Superstar Firms Research Articles

Exposure to superstar firms and financial distress

AbstractA few highly successful firms (“superstar firms”) have captured large market shares and earned massive profits in recent decades. We examine whether superstar firms are associated with a greater likelihood of financial distress for firms exposed to them in product markets. Building on recent research, we identify superstars as firms with the highest markups in the industry and whose industry markup share increases over time. We then measure, with product similarity scores, a firm’s overall product market exposure to superstars. We document that firms with greater exposure are more likely to file for bankruptcy. We examine why superstar exposure is associated with bankruptcy and show that firms with the greater superstar exposure exhibit weaker financial performance and greater riskiness. Furthermore, we show that the association between superstar exposure and the likelihood of bankruptcy strengthens when superstars have greater market power.

Digital transition, data-and-tasks crowd-based economy, and the shared social progress: unveiling a new political economy from a European perspective

The current unequal distribution of the benefits of digital transition and data-and-tasks crowd-based economy is directly linked to an incomplete interpretation of the behaviour of economic agents and their effects. This article proposes a new economic vision of digitalisation based on overcoming the postulates of neoclassical (automation-oriented and implemented mainly in the US) and autocratic (control-oriented and implemented mainly in China) economics. It suggests recovering the evolutionary, social, institutional, ethical and humanistic precepts of political economy. Following this more plural and European conceptual orientation, the analysis shows that current inequality arises from a digital R&D&I process plagued by network, platform, bias and polarisation effects, from business models that foster automation, and from the emergence of large superstar firms or control organisations with excessive market and political power. The redirection of technological progress towards more democratic individual values and shared social welfare requires digital governance based on new incentives and taxes, a greater strategic and political orientation towards social sustainability, and a new transformative role for the State.

Firms and inequality

Abstract We review the existing literature on falling business dynamism and present a new analysis using comprehensive UK firm-level panel data. Since the mid-1990s, there has been a large increase in UK firm-level inequality (especially in the upper tails) of productivity, wages, markups and labour shares, similarly to the USA. We suggest a simple theoretical framework for understanding some of these trends and quantitatively analyse why, despite increasing markups, the UK labour share has not fallen as sharply as that in the USA. Finally, we suggest some policy options in response to these worrying trends, including modernizing competition rules to deal with the growth of superstar firms and strengthening worker bargaining power.

Robots and the rise of European superstar firms

We study how a recent digital automation technology—industrial robots—is associated with the distribution of sales, productivity, markups, and profits within industries. Our empirical analysis combines data on the industry-level stock of industrial robots with firms' balance sheet data for six European countries from 2004 to 2013. We find that industries with high robot exposure are characterized by dis-proportional increases in productivity in those firms that are already most productive to begin with. Those firms are able to increase their markups and overall profits, while less profitable firms within the same industry, country and year tend to see declining markups and profits. We also find that variation in robot exposure across industries is correlated with declining labor income shares, mainly through adjustments within firms that are initially large, productive and have low labor cost-to -sales ratios. In sum, our paper suggests that European manufacturing industries with higher robot adoption rates experience a stronger emergence of superstar firms and more pronounced shifts of the functional income distribution away from wages and towards profits.

Simulating the emergence of superstar firms: The role of luck vs talent

This paper explores the dynamics of superstar firms, introduced by Rosen's seminal work on talent's role in success. The traditional viewpoint posits that technological advancements drive market dominance by highly talented individuals, creating a 'superstars' landscape. The paper challenges this perspective, introducing luck as a crucial and overlooked factor in shaping the success of superstar firms. Using an agent-based model, the study simulates the emergence of superstars in twelve countries. The results suggest that while talent and technology are essential, luck also plays a significant role in the 'rich get richer' phenomenon observed in superstar firms, emphasizing the multifaceted nature of success and suggesting opportune policy strategies to foster true meritocracy.

Bureaucratic transfers and industrial structure changes in China: The role of superstar firms

This paper examines how local industrial structure changes after bureaucratic transfers across Chinese cities. Utilizing firm-level data within the manufacturing sector, we show a positive and significant effect of transferred local leaders on the industrial similarity between cities connected by them, and this response arises 3 years after the transfers. However, when transferring between cities with notable disparities in resource endowments, local leaders induce diminished industrial similarity among connected cities. Our mechanism analyses then find that, after transferred leaders arrive, new superstar firms are more likely to be attracted to their current jurisdictions and new industries in which their previous jurisdictions have already superstar firms tend to be developed in the current jurisdictions, thus making the industrial structure between the connected cities more similar. Furthermore, we find that transferred local leaders contribute to the synchronization of regional economic growth through facilitating the diffusion of productive capabilities across cities.

Financialization, earnings volatility, and firm turbulence in the risk society

ABSTRACT This paper explores financialization through the lens of with profits accruing primarily through financial channels through risk commodification. While financialization ostensibly increases corporate profits, individual firms have been experiencing escalating volatility driven by heightened competition and technological disruptions. To the extent that firm instability is driven by something fundamental that cannot be reduced for shareholders through portfolio diversification, financialization simultaneously disperses risks to workers, fostering economic instability and exacerbating income inequality. The paper delineates a rise in earnings volatility among workers, attributing it to structural changes in labour markets marked by contingent work arrangements and diminished job security. This volatility reflects broader societal shifts towards a more precarious workforce, necessitating a re-evaluation of traditional measures of economic security. The confluence of these trends manifests in the intertwining of firm turbulence and wage volatility, particularly pronounced in the non-manufacturing sector. In parallel, financialization has also led to rising industrial concentration and market power in the U.S. economy that centralises profit. Superstar firms emerge as key actors, uniquely positioned to maximise their risk/return profile. By restricting profits to a small core of well-compensated workers, these firms are simultaneously offering higher wages while driving down the labour share, thus exacerbating income inequality.

Artificial intelligence, firm growth, and product innovation

We study the use and economic impact of AI technologies. We propose a new measure of firm-level AI investments using employee resumes. Our measure reveals a stark increase in AI investments across sectors. AI-investing firms experience higher growth in sales, employment, and market valuations. This growth comes primarily through increased product innovation. Our results are robust to instrumenting AI investments using firms' exposure to universities' supply of AI graduates. AI-powered growth concentrates among larger firms and is associated with higher industry concentration. Our results highlight that new technologies like AI can contribute to growth and superstar firms through product innovation.

The rise of superstar firms in the United States: The role of global sourcing

Recent trends of global sourcing, market concentration, and aggregate markup have garnered increased attention. This paper examines the impact of global sourcing of inputs on market structure and markup changes in the United States. We develop a theoretical model with heterogeneous firms that suggests only the most-productivity firms will self-select to source inputs overseas, resulting in an increase in the markups and market shares of these leading firms, while lower-productivity firms are crowded out. Based on the theoretical analysis, aggregate markup rises due to both the within-firm markup adjustments and market share concentration among leading firms. We then provide empirical evidence supporting our theoretical predictions, analyzing the effect of imported inputs on markup adjustments, market shares, and industrial markups in the United States over the past four decades. Our results highlight the importance of firms’ self-selection effect in the global sourcing market and its impact on market outcomes. Failing to account for this influencing channel could lead to an underestimation of the contribution of input globalization to the rise of markup and other market consequences.

Productivity dispersion, wage dispersion and superstar firms

AbstractUsing a rich sample of firms in 14 EU countries from 2000 to 2016, we confirm increases in productivity dispersion, wage dispersion and superstar firms. Beyond reaffirming an incomplete pass‐through from productivity to wages, we present novel empirical evidence of an even weaker pass‐through in industries dominated by superstar firms. This effect is observed in both the lower and upper parts of the productivity and wage distributions, and is stronger for tradable (versus non‐tradable) sectors and markets with low (versus high) collective bargaining power. These findings point to different mechanisms, consistent with theoretical work and various underlying structural changes in the economy.

The Superstar Phenomenon Within a Digitized Economy: Theories, Causes, and Case Studies Surrounding the Entertainment Industry and Beyond


 
 
 
 The primary focus of this writing is to examine a structural wage distribution approach across several entertainment industries and within the corporate structure – in the fields of sports and music and top executives in businesses. Given the digitization of the modern economy – an ongoing transition drastically changing purchasing and consuming behaviors – viewership has become more accessible to a broader audience. Nonetheless, this form of convenience and publicity also exacerbates a more profound economic scenario that televised celebrities, especially entertainers like athletes, artists, and musicians, experience: the superstar phenomenon, or the concentration of high wages attributed to a small group of earners when compared to others within the same business. This condition alludes to the notions of opportunity cost, willingness to compete, incentives and disincentives, marginal costs, scarcity rent, imperfect substitution, and the extreme value theory that assesses how different professions may be experiencing elements of the phenomenon that affect the outcome of industry structures and economic well-being. From these observations, a question arises: what economic factors contribute to the magnification of pay disparity to create the superstar phenomenon, and how does this effect permeate and reflect different industries' pay structure gaps? Upon analysis, the cause seems to deter from the metric of pure skill or talent evaluation but instead focuses on individuals' marketability, attractiveness, irreplaceability, and influence, offsetting the direct correlation of statistical performance to payroll. 
 Furthermore, the ability to mass replicate performances and scarcity in handling top managerial responsibilities for entertainers and executives, respectively, exaggerates consumers' biases in focusing on the victor or leader. In other cases, one's ability to acquire superstardom derives from obtaining endorsements and sponsorships in the case of athletes and musicians and 
 
 
 
 
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 reputability within businesses to form superstar firms. Lastly, it is integral to note that beyond reputation and its structural advantages in pay, a psychological advantage also emerges, particularly within individual athletics, where opponents facing a superstar feel intimidation and showcase sub-par performances. In turn, superstars experience more favorable outcomes, a cyclical advantage that yields more award money, attention, and brand deals. Thus, the trends within the phenomenon, both in group and singular, entertainment and corporate settings will play an analytical role when stakeholders assess an individual or a firm's profitability. The phenomenon also draws on financial distribution shifts as the economy digitizes and concentrates on the elite percentage of income earners. This, however, creates a widening margin between the superstars and the rest while having side effects of pushing workers positioned lower in the industry's ladder out of the market, exacerbating inequality, particularly within entertainment industries (Koenig, 2017). By looking at statistics in pay distributions and using the aforementioned economic principles, this paper will provide a comprehensive theoretical analysis exploring the origins and justifications of the superstar phenomenon. 
 
 
 

Does the Tax System Favor Superstar Firms?

Does the Tax System Favor Superstar Firms?

Exposure to Superstar Firms and Financial Distress

Exposure to Superstar Firms and Financial Distress

Leveraging AI: What Makes Superstar Firms Better Than the Average Corporation?

Leveraging AI: What Makes Superstar Firms Better Than the Average Corporation?

Lopsided Schumpeterian competition and the superstar firm phenomenon in OLED flat-panel displays

ABSTRACT Lopsided Schumpeterian competition and the emergence of ‘superstar’ firms are examined in the flat-panel display industry, where the difficulty of commercialising active-matrix OLED (AMOLED) flat panels led to patterns of innovation and competition vastly dissimilar to those that had prevailed in Liquid Crystal Display (LCD) flat panels. Applying the concept of a Schumpeterian ‘Ultra-Mark II’ technological regime, the study sheds light on how superstar firms build industry dominance through R&D and the building of exclusive supplier networks when their industry (or a certain segment of it) morphs into a quasi-monopolistic type of arena.

The Rise of Pass-Throughs and the Decline of the Labor Share

We study the coevolution of the fall in the US corporate-sector labor share and the rise of business activity in tax-preferred pass-throughs. We find that reallocating activity to the form it would have taken prior to the Tax Reform Act of 1986 accounts for one-third of the decline in the corporate-sector labor share between 1978 and 2017. Our adjustments are concentrated among mid-market firms in services, magnifying the role of the manufacturing sector and superstar firms in driving the remaining decline in the labor share. Our findings highlight the importance of tax policy when measuring factor shares. (JEL D22, E25, H25, K34, L60, L80)

The rise of market power and firms' investment: Evidence from China

AbstractFollowing De Loecker et al. (2020) we characterise the evolution of market power based on listed firm data in the Chinese economy from 2000 to 2019. The increase is mainly driven by a few superstar firms. In addition, we find strong evidence of an inverted U‐shape relation between market power and investment. Increasing market power encourages competing firms to invest in beating the competition but discourages firms from investing in an unequal economy because of the decline in investment payoffs. These findings indicate that the superstar firm effect harms investment, resulting in a potential decline in the economic growth rate.

Jacob Mincer Award

Previous articleNext article FreeJacob Mincer AwardPDFPDF PLUSFull Text Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinked InRedditEmailQR Code SectionsMoreLawrence F. Katz is the 2022 recipient of the Jacob Mincer Award for lifetime contributions to the field of labor economics. Katz graduated from Berkeley in 1981 and earned his PhD in economics from the Massachusetts Institute of Technology in 1985. He returned to Berkeley as an assistant professor and joined the economics faculty of Harvard University after one year, where he is currently the Elisabeth Allison Professor of Economics. He is a Society of Labor Economists (SOLE) fellow (elected 2005), a past SOLE president (2013–14), a research associate of the National Bureau of Economic Research, a fellow of the Econometric Society and the American Academy of Arts and Sciences, a member of the US National Academy of Sciences, and a research fellow at the Institute of Labor Economics (IZA). Katz was chief economist of the US Department of Labor and has served on the advisory boards of several important institutions.Katz’s most influential research studies the evolution of wage inequality in advanced countries. He focuses on the fundamental role of technological change and education. His 1992 Quarterly Journal of Economics paper with Murphy developed the “canonical framework,” a simple model expressing the educational wage premium as reflecting observable shifts in educational supply and a residual technical change term. He found that although increases in the supply of skilled workers reduce inequality, technology often favors more skilled workers, increasing inequality. With Autor and Krueger, he found that increases in observable technology indicators, such as computer usage and R&D, increase skill demand, further bolstering the skill-biased technological change hypothesis. Researchers have adopted these methods to analyze changing inequality in many countries.His authoritative book with Claudia Goldin, The Race between Education and Technology (2008), examines how the growth of educational institutions contained inequality for most of the twentieth century. The slowdown in educational attainment for cohorts entering the labor market after roughly 1980 increased the return to schooling in the last quarter of the century.With Autor and Kearney (American Economic Review, 2006; Review of Economics and Statistics, 2008), Katz argues for a more nuanced role of technology. Digital technologies tend to replace routine tasks performed by occupations in the middle of the wage distribution, where wages and employment fell noticeably from the 1990s, compared with both the top and the bottom of the earnings distribution. European studies replicate this “hollowing out” of “middle jobs.” His recent work shows that the growth of large “superstar firms” with low labor shares and high profit margins explains the decline in labor’s share of gross domestic product (Quarterly Journal of Economics, 2020). Again, he links this to changes in the fundamental nature of technologies.Other work demonstrates the importance of place. With Kling and Liebman (Econometrica, 2007; Quarterly Journal of Economics, 2001), he demonstrated that although changing neighborhoods did not raise adults’ earnings, it substantially improved their mental health. With Chetty and Hendren (American Economic Review, 2016), he found that better neighborhoods helped the future labor market outcomes of younger children.In sum, Lawrence Katz is an extraordinarily productive scholar who has changed the face of social science. His work is marked by an intense empirical seriousness and a strong focus on policy. His research seeks to change the world, not just to interpret it.Beyond his research contributions, Katz has provided distinguished service to the profession as editor of the Quarterly Journal of Economics for the past 30 years. Under his leadership, it has become the most widely cited economics journal. His success in reducing review times at that publication has set the standard for other top journals in economics. He is renowned for his generous mentorship of junior scholars and his decency and respect in dealing with other economists. Previous articleNext article DetailsFiguresReferencesCited by Journal of Labor Economics Volume 40, Number 3July 2022 Published for the Society of Labor Economists, Economics Research Center/ NORC Article DOIhttps://doi.org/10.1086/721002 Views: 571Total views on this site © 2022 The University of Chicago. All rights reserved.PDF download Crossref reports no articles citing this article.

It's a Different World: A Dialog on the Attention-Based View in a Post-Chandlerian World

In this Dialog, seven scholars consider the theoretical implications and research opportunities a changing environment presents for the Attention-Based View (ABV). With its roots in the 1950s Carnegie School, ABV is expanding and evolving in ways that accommodate the changes in the corporate context characterized by distributed, porous structures of organizational networks such as ecosystems and platforms. The authors emphasize a shift toward a more dynamic orientation of this research, one that addresses the challenges of sustaining coherent attention and sensemaking, a shift from quantity to quality of attention, and how corporate communications ranging from formalized strategy presentations to less formal social media communications can spin attention in ways that lead to intended as well as unintended outcomes. Emerging organizational trends open up radically different perspectives on attention: today's superstar firms draw new kinds of attention and many new business models are based upon the attraction and selling of customer attention.

Assessing gains of trade in monopolistic competition under the presence of industry leaders

ABSTRACT A recent literature has documented a widespread rise of superstar firms. This is at odds with the simplifying assumption of a continuum of firms, predominant in International Trade. In this paper, we assess its consequences by identifying the magnitude and direction in which gains of trade depart from monopolistic competition once we account for leading firms. With this goal, we extend the Melitz model by incorporating a revenue threshold such that truly negligible firms are modelled as in Melitz, while the largest ones are treated as non-negligible firms that earn positive profits. Firm-level data for several countries show that accounting for leaders entails greater gains of trade in all cases, with differences of up to 20%. The outcome is explained by an additional benefit of reallocating resources towards more productive firms, not captured by the Melitz model: increases in aggregate income through positive effects on profits.