Archive for the 'academic' Category

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Understanding Small Business Heterogeneity

Published on 16 May 2011 in academic and news. 0 Comments Tags: , .

by Erik Hurst, Benjamin Wild Pugsley  -  #17041 (CF EFG IO LS PE PR)

In this paper, we show that substantial heterogeneity exists among U.S. small businesses owners with respect to their ex-ante expectations of future performance, their ex-ante desire for future growth, and their initial motives for starting a business.  Specifically, using new data that samples early stage entrepreneurs just prior to business start up, we show that few small businesses intend to bring a new idea to market.  Instead, most intend to provide an existing service to an existing customer base.  Further, using the same data, we find that most small businesses have no desire to grow big or to innovate in any observable way.  We show that such behavior is consistent with the industry characteristics of the overwhelming majority of small businesses, which are concentrated among skilled craftsmen, lawyers, real estate agents, doctors, small shopkeepers, and restaurateurs.   Lastly, we show non pecuniary benefits (being one’s own boss, having flexibility of hours, etc.) play a first-order role in the business formation decision.  We conclude by discussing how failing to acknowledge the ex-ante heterogeneity can lead to biased inferences of the importance of entrepreneurial talent, entrepreneurial luck, and financial frictions from the ex-post distribution of firm size.

http://papers.nber.org/papers/W17041

Job Loss in the Great Recession: Historial Perspective from the Displaced Workers Survey, 1984-2010

Published on 16 May 2011 in academic, news and research. 0 Comments Tags: , , , , .

by Henry S. Farber  -  #17040 (LS)

The Great Recession from December 2007 to June 2009 is associated with a dramatic weakening of the labor market from which the labor market is now only slowly recovering.  The unemployment rate remains stubbornly high and durations of unemployment are unprecedentedly long.  I use data from the Displaced Workers Survey (DWS) from 1984-2010 to investigate the incidence and consequences of job loss from 1981-2009.  In particular, the January 2010 DWS, which captures job loss during the 2007-2009 period, provides a window through which to examine the experience of job losers in the Great Recession and to compare their experience to that of earlier job losers.  These data show a record high rate of job loss, with almost one in six workers reporting having lost a job in the 2007-2009 period.  The consequences of job loss are also very serious during this period with very low rates of reemployment, difficulty finding full-time employment, and substantial earnings losses.

http://papers.nber.org/papers/W17040

Trust in Public Institutions over the Business Cycle

Published on 22 Mar 2011 in academic, news and research. 0 Comments Tags: , , .

by Betsey Stevenson, Justin Wolfers  -  #16891 (EFG LS PE POL)

We document that trust in public institutions–and particularly trust in banks, business and government–has declined over recent years. U.S. time series evidence suggests that this partly reflects the pro-cyclical nature of trust in institutions.  Cross-country comparisons reveal a clear legacy of the Great Recession, and those countries whose unemployment grew the most suffered the biggest loss in confidence in institutions, particularly in trust in government and the financial sector.  Finally, analysis of several repeated cross-sections of confidence within U.S. states yields similar qualitative patterns, but much smaller magnitudes in response to state-specific shocks.

http://papers.nber.org/papers/W16891

Policies to Encourage Job Creation: Hiring Credits vs. Worker Subsidies

Published on 15 Mar 2011 in academic, news and research. 0 Comments Tags: , , , .

by David Neumark – #16866 (LS)

The Great Recession has spurred interest in policy efforts to spur job creation. This article surveys existing research on two “direct” job creation policies: subsidies to employers to hire workers (“hiring credits”); and subsidies to individuals to enter the labor market (“worker subsidies”). The research suggests that in the short-term, when recovery from the recession is a priority, hiring credits are likely a more effective policy response. First, hiring credits are likely more cost effective, as long as they focus on the recently unemployed and create incentives for new job creation. Second, in general, worker subsidies better target benefits to low-income families and especially single mothers. At this juncture, however, because the recession fell so heavily on men, a hiring credit focused on the unemployed may target low-income families well, and the usual distributional concern with low-income female-headed households may be less paramount. And third, employment subsidies may not be as effective when there is high cyclical unemployment. In the longer-term, however, when the labor market has recovered more from the recession and the focus can shift to longer-standing employment problems and distributional concerns, greater reliance on worker subsidies may do more to increase employment while shifting the distribution of benefits more toward lower-income households.

http://papers.nber.org/papers/W16866

The Capital Structure Decisions of New Firms

Published on 03 Feb 2011 in academic, news and research. 0 Comments Tags: , , , , .

This paper finds that startups rely heavily on external debt sources such as bank financing, and less extensively on friends and family-based funding sources. I’m curious whether the latter includes loans collateralized by real estate.

NBER Digest:

In The Capital Structure Decisions of New Firms (NBER Working Paper No. 16272), co-authors Alicia Robb and David Robinson investigate the capitalization choices that firms make in their initial year of operation. Using a novel dataset that tracks firms’ funding decisions through their early years of operation, they find that these firms rely heavily on external debt sources such as bank financing and less extensively on friends and family-based funding sources.

There is a widely held view that frictions in capital markets prevent startup firms from achieving their optimal size, or indeed, from starting up at all. That view implies that startups are likely to pursue financing from informal channels. But Robb and Robinson find that funding through the use of formal debt dwarfs funding from friends and family: the average amount of bank financing is seven times greater than the average amount of insider-financed debt. Moreover, three times as many firms rely on outside debt as inside debt. This reliance on formal credit channels as opposed to personal credit cards and informal lending even holds true for the smallest firms in the sample at the earliest stages of their founding.

These findings are robust to controls for credit quality, industry, and characteristics of the business owner. Nonetheless, the authors do find that women are somewhat less likely to acquire outside debt. Also, black-owned businesses have a lower ratio of outside-to-inside financing. Businesses started by individuals without a high school degree also rely more on inside financing than others.

Extending their analysis, the authors find that a capital structure that is more heavily tilted towards formal credit channels is associated with a greater likelihood of success for the new firm. Firms that ceased operations within three years not only began smaller but also had considerably smaller proportions of outside debt-to-total capital. Moreover, capital structure decisions are especially important in the initial years: firms that accessed more external debt in the initial stages were nearly 10 percent more likely to be in the top revenue group. Even if credit conditions in 2004 — the first year of the data set — were unique, credit market access appears to have had an important impact on firm success.

The authors conclude that the heavy reliance on external debt underscores the importance of well functioning credit markets for the success of nascent business activity. Because startups rely so extensively on outside debt as a source of startup capital, they are especially sensitive to changes in bank lending conditions.

Who Creates Jobs?

Published on 01 Feb 2011 in academic, news and research. 0 Comments Tags: , , , .

This is a research area I’ve been keenly interested in for a while. Despite what passes for conventional wisdom, new businesses (which are usually small), not small businesses per se, are the key to net job creation. Although new businesses create disproportionately more jobs, they also destroy disproportionately more jobs.

Still, large mature businesses employ the plurality of U.S. workers and tend to be more cyclically sensitive (e.g., new work [no link] by Fort, Haltiwanger, Jarmin, and Miranda and recent work by Moscarini and Postel-Vinay).

NBER Digest:

The popular perception that small businesses create most of America’s jobs has been the focus of heated debate for three decades. However, the more telling characteristic for predicting job creation is the age of the firm, not its size, according to a new study by John Haltiwanger, Ron Jarmin, and Javier Miranda. In “Who Creates Jobs? Small vs. Large vs. Young,” the researchers conclude that the younger companies are, the more jobs they create, regardless of their size.

Of course, all startup firms operate in a volatile “up or out” environment. After five years, many of these young companies are “out” — they fail and, as a result, destroy nearly half of the jobs created by all new companies. Nevertheless, the surviving firms continue to ramp “up,” growing faster than more mature companies, and creating a disproportionate share of jobs relative to their size.

“Firm startups account for only 3 percent of employment but almost 20 percent of gross job creation,” the authors write. “[T]he fastest growing continuing firms are young firms under the age of five,” the authors conclude.

In this study, which relies on data from the Census Bureau, the authors confirm that smaller companies created more jobs than larger companies during 1992-2005. But the importance of firm size depends very much on the assumptions one makes about the base year of the analysis, the number of employees used to define “small”, and other factors. The real driver of disproportionate job growth, they find, is not small companies, but young companies. It is the startup firms that generate the surge of jobs that earlier research attributed to small companies.

Indeed, grouped in traditional ways, businesses tend to create jobs in proportion to their importance in the economy. Thus, large mature firms — those more than ten years old and with more than 500 workers — employed about 45 percent of all private-sector workers and accounted for almost 40 percent of job creation and destruction in this study.

http://papers.nber.org/papers/W16300

On the Persistent Financial Losses of U.S. Airlines: A Preliminary Exploration

Published on 31 Jan 2011 in academic and news. 0 Comments Tags: , , , , .

by Severin Borenstein  -  #16744 (IO EFG)

U.S. airlines have lost nearly $60 billion (2009 dollars) in domestic markets since deregulation, most of it in the last decade.  More than 30 years after domestic airline markets were deregulated, the dismal financial record is a puzzle that challenges the economics of deregulation.  I examine some of the most common explanations among industry participants, analysts, and researchers — including high taxes and fuel costs, weak demand, and competition from lower-cost airlines.  Descriptive statistics suggest that high taxes have been at most a minor factor and fuel costs shocks played a role only in the last few years.  Major drivers seem to be the severe demand downturn after 9/11 — demand remained much weaker in 2009 than it was in 2000 — and the large cost differential between legacy airlines and the low-cost carriers, which has persisted even as their price differentials have greatly declined.

http://papers.nber.org/papers/W16744

Calorie Posting in Chain Restaurants

Published on 31 Jan 2011 in academic and news. 0 Comments Tags: , .

by Bryan Bollinger, Phillip Leslie, and Alan Sorensen

We study the impact of mandatory calorie posting on consumers’ purchase decisions using detailed data from Starbucks. We find that average calories per transaction fall by 6 percent. The effect is almost entirely related to changes in consumers’ food choices—there is almost no change in purchases of beverage calories. There is no impact on Starbucks profit on average, and for the subset of stores located close to their competitor Dunkin Donuts, the effect of calorie posting is actually to increase Starbucks revenue. Survey evidence and analysis of commuters suggests the mechanism for the effect is a combination of learning and salience. (JEL D12, D18, D83, L83)

Full-Text Access | Supplementary Materials

Updated drafts of markup and industry papers

Published on 10 Jul 2010 in academic and research. 0 Comments Tags: , , , , , , , .

We have posted updated drafts of our markup paper and our industry evidence paper.

In our markup paper, “The Cyclical Behavior of the Price-Cost Markup,” we re-estimated our marginal change in overtime hours using microdata from my Londitudinal Population Databse (LPD). We still find that markups are procyclical or acyclical, both unconditionally and conditional on demand shocks.

In our industry paper, “Industry Evidence on the Effects of Government Spending,” we significantly updated the theory and discussion, explored other industry characteristics associated such as unionization and concentration, and added analysis of the dynamic interactions. We now discuss how the growth of government spending across industries is correlated with technology and show how accounting for this correlation is essential for constructing a proper instrument for government demand.

Copies of either paper can be downloaded from my research page.

Updated version of markup paper

Published on 02 Mar 2010 in academic and research. 0 Comments Tags: , , , , .

We have updated our working paper, “The Cyclical Behavior of the Price-Cost Markup.” This version will presented at the 2010 International Research Forum on Monetary Policy on March 26-27, 2010.

You can download a copy of the paper from the link above or on my Research page.