The importance of competition in local geographic markets has increased as the consumption of non-tradable goods and services has risen compared to tradable ones. Leveraging confidential matched employer-employee microdata and detailed geographic information on firms and workers, I document new evidence on the rise in firms’ geographic expansion and local competition in Canada between 2001-2018. To account for these trends, I build a new dynamic general equilibrium model of firms’ geographic expansion decisions incorporating multiple markets and Cournot oligopolistic competition in local markets. I estimate the model for two periods and find that three factors are crucial to match the observed trends - (1) increased innovation costs for entrepreneurs, (2) a compositional shift toward less productive and less expansion-efficient entrants, and (3) greater product differentiation between local varieties. The decentralized equilibrium is inefficient due to various externalities associated with firms' geographic expansion. This supports the need for taxing or subsidizing firms' geographic expansion costs to increase welfare. I find that subsidizing the geographic expansion of more productive and more expansion-efficient firms can substantially increase efficiency and social welfare.
Cash utilization in U.S. merger and acquisition (M&A) transactions has increased over 50% since the early 1990s amidst a secular, global M&A boom. How does this cash-use relate to firms' cash stockpiles, and what are the aggregate implications for firm innovation, growth and monetary policy? To answer these questions, we pose a general equilibrium theory of R&D-intensive firm cash stockpiling and use in M&A transactions. M&A cash bids can close faster than those externally financed, hence reducing the hazard of competing offers and external risks of trade breakdown. A higher common-value component in M&A arising from transferable productivity of firms’ intangible assets spurs increased M&A competition and serial acquirer cash-stockpiles. Despite sellers receiving a cash-premium as compensation, cash-use biases M&A rents and growth incentives towards serial acquirers. Higher nominal interest rates differentially impact internal and external growth incentives across firms, re-shaping the firm-size and productivity distribution. Calibrated to the U.S. economy, we find that increasing transferable productivity differences and M&A competition, not interest rates, can account for the majority of aggregate firm cash stockpiles since 1990.
Recent evidence suggests that local product-market concentration may be declining even though there is uncontroversial evidence for the increase in national concentration in the United States. Using a standard model incorporating endogenous entry and markups to allow for multi-market firms, this paper reconciles this divergence in trends in national versus local concentration and explores its implications for consumer welfare. I show that the fall in local concentration is driven by a fall in market entry costs that encourages entry into multiple geographic markets (fall in local concentration), but this is coupled with a decline in the number of firms in the economy (increase in national concentration). Calibration of the baseline model leads to striking results. A reduction of 10% in market entry costs leads to: (1) An increase of 4.38% in the number of firms in a market and a decrease of 0.01% in the number of firms in the economy (2) An increase of 2.36% in aggregate consumption and real wages. Hence, increasing national market concentration in the United States may not be a cause of worry as it is associated with better outcomes for consumers.
This paper investigates the impact of innovations in ICTs on the effectiveness of governance using cross-country unbalanced panel data for the period from 1996 to 2017. With the ability of information storing, sharing and automation, ICT innovation can improve governance by enriching the governmental information infrastructure, presenting opportunities for better decision-making, encouraging pro-active government-citizen interaction and increasing public accountability. At the same time, the increasing trend of the digital divide, cyber-crime, loss of privacy, unemployment and inequality put pressure on the ability of a state to govern effectively. The resultant effect of ICTs on the effectiveness of governance depends on the relative strength of the two forces. We find that improvement in ICT leads to a rise in the effectiveness of governance and control corruptions subject to the efficacy of the judicial system and the rule of law, and the presence of a better rule of law strengthens the favourable impact of ICT on governance.
The transition to clean energy is an imperative element of sustainable growth. How are the incentives to invest in the transition to clean energy affected by the level of development of an economy? To answer this question, we link clean energy transitions to the process of structural change - the secular reallocation of labor across sectors in an economy. In this paper, we provide evidence of differential emission levels and clean energy transition rates between economies at different stages of development. We highlight how the process of structural change can impact the proportion of clean vs. dirty energy in an economy using a model of structural change augmented with an energy sector. We model an infinitely-lived closed economy with two final sectors: manufacturing and services, and one intermediate sector: energy. There is one representative and competitive firm in each sector which produces using labor and energy inputs. Energy can be dirty or clean, and the government invests in energy efficiency and in building renewable energy capacity. We show that economies at different stages of development invest different amounts for transitioning to clean energy since the benefits from the transition are higher when a higher proportion of GDP comes from energy-intensive sectors.