Full Citation

Title: Essays on Firm Dynamics

Citation Type: Dissertation/Thesis

Publication Year: 2020

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Abstract: Firm size distributions and firm dynamics have important implications for macroeconomic outcomes, particularly aggregate productivity through effects on allocation of human and physical capital. This dissertation evaluates the mediating role of firm size distribution on the allocation of human capital over the business cycle, and identifies the drivers behind firm dynamics across regions. Over eight million jobs were lost in the Great Recession, creating widespread economic hardship. The first chapter documents a novel and robust empirical regularity, that highly concentrated local labor markets experienced larger employment declines during the Great Recession. I provide an explanation using a model with heterogeneous firms where recessions arise as an aggregate consequence of idiosyncratic firm shocks. My model predicts a larger decline in expected employment when the market has a higher initial concentration level. The key idea is that relatively small firms are unable to absorb the large number of workers that get displaced when relatively big firms are hit by idiosyncratic shocks, as the absorption is limited by decreasing returns to scale (at the firm) and an upward-sloping labor supply (in the local labor market). I undertake a series of empirical tests to rule out alternative explanations, and show that large employment losses in concentrated labor markets are not driven by highly concentrated industry-locations being hit harder during the Great Recession, having thinner labor markets, having more large firms, or having high firm leverage ratios. In the second chapter, I explore the drivers of new-firm creation, focusing on unintended consequences of unemployment insurance on the propensity of unemployed individuals to form new businesses. Exploiting staggered changes in benefit generosity across states and over time, I find that higher unemployment insurance (UI) benefits lower the probability that an unemployed person will become self-employed and delay such a transition. These effects are concentrated in the formation of unincorporated business. The negative effects are smaller in states offering a self-employment assistance program that allows the unemployed to collect benefits while starting their own business. The last chapter studies how the adoption of product line exception (PLE) to successor non-liability, a plausibly exogenous mechanism that introduces a friction into the corporate transactions market, affects firm acquisitions and growth. We find that adoption of PLE has a negative effect on the propensity of being acquired, and a positive effect on closure rate, especially among manufacturing establishments. In line with the predictions of our theoretical model, we find stark differences in effects across young vs older firms. In particular, the probability of acquisition, as well as closure, increases for young manufacturing establishments after PLE is adopted. In contrast, the impact on older establishments is more in line with the overall effects (lower acquisition and higher closure propensity), albeit statistically insignificant. Firm level regressions show slower growth, greater exit and lower entry rates following adoption of PLE for manufacturing firms. Together, these results suggest that the friction from adoption of PLE has material effects in the manufacturing sector including reduction in reallocation of assets through acquisitions, shift in the focus of corporate transactions to younger incumbents, and reduction in firm growth, entry and survival.

Url: https://deepblue.lib.umich.edu/bitstream/handle/2027.42/155038/wenjianx_1.pdf?sequence=1

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Authors: Xu, Wenjian

Institution: University of Michigan

Department: Economics

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Publisher Location: Ann Arbor, MI

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Data Collections: IPUMS USA, IPUMS CPS

Topics: Labor Force and Occupational Structure

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