Customer Accumulation, Firm Size, and Aggregate Productivity (Job Market Paper)
Abstract: Firms differ in how well they can produce as well as how many customers they can sell to. In this paper, I study the possibility of mismatch between these two objects: productive firms with few customers and unproductive firms with many. I argue that this is an important channel for understanding firm size dispersion and a key determinant of aggregate productivity. To do so, I develop a dynamic macroeconomic model where firms endogenously differ in both productivity and customer access. Customer accumulation in the model is gradual and uncertain, naturally allowing for productivity-customer mismatch. I show that the firm's static optimality conditions distinguish customer access from productivity, allowing me to separately identify the two objects in firm-level data. Applying this method to administrative data covering the universe of Canadian firms, I uncover a surprising degree of mismatch. This leads to a strong policy implication: A tax on high-revenue firms — clearly detrimental in standard models — can increase aggregate productivity and welfare. This is because the tax shifts production away from unproductive large firms, reducing misallocation by enough that the net effect is positive. I also find substantial welfare gains from subsidizing firm investment in customer accumulation, highlighting an understudied margin for policy intervention.
Intangible Investment, Spillovers, and Aggregate Growth, with Renato Zimmermann
Abstract: We develop a model of endogenous growth and oligopolistic competition that distinguishes between two margins of intangible investment: i) innovation and ii) demand (branding, marketing, etc.). Both margins increase aggregate productivity, but they differ in their associated spillovers. Innovation generates the usual positive spillovers by expanding the technological frontier. Demand accumulation, however, generates negative spillovers: superstar firms with large demand stocks raise the cost of expansion for new firms. Calibrating the model to US firm-level data, we show that a reduction in the cost of demand accumulation (e.g., due to the advent of digital advertising) can explain the decline in business dynamism observed in the data. Surprisingly, however, we find that such a cost reduction increases household welfare. This is because the fall in business dynamism is accompanied by greater intangible investment and therefore higher labor productivity. This positive force quantitatively dominates the cost of lower dynamism, raising overall output and welfare.
The Rise of Winner-Takes-All Markets
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 unlikely to be dislodged. 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). The calibrated model matches the decline in growth and rise in leadership persistence observed in the data, and features a dramatic increase in the strength of learning by doing. My results suggest that learning by doing is at the heart of the macroeconomic shifts observed over the last 40 years.
Protectionist Tariffs With Third Country Effects, with Abdelrahman Amer and Daniel Trefler
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.
Income Dynamics Before, During, and After Entrepreneurship: Evidence and Theory, with Gueorgui Kambourov, Burhan Kuruscu, Sergio Ocampo, and Baxter Robinson
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.