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Abstract: Modern economies exhibit striking variation in firm size, a fact traditionally attributed to productivity differences. Aside from productivity, however, firms also differ in the number of customers they can sell to. In this paper, I argue that these differences are crucial for firm size dispersion and have strong policy implications. I construct a dynamic macroeconomic model where firms endogenously differ in productivity and customer access. I calibrate the model to administrative microdata covering the universe of Canadian firms and find that customer accumulation accounts for 63% of variation in firm size. Turning to policy analysis, I find that a tax on high revenue firms can increase welfare, in stark contrast to productivity-only models. This is because productivity-only models equate size with productivity, whereas my model allows for unproductive firms to be large due to high customer access. The tax shifts production away from these firms, increasing aggregate productivity. Finally, I find that subsidizing firm investment in customers can raise welfare by 4%, revealing an important margin for policy intervention that productivity-only models are silent on. 

Draft

Abstract: Recent literature has found that leading firms have higher market shares, profits, and markups than they did 40 years ago. I add to this literature by presenting new evidence focused on the persistence of market leadership. I find that persistence is high and rising, meaning that firms who take hold of the high rewards associated with market leadership are increasingly difficult to dislodge. I then propose a dynamic model of oligopolistic competition and endogenous growth that captures this fact. The key novelty of the model is a “learning by doing” mechanism, whereby productivity is determined in part by past levels of production. I calibrate the model to match firm-level US data in two time periods: Early (1976-1990) and Late (2000-2020). I find that the learning by doing mechanism is much more prominent in the later time period, and this quantitatively explains 54% of the rise in leadership persistence.

Draft coming soon!

Abstract: When an incumbent firm invests in increasing its profits, does this benefit other firms? The endogenous growth literature has typically assumed the answer is “yes.” We consider an endogenous growth model with two types of innovations: Those that advance the technological frontier, allowing other firms to “stand on the shoulders of giants”, and those that improve the profits of the innovating firm while leaving the technological frontier unchanged. We show that the second type of innovations in fact generate negative spillovers, by deterring entry and thereby reducing competition. We quantify the magnitude of these negative spillovers and evaluate policy in this environment. Our framework suggests that while targeted investment subsidies benefit the broader economy, indiscriminate subsidies can inadvertently reduce entry and slow aggregate growth.

Abstract: It is well known that import competition can have strong negative effects on domestic workers. Shielding workers from these shocks is among the primary stated objectives of tariffs. In practice, however, tariffs often fail to increase domestic production. For example, the 2018 US tariffs on China benefited countries such as Thailand and Vietnam far more than domestic producers. These "third country effects" cannot be explained by workhorse trade models. We build on recent methodological advancements to assess the effect of bilateral tariff changes on sectoral employment while incorporating third country effects. Our framework combines flexible substitution patterns with an otherwise standard model of labor market frictions. The effects of tariffs in this environment are heterogeneous across workers and products, providing a rich laboratory for counterfactual analyses. We use our model to quantify the efficacy of tariffs in protecting domestic workers and reversing job losses from free trade.

Abstract: New firms play a key role in shaping aggregate productivity, innovation, and wealth accumulation. Many entrepreneurs behind these new firms also work in other firms, participating in the labor market before, during, or after operating their business. How are their entrepreneurial and labor market outcomes connected? We document new facts about these outcomes using rich Canadian data covering the universe of workers and entrepreneurs from 2001-2019. We find high income workers are more likely to enter entrepreneurship, their businesses survive longer, and, on average, earn higher profits. However, after business exit, entrepreneurs return to their pre-business-entry levels of labor income, while workers without entrepreneurial activity experience income growth. This forgone growth is part of the cost of entrepreneurship. Finally, we present evidence of a positive but low correlation between labor and entrepreneurial ability among individuals who we observe as both workers and entrepreneurs. We develop a dynamic quantitative model consistent with these facts and use it to recover the distribution of abilities behind the selection into entrepreneurship and the labor and firm outcomes we observe.