Incorporation, Selection and Firm Dynamics: A Quantitative Exploration
This paper studies how incorporation, which provides limited liability to firm owners, affects firm dynamics and macroeconomy. I propose an equilibrium model of firm dynamics with endogenous entry and exit, where firms spend resources to improve their productivity and choose whether to incorporate or not. Incorporation provides liability protection which ensures that firm value is bounded from below, at the expense of high set-up and maintaining cost. An important model feature is that firms have heterogeneous (high and low) types which differ in their capacity to improve productivity. This heterogeneity allows for the possibility of selection as high-type firms, who have higher growth potential, benefit more from incorporation. I estimate the model by using Danish firm-level data, specifically exploiting the heterogeneity in exit rates by age conditional on size to identify firm types in growth potential and therefore selection. The quantitative results suggest that both treatment and selection effects of incorporation are important and accounting for firm heterogeneity is quantitatively relevant in explaining the observed better performance of incorporated firms. Conditional on the firm type, incorporated firms choose an expansion rate, the rate at which firms improve their productivity, 50% higher than unincorporated firms do on average. This indicates a significant positive treatment effect of incorporation on firm-level productivity growth. Upon entry, 90% (15%) of the incorporated (unincorporated) firms are high- types, which are estimated twice as efficient as low-types in improving their productivity. This underlines a significant selection effect which is more pronounced among incumbents as the exit rate of high-type firms is lower. In a counterfactual economy where the incorporation decision is randomized within firm types, the productivity growth decreases from 3% to 2.7% and the difference in the average size of incorporated and unincorporated firms decreases by 32%. I find significant welfare gains from subsidizing incorporated firms and large welfare losses from removing incorporation choice. These welfare results are largely driven by the change in the degree of selection, i.e. the change in the composition of firm types.
Innovation, Reallocation and Growth (with Daron Acemoglu, Ufuk Akcigit, Nicholas Bloom, and William Kerr),
American Economic Review 2018, 108(11): 3450-91.
We build a model of firm-level innovation, productivity growth and reallocation featuring endogenous entry and exit. A new and central economic force is the selection between high- and low-type firms, which differ in terms of their innovative capacity. We estimate the parameters of the model using US Census micro data on firm-level output, R&D and patenting. The model provides a good fit to the dynamics of firm entry and exit, output and R&D. Taxing the continued operation of incumbents can lead to sizable gains (of the order of 1.4% improvement in welfare) by encouraging exit of less productive firms and freeing up skilled labor to be used for R&D by high-type incumbents. Subsidies to the R&D of incumbents do not achieve this objective because they encourage the survival and expansion of low-type firms.
Lack of Selection and Limits to Delegation: Firm Dynamics in Developing Countries (with Ufuk Akcigit and Michael Peters),
R&R American Economic Review.
Managerial delegation is essential for firm growth. While firms in poor countries often shun outside managers and instead recruit among family members, the pattern is quite the opposite for firms in rich countries. In this paper, we ask whether these differences in managerial delegation have important aggregate effects. We construct a model of firm growth where entrepreneurs have fixed-time endowments to run their daily operations. As firms grow larger, the need to delegate decision-making authority increases. Firms in poor countries might therefore decide to remain small if delegating managerial tasks is difficult. We calibrate the model to firm-level data from the U.S. and India. We show that the model is quantitatively consistent with the experimental micro evidence on managerial efficiency and firm growth reported in Bloom et al. (2013). Our quantitative analysis shows that the low efficiency of delegation in India can account for 5% of productivity and 15% of income differences between the U.S. and India in steady state. We also show that such inefficient delegation possibilities reduce the size of Indian firms, but would cause substantially more harm for U.S. firms. This is because there are important complementarities between the ease of delegation and other factors affecting firm growth.
Technology Adoption and the Latin American TFP Gap (with Ufuk Akcigit, Maya Eden, and Ha Nguyen), Draft available upon request
We develop a novel methodology to study the dynamics of technology adoption across countries. We identify changes in “technology” as changes in the productivity of the frontier country that have a lagged effect on the productivity of the adopting country. We illustrate our methodology by studying the adoption process between Latin America and the Caribbean (LAC) countries and the US. Our analysis suggests an 8 year adoption lag, after which technologies are fully or nearly-fully adopted; this estimate implies that technology can account for a productivity gap of 4-10% (provided that there is full adoption in the long-run), and a TFP growth differential between 0-0.5%. We illustrate that our estimates are consistent both with the timing of the IT revolution, and with cross-country patent citation data. Finally, we provide a simple theory about the potential determinants of the measured adoption lags which highlights a possible link between the static wedges and technology adoption decisions.
Research in Progress:
- Entry through Spinoffs, Competition and Growth
- Patents, Trade Secrets and Technology Diffusion
Research Prior to PhD
Please see my personal website.
- Introduction to Microeconomics, Instructor (Summer 2016, Spring 2018)
- Law and Economics, Teaching Assistant for Prof. Camilo Garcia-Jimeno (Fall 2017)
- Foundations of Market Economies, Teaching Assistant for Prof. Jesus Fernandez-Villaverde (Fall 2017)
- Econometrics II (Graduate), Recitation Instructor for Prof. F.X. Diebold. (Spring 2014, 2015)
- Introduction to Microeconomics, Recitation Instructor for Prof. Rebecca Stein (Fall 2013, 2014)
Researcher, Research Department, Central Bank of Turkey (2006-2012).
University of Nottingham (2014, 2015), Bilkent University (2014), Collège de France (2016), University of Chicago (2015, 2019).
Referee for Journal of Political Economy, Journal of Monetary Economics, Journal of the European Economic Association, Journal of Development Economics, Economic Journal, Macroeconomic Dynamics, The Scandinavian Journal of Economics, Structural Change and Economic Dynamics, Central Bank Review.
Macroeconomics, Firm Dynamics, Economic Growth, Innovation, Entrepreneurship.
133 South 36th Street
Philadelphia, PA 19104
Professor Ufuk Akcigit (Advisor)
Department of Economics
University of Chicago
+1 (773) 702-0433
Professor Dirk Krueger
Department of Economics
University of Pennsylvania
+1 (215) 573-1424
Professor Michael Peters
Department of Economics