Monday, 20 August 2018

Competition and firm productivity

Using data on Portuguese firms this new working paper looks at the relationship between competition and firm productivity. And, not too surprisingly, finds a positive relationship between competition and both total factor productivity and labour productivity.

Competition and Firm Productivity: Evidence from Portugal

Pedro Carvalho
Abstract:
This paper presents empirical evidence on the impact of competition on firm productivity for the Portuguese economy. To that effect, firm-level panel data comprising information between 2010 and 2015 gathered from the Integrated Business Accounts System (Portuguese acronym: SCIE) is used. The database enables the construction of economic and financial indicators, which allow for isolating the impact of competition on firm-level productivity. We find a positive relationship between competition and both total factor productivity and labor productivity. This relationship is found to be robust to different specifications and in accordance with the results in the literature obtained for other countries.

Saturday, 18 August 2018

Henry Hansmann on codetermination

Codetermination is the practice of workers of a firm being able to vote for representatives on the board of directors in an enterprise. It has been getting a bit of press lately, in the US at least, thanks to a new bill from Senator Elizabeth Warren. When thinking about whether codetermination is a good thing or not it's useful to ask who should own a company and why. In his article 'Ownership of the Firm' Henry Hansmann makes a simple but important point about a firm's owners,
"In determining whether the costs of ownership are manageable for a given class of patrons, homogeneity of interest appears to be an especially important consideration. In particular, it is evidently a significant factor in the widespread success of the modern investor-owned business corporation, and it may be among the best explanations for the relative paucity of worker­owned firms, which otherwise have some significant efficiency advantages" (Hansmann 1988: 301-2).
Heterogeneity of interests can increase the firm's costs of decision making substantially. Codetermination seems to be the very opposite of 'homogeneity of interest' in that it deliberately sets out to increase the 'heterogeneity of interest'.

When discussing the German experience with codetermination in his book "The Ownership of Enterprise" Hansmann writes,
"[...] the worker representatives on the board represent constituencies with diverse interests. The legally mandated system for selecting worker representatives reinforces this, because it requires that there be at least one representative from each of three classes of workers: wage earners, salaried employees, and managerial employees" (Hansmann 1996: 111)
Hansmann goes on the say
"From all that has been said above, one would not expect that this system of representation would be highly viable as a means of governing the firm. Given the apparent difficulty of making collective self-governance workable for employees alone when the labor force is heterogeneous, it would be surprising if a firm's electoral mechanisms, including voting for and within the board of directors, could effectively be employed not only to resolve conflicts among different groups of employees but also to deal with the more serious conflicts of interest between labor and capital" (Hansmann 1996: 111)
Hansmann then notes
"The German expereince does not clearly belie that expectation" (Hansmann 1996: 111).
Hansmann then raises an important point about codetermination,
"[...] codetermination has been imposed upon German firms by force of law; no similar system seems to have been adopted by any significant number of firms either inside or outside of Germany in the absence of compulsion" (Hansmann 1996: 111).
You have to ask, if codetermination is so good for the firm why isn't it adopted voluntarily?

Refs.:
  • Hansmann, Henry (1988). 'Ownership of the Firm', Journal of Law, Economics, and Organization, 4(2) Autumn: 267-304.
  • Hansmann, Henry (1996). The Ownership of Enterprise, Cambridge, Mass: Harvard University Press.

An interview of Ross Emmett

From the Smith and Marx Walk into a Bar: A History of Economics Podcast comes this interview of Ross Emmett by Scott Scheall.

In this wide-ranging episode, co-host Scott Scheall interviews Ross Emmett, Professor of Political Economy and Director of the Center for the Study of Economic Liberty at Arizona State University. Discussion topics include Ross's work on Frank Knight and the circle of economists around Knight at the University of Chicago, Robert Malthus's contributions to economics, and Ross's friendship with the influential historian of economic thought Warren Samuels.

Friday, 17 August 2018

Horizontal integration can be good for you

It has long been recognised that vertical integration can enhance efficiency. It can deal with hold-up problems etc. But horizontal integration has been looked at with much more suspicion.
The conventional view is that anticompetitive mergers increase industry concentration and hence increase market power, harm competition ex post, and therefore need to be carefully reviewed and possibly restricted by regulators. Hence, regulators, such as the Antitrust Division of the Department of Justice or the Federal Trade Commission, have the mandate to prevent situations that “excessively” transfer welfare from consumers to firms via buildups of dominant positions or firms with disproportionate market power, including mergers perceived to be anticompetitive.

Are these policies effective or desirable? We take a dynamic approach and find the answer to be No in both cases.
This quote is from a posting at the Pro-Market blog by Dirk Hackbarth and Bart Taub in which they ask Can Horizontal Mergers Actually Boost Competition?
To reach these conclusions we built a dynamic, noisy collusion model that captures firms’ optimal output strategies prior to a merger. [...] We thus focus only on the desire of firms to collude prior to merging or potentially to merge if collusion fails.
The conventional view fails to account for dynamics. Firms in our dynamic model are forward-looking, aware that they are in a dynamic cartel-like situation, but are unable to directly observe the actions of the rival firm, which would enable them to enforce the cartel. The inability of each firm to observe the other firm’s output reflects the real world: regulators punish firms that directly track and coordinate with each other’s actions for market power purposes.
Hackbarth and Taub go on to explain,
The conventional view fails to account for dynamics. Firms in our dynamic model are forward-looking, aware that they are in a dynamic cartel-like situation, but are unable to directly observe the actions of the rival firm, which would enable them to enforce the cartel. The inability of each firm to observe the other firm’s output reflects the real world: regulators punish firms that directly track and coordinate with each other’s actions for market power purposes.

Because they are blocked from observing each other directly, firms are unable to punish their rival for directly perceived deviations from collusion–that is, for producing too much in order to realize temporarily higher profits at the expense of the other firm. The inability to directly observe and punish deviations therefore requires a tacit collusion arrangement, in which firms attempt to observe each other indirectly–via prices. This indirect observation is imperfect, however, because prices are affected by random influences, in addition to the effects of the firms’ output choices.

Because of the random influences a firm can mistakenly appear to produce too much output. Under the tacit collusion arrangement this triggers a punishment in which the rival firm increases output, thus driving down prices and so harming the deviating firm: there is a price war, resulting in low profits for both firms. It is the fear of this price war that sustains the tacit collusion arrangement in the long run.

The potential to merge weakens those punishments, because it prematurely terminates them under terms that are an improvement over the price war for the firm that is being punished. Instead of the price war, the deviating firm gets a share in the monopoly that the firms form when they merge. Because the potential for punishment is concomitantly reduced, the trepidation about aggressively producing output in contravention of the interests of the cartel arrangement is reduced: there is more competition, resulting in more output and lower prices. Our conclusion is thus the exact opposite of the conventional view that mergers are harmful for society: making mergers more difficult (i.e., costlier for the firms) is actually harmful to society, because it strengthens the ability of firms to punish each other and enforce the cartel.

In addition to this fundamental result, we also show that pre-merger collusion is dynamically stable: episodes of collusion are long-lasting, and price wars are unusual and brief. Because mergers occur in the face of an incipient price war, mergers are therefore rare–pre-merger collusion is the normal state of the firms.
and
Although the monopoly gains stemming from merging harm consumers in the long run, the enhancement of pre-merger competition benefits consumers in the short-run and those benefits dominate the losses to consumers from the later formation of the post-merger monopoly. This is because discounted expected losses from post-merger increases in market power are small if mergers are rare [empirically they are] and hence the contemporaneously pro-competitive effect of the potential for mergers exceeds those losses if firms spend most of their time in pre-merger competition. This gives further impetus to a regulatory policy that is therefore a bit counterintuitive: reduce barriers and costs of merging in order to harness the pro-competitive effects of mergers.
In short, Hackbarth and Taub show, somewhat counter-intuitively, that regulators can increase consumer welfare by facilitating mergers by lowering frictions, such as barriers, costs, and expenses formally or informally placed by merger regulation such as merger guidelines of the Commerce Commission, the US Department of Justice or the European Commission.

Now just wait for the sound of heads exploding at the Commerce Commission!

Thursday, 9 August 2018

An interview with Vernon Smith

From the IEA comes this interview of Professor Vernon Smith by Kate Andrews.
Professor Smith gives his analysis of current economic trends in the US and throughout Europe, including his take on Donald Trump's tariffs and obstacles to free trade.

Tuesday, 31 July 2018

Bruce Caldwell on F.A. Hayek, economic history, and his life's work

From the Hayek Program Podcast comes this audio in which Peter Boettke interviews Bruce Caldwell on the life and work of F.A. Hayek.
On this episode of the Hayek Program Podcast, Hayek Program Director Peter Boettke speaks with Professor Bruce Caldwell about his current projects, including an exciting new biography of F.A. Hayek himself. Caldwell talks of his experience and inspirations in directing the Center for the History of Political Economy at Duke University, the significance of his chosen life's work, and the history of the ideas found within it.

Friday, 27 July 2018

The latest Big Mac Index

From The Economist magazine comes their latest iteration of the Big Mac Index:


On the raw data version, shown above, the New Zealand dollar is 23.2 per cent under-valved.

If we adjust the index to account for GDP per person we see that the New Zealand dollar is 9.9 per cent under-valved.

Friday, 20 July 2018

Unemployment and domestic violence

Dan Anderberg spends a couple of mintues talking about his research on the link between unemployment and domestic violence.