensions: trust in the central bank's inflation target and trust in the central bank's capacity to stabilize the business cycle. We find, first, that when large negative shocks occur, the subsequent trajectories taken by output gap and inflation typically coalesce around a good and a bad trajectory. Second, these good and bad trajectories are correlated with movements in trust. In the bad trajectories, trust collapses, and in the good trajectories, it is not affected. This feature is stronger when a negative supply shock occurs than in the case of a negative demand shock. Third, initial conditions, in particular the initial state of inflation and output expectations, matter. Unfavorable initial expectations drive the economy into a bad trajectory, and favorable initial expectations produce good trajectories. Fourth, we analyze the sensitivity of our results with respect to the size of the shocks. Fifth, we derive implications of our results for our capacity of making forecasts about the effects of large demand and supply shocks.

Asymmetric impact of oil price shocks on inflation: Evidence from quantile-on-quantile regression

In this paper, we explore the asymmetric impact of different oil price shocks on inflation after decomposing the shocks into supply shocks, demand shocks, and risk shocks. Using the quantile-on-quantile regression (QQR) approach, we reveal that when inflation is positive, oil supply shocks have a negative impact on inflation, and demand shocks affect it asymmetrically. Positive demand shocks have a positive effect on inflation, while negative demand shocks affect inflation negatively. In a deflationary environment, positive supply shocks and negative demand shocks do not have a significant impact on inflation, while negative supply shocks and positive demand shocks are conducive to alleviating deflation. The risk shocks affect inflation insignificantly in most of the periods. Only when the risk shocks are dramatically high, they will negatively affect inflation which is in a positive situation. However, the risk shocks no longer affect inflation significantly when inflation is also extremely high. Our conclusions are robust after being compared with the results of the quantile regression approach. We finally explore the time-varying characteristic of impact, finding that the influence of shocks is relatively higher during the major supply, demand, and risk shock events than in other periods.

Demand or Supply? An empirical exploration of the effects of climate change on the macroeconomy

Using an original panel data set for 24 OECD countries over the sample 1990–2019 and a multivariate empirical macroeconomic framework for business cycle analysis, the paper tests the combined macroeconomic effects of climate change, environmental policies and green innovation. Overall, we find evidence of significant macroeconomic effects over the business cycle: physical risks act as negative demand shocks while transition risks act as downward supply movements. The disruptive effects on the economy typical of a disorderly transition are exacerbated for low income, high emission countries with no history of environmental policy or with a high exposure to natural disasters. In general, one size does not fit all and results support the need for a (possibly country-specific) policy mix to counteract climate change with a balance between demand-pull and technology-push policies.

Asymmetric Disclosure, Noise Trade, and Firm Valuation

ABSTRACTWe study the impact of asymmetric (i.e., conservative or aggressive) disclosure on a firm’s price in the classic setting in which its stock is traded by risk-averse investors and noise or liquidity traders. We show that asymmetric accounting policies alter the relative risk faced by investors when they short versus long, which causes market liquidity to differ for positive versus negative demand shocks. As a result, accounting conservatism raises firms’ valuations and lowers their expected returns. We further demonstrate that the relationship between accounting informativeness and expected returns depends upon the skewness of investors’ prior beliefs. Finally, we find that a firm that can commit to an accounting policy can tailor this policy to benefit from noise trade and foster overvaluation.JEL Classifications: D72; D82; D83; G20; M41.

Do wholesale pricing strategies matter during asymmetric disruptions? A game theoretic analysis

PurposeIn most economies, there are rules from the market regulators or government to sell at an equal wholesale price (EWP). But when one upstream channel is facing a negative demand disruption and another positive, EWP can create extra pressure on the disadvantageous supply chain partner, which faces negative disruption. The purpose of this study is to analyse the impact of EWP and the scope of the discriminatory wholesale price (DWP) during disruptions.Design/methodology/approachFor the study, the authors used a dual-channel supply chain consisting of a manufacturer, online retailer (OR) and traditional brick-and-mortar (BM) retailer. Stackelberg game is used to model the interaction between the upstream and downstream channel partners, and the horizontal Nash game to analyse the interaction within downstream channel partners. For modelling asymmetric disruption, the authors took instances from the lock-down and post-lock-down periods of the COVID-19 pandemic, where consumers flow from BM retailer to OR store.FindingsBy analysing the disruption period, the authors found that this asymmetric disruption is detrimental to the BM channel, favourable to OR and has no impact on the manufacturer. But with DWP, the authors found that the profit of the BM channel and manufacturer can be increased during disruption. Though the profit of the OR decreased, it was found to be higher than in the pre-disruption period. Under DWP, the consumer surplus increased during disruption, making it favourable for the customers also. Thus, DWP can aid in creating a win-win strategy for all the supply chain partners during asymmetric disruption. Later as an extension to the study, the authors analysed the impact of the consumer transfer factor and found that it plays a crucial role in the optimal decisions of the channel partner during DWP.Originality/valueVery scant literature analyses the intersection of DWP and disruptions. To the best of the authors’ knowledge, this study, for the first time uses DWP as a tool to help the disadvantageous supply chain partner during asymmetric disruptions. The study findings will assist the government, market regulators and manufacturers in revamping the wholesale pricing policies and strategies to help the disadvantageous supply chain partner during asymmetric disruption.

What is the role of perceived oil price shocks in inflation expectations?

Not much. We identify the perceived oil price shock, as well as perceived global demand and supply shocks, using sign restrictions in a factor-augmented vector autoregression model that includes forecasts for crude oil price growth, real GDP growth, and inflation across 84 economies. The perceived oil price shock explains only 10% of the fluctuations, on average, in global inflation expectations from January 2012 to December 2022, and accounts for an even smaller fraction during the COVID-19 pandemic. Allowing for the oil price noise shock – reflecting exogenous shifts in agents’ optimism and pessimism – does not materially change the limited pass-through of the perceived oil price shock to inflation expectations. In contrast, perceived global supply and demand shocks dominate, especially since the onset of the pandemic. Over the first eight months, professional forecasters viewed the pandemic, on net, as a negative demand shock and lowered their short-term inflation expectations. In early 2021, professionals quickly switched their views and sharply increased their inflation expectations amid burgeoning and persistent supply chain disruptions and labor constraints.

Supply Constraints and Search Equilibrium in Office Markets

AbstractWe present a new conceptual framework to estimate office supply elasticity, where net business survival, physical and economic mismatch are used to identify frictional and structural vacancy. Alongside regulatory and geographical constraints, we also find an unobserved feature of supply elasticity linked to natural vacancy. Our results confirm that US Metropolitan Statistical Areas are generally supply inelastic and the search and matching process plays a key role in supply dynamics. In the least inelastic markets, investors tend to be more flexible to respond to negative demand shocks. As a result, we observe a reduction in structural vacancy and a subsequent increase in cyclical vacancy given the slow short-term movement in absorption. These findings also shed light upon office market dynamics during the COVID-19 period.

INVESTIGATING RACIAL SALARY DISCRIMINATION AND THE ROLE OF BARGAINING POWER: EVIDENCE FROM THE NBA

This paper investigates racial salary discrimination by analyzing an NBA dataset from 1985 to 2022. My findings reveal that non-white players receive around 10% lower remuneration than their white counterparts, after accounting for the player, team and consumer attributes. I investigate this salary gap, indicative of discrimination against black players, by studying the salary contracts under which players possess different levels of bargaining power. I find that this earning shortfall is strongly persistent under contracts where employers have monopsony and oligopsony power, suggesting that slight relaxation of the competition in the contracting environment cannot alleviate the discrimination. Nevertheless, discrimination is eliminated when players are signed under contracts that are protected by the collective power of a union. In addition, I discover that a negative demand shock (proxied by COVID-19) and a negative supply shock (proxied by lockouts) amplify this racial discrimination.

Monetary Policy since the Onset of the COVID-19 Pandemic: A Path-Dependent Interpretation

Some argue that the Fed underreacted to rising inflation in 2021 after the US economy started to recover from the COVID-19 crisis. By using data from the Summary of Economic Projections (SEP), we surmise that the FOMC expected to keep the federal funds rate near zero by the end of 2021, but at the same time, the committee also expected to make the policy rate catch up to inflation over the next two years. We then argue that the Fed chose this gradual approach in response to the negative demand shock that pushed the policy rate to its effective zero lower bound. Economic literature on optimal monetary policy suggests that this policy approach is optimal in an event such as the COVID-19 crisis.

Monetary policy inertia and the paradox of flexibility

This paper revisits the paradox of flexibility, i.e., the result that, in a liquidity trap, greater price flexibility amplifies output volatility in response to negative demand shocks. We argue this paradox is the consequence of a failure of standard models to correctly characterise monetary policy at the zero lower bound. We show that allowing for a smooth adjustment of the shadow policy rate eliminates the paradox and produces output responses to a negative demand shock that are in line with those under optimal monetary policy. The reason is that, under an inertial policy, a decline in the shadow rate implies that the future actual policy rate will remain relatively low, which increases expectations about the economic outlook and inflation. The rise in inflation expectations reduces the real rate, thereby sustaining real activity. As we raise the degree of price flexibility, a negative demand shock causes a sharper fall in the shadow rate and increase in inflation expectations, which leads to a more significant drop in the real rate and, hence, a milder decline in the output gap.