Monday, June 30, 2014

Most firms are small, but most people work at large firms

Click for larger image
Note: Firm size bins are not uniform in scope

The chart above shows that it can sometimes be misleading to say that "X% of US businesses have characteristic Y" (an example). Around 55 percent of US firms are in the smallest size category (less than 5 employees), but only 5 percent of US workers are employed at those firms. Over 70 percent of workers are employed by firms with at least 50 employees. Furthermore, the share of employment accounted for by large (and old) firms has been steadily growing.

I don't own this image; I found it on the Internet.

Friday, June 27, 2014

What's up with those post-2000 IPOs?

Timothy B. Lee has a new interview with Marc Andreessen (h/t Tyler Cowen) about "the death of the IPO." An excerpt:

There's been an absolutely dramatic change. What you say is exactly right. Twenty years ago, IPOs had gotten democratized. You had Microsoft able to go public at less than $1 billion valuation. If you invested in Microsoft's IPO and held you had the prospect in the public market of a 1,000-times gain. There were a whole bunch of other comparable situations over the years. With Oracle, most of the gain was in the public market. In prior eras, the same was true of IBM and Hewlett Packard. These companies primarily grew up in the public market. . . .
The result of all that is the effective death of the IPO. The number of public companies in the US has dropped dramatically. And then correspondingly, growth companies go public much later. Microsoft went out at under $1 billion, Facebook went out at $80 billion. Gains from the growth accrue to the private investor, not the public investor.

So the argument is that high-growth firms now do their serious growth prior to going public. In a new working paper (with coauthors, discussed here and here), we find some evidence consistent with this idea. Here's Figure 15 from our paper:

Here we've sliced the Compustat data by IPO cohort, with cohorts defined by a decade. The lines show each cohort's share of total employment (among publicly traded firms). So, for example, the red line shows that the cohort of firms that went public in the 1950s rose to almost 20 percent of employment by 1970 and has gradually declined ever since.

The 1970s, 1980s, and 1990s cohorts gained employment share rapidly, with the explosive 1990s IPOs actually becoming the largest cohort by around 2000. But the 2000s cohort is a bit of a dud. It only gains employment share very gradually; and, unlike previous cohorts, after 10 years it is still a long way from being a large cohort.* And by the way: if you do this by sales instead of employment it looks pretty much the same (not shown in the paper). The figure alone isn't a smoking gun, but it's suggestive; and other evidence in our paper demonstrates that the growth distribution for public firms has tightened and unskewed since ~2000 (e.g., Figure 14).

You could probably tell a few stories for why the 2000s cohort looks so different. One of them could be Andreessen's. I don't know anything about that stuff so I won't comment.

But the patterns are pretty striking.

*We also show in the paper (see Figure 16) that the 1980s and 1990s cohorts were more volatile than both the cohorts that preceded them and the 2000s cohort, a composition effect which helps explain the aggregate trend I discussed in my last post; see also Davis, et al. (2007)

Tuesday, June 24, 2014

Trend reversal: A new fact about public firms

About a decade ago, people were looking at Compustat data (which provide financial statement information for public firms) and noticing that various measures of employment and sales volatility appeared to be on an upward secular trend. They were casting about, looking for a explanation for why US firms were becoming more volatile. More volatile productivity shocks? A composition shift to industries that were naturally more volatile? Globalization? That sort of thing.

In 2006, Davis, et al. showed that the increasing volatility trend was actually unique to public firms (that paper also cites the studies that originally found and explored the trend among public firms). Once you look at the entire universe of US firms, public and private, you see an opposite trend, one that I've discussed many times and done some research on with coauthors: declining volatility. So the mystery was actually: why are public firms becoming more volatile while private firms are becoming less volatile?

Fast forward to today. In a new working paper (preliminary and incomplete), coauthors and I show that the trend of increasing volatility among public firms appears to have reversed. Here are data from Compustat*:

Compustat data (non-confidential)
Click for larger image

Employment volatility shows a pretty clear reversal starting in the early 2000s, while sales volatility appears to level off. However, sales variables are very sensitive to, e.g., industry-specific prices and other stuff, and we show in the paper that if industry effects are removed sales volatility also declines in the post-2000 period. To my knowledge, this trend reversal among public firms is a new fact. Some readers might also find the relationship between sales and employment volatility over time interesting.

So we can add publicly traded firms to the list of business types that are experiencing declining churn and volatility.

*The volatility measure used here is the "modified Comin" measure discussed in Davis, et al. (2006). Basically think of the standard deviation of a firm's growth rates over a 10-year period, but modified to better use endpoints. The aggregate measure is just an activity-weighted average of the firm measures.

Sunday, June 22, 2014

Amazon, Hachette, and the holdup problem

If you haven't been paying attention, Amazon and book publisher Hachette are in an ongoing dispute about the distribution of surplus. I wrote about this here, but I underestimated how complicated the situation is. Cory Doctorow reports that Hachette is trapped with Amazon by the nature of its intellectual property policies:

It is precisely because Hachette has been such a staunch advocate of DRM [digital rights management] that it cannot avail itself of this tactic. Hachette, more than any other publisher in the industry, has had a single minded insistence on DRM since the earliest days. It's likely that every Hachette ebook ever sold has been locked with some company's proprietary DRM, and therein lies the rub. 
Under US law . . . only the company that puts the DRM on a copyrighted work can remove it. . . . By allowing Amazon to put a lock on its products whose key only Amazon possessed, Hachette has allowed Amazon to utterly usurp its relationship with its customers.

Now read this excerpt from Ricardo Caballero's excellent Specificity and the Macroeconomics of Restructuring:

Specificity in a relationship reduces the flexibility of separation decisions. . . . To the extent that it is irreversible, entering into a relationship creates specific quasi-rents that may not be divided ex post according to the parties' ex ante terms of trade. Avoiding this transformation from an ex ante competitive situation to an ex post bilateral monopoly--known in the literature as a "fundamental transformation" or the "holdup problem"--requires prior protection through comprehensive and enforceable long-term contracts. (59) [emphasis by RD]

After voluntarily entering a relationship of specificity with Amazon in which Amazon controls the DRM governing Hachette ebooks, the publisher now finds that its counterparty wants to appropriate rents from the relationship. I hadn't before realized that we can view DRM through the lens of the holdup problem, which is ubiquitous in specificity-relevant macro literature (most notably the DMP labor matching literature). Here's the full first sentence of the above excerpt:

Specificity in a relationship reduces the flexibility of separation decisions, which induces reluctance in the investment decision. This is the basic insight of the irreversible investment literature.

So to the extent that the holdup problem characterizes the market for intellectual property, we might expect less creation of intellectual property than is socially optimal. Or, at least, we'd expect sophisticated producers to cover their bases with appropriate contracts. As a side note, this concept is what motivates things like non-compete agreements, though unintended consequences are everywhere.

Saturday, June 14, 2014

Macroeconomists and "skin in the game"

Noah Smith has reviewed Big Ideas in Macroeconomics. My review is here. An interesting argument from Smith:

Athreya also fails to deal with another reason for outside criticism - the need for "skin in the game" when it comes to policy advice. Macroeconomists are usually well-off people with good job skills, often with tenure, who won't really suffer if they give the government bad advice for dealing with recessions and inflations. . . . That means politicians need to be skeptical of academic macro.

This is an interesting rule of thumb. My first thought was that almost nobody who gives policy advice is ever forced to fully internalize the effects of their policies--macro or microeconomists, social scientists generally, probably most of the macro "outsiders" Smith describes, and even the politicians making the policies never really bear any serious costs. Macroeconomists are not unique in this respect. My second thought was that there is a large body of policy advisers who do have skin in the game: rent-seeking businesses and others that just want policy to funnel cash and prizes their way.

So I think it's a dilemma.

Smith makes this argument in service of the notion that non-macroeconomists play a useful role in alerting policymakers to the shortcomings of macro. That is a good point; though I will say that this doesn't solve the problem of outsiders sometimes being utterly confused (yet confident nonetheless) about the macro practices they criticize.

Tuesday, June 10, 2014

Steve Jobs on firm dynamics

From Isaacson's biography of Jobs, which is truly fantastic:

I have my own theory about why decline happens at companies like IBM or Microsoft. The company does a great job, innovates and becomes a monopoly or close to it in some field, and then the quality of the product becomes less important. The company starts valuing great salesmen, because they're the ones who can move the needle on revenues, not the product engineers and designers. So the salespeople end up running the company. . . . When the sales guys run the company, the product guys don't matter so much, and a lot of them just turn off. (568-9)

Is this a natural characteristic of the firm maturity process? We do think that the firm extensive margin--new firms or at least new establishments--is a key driver of productivity growth, but within-establishment productivity growth may contribute more to aggregate improvements. That said, Jobs isn't talking about productivity as traditionally measured; I suspect he is referring to product (rather than production) innovations.

There is also this:

I hate when people call themselves "entrepreneurs" when what they're really trying to do is launch a startup and then sell or go public, so they can cash in and move on. They're unwilling to do the work it takes to build a real company, which is the hardest work in business. That's how you really make a contribution and add to the legacy of those who went before. You build a company that will stand for something a generation or two from now. That's what Walt Disney did, and Hewlett and Packard, and the people who built Intel. (569)

It occurs to me that the kind of startups that are designed for acquisition are really just a form of within-firm innovation for acquiring incumbent firms. Maybe the reason Jobs is so obsessed with the concept of a "company" is that, as he has said, all the products he developed become obsolete rapidly; he cared about creating a company that could develop new products in perpetuity. He certainly created an incredible company in addition to a lot of incredible products (and I say this as someone who has never felt inclined to buy any of them).

One more thing on Jobs. Here is a paragraph from Acemoglu, Akcigit, and Celik (2014):

Societies and organizations that impose a set of rigidly specified rules, discourage initiative and deviations from established norms, shun or even ostracize rebellious behavior, and do not tolerate those that 'move fast and break things' will significantly lag behind their more open, "individualistic" or "risk-taking" counterparts in creative innovations--even though they might still be able to function successfully with existing technologies.

Now watch this video of Jobs from 1994:

Wednesday, June 4, 2014

Competition: Amazon is not "unrivaled" edition

A few weeks ago, a friend shared this article with me:

Amazon’s power over the publishing and bookselling industries is unrivaled in the modern era. . . . 
Amazon has been discouraging customers from buying titles from Hachette, the fourth-largest publisher by market share. Late Thursday, it escalated the dispute by making it impossible to order Hachette titles being issued this summer and fall. 

Emphasis mine. Yesterday, Huffington Post reported:

Amazon finally seems to be loosening its grip after weeks of choking off titles from publisher Hachette in a fight over e-book prices. . . .
Other retailers, including Walmart, Target and Barnes & Noble, have seized the standoff as an opportunity to one-up Amazon. Hachette's spokeswoman said each of the companies approached the publisher over the last few weeks about offering special deals on its books. Walmart, for example, slashed 40 percent off up to 400 Hachette titles and advertised faster shipping on the books.

Tuesday, June 3, 2014

The granular economy

Figure 5 in Caliendo, et al. (change is 2002-2007)
Click for larger image

From a new paper by Caliendo, Parro, Rossi-Hansberg, and Sarte:

We develop a quantitative model of the U.S. economy broken down by regions and sectors. In each sector and region, there are two factors of production, labor and a composite factor comprising land and structures. . . . Labor is allowed to move across both regions and sectors. Land and structures can be used by any sector but are fixed locally. Sectors are interconnected by way of input-output linkages but, in contrast to Long and Plosser (1983) and its ensuing literature, shipping materials to sectors located in other regions is costly in a way that varies with distance. . . . We calibrate the model and explore the regional, sectoral, and aggregate effects of disaggregated productivity changes. Specifically, for a given productivity change located within a particular sector and region, the model delivers the effects of this change on all sectors and regions in the economy. (2)

Here we can think about the elasticity of GDP (or TFP, or welfare) to things happening in specific regions and/or sectors, accounting for flows of labor, intermediate goods, and final goods across regions. This reminded me of Gabaix 2011, which finds:

In the granular view, idiosyncratic shocks to large firms have the potential to generate nontrivial aggregate shocks that affect GDP, and via general equilibrium, all firms. . . The idiosyncratic shocks to the top 100 firms in the United States can explain one-third of the fluctuations of GDP. (735, 736) 

Gabaix's approach to heterogeneity was all about firms; Caliendo, et al. look at sectors and regions. This is a static model with two factors (capital/structures and labor). Labor is costlessly mobile. There is a rich interregional trade and input/output structure. The paper is worth looking at for the charts alone, which include GDP and GDP growth by region, geographic concentration of sectors, sectoral productivity by region, and others. Take a look.

The authors have a lot of interesting results. "We find that disaggregated productivity changes can have dramatically different implications depending on the regions and sectors affected" (2), in part because of these fixed factors of production that are durable. "A productivity change of the same national magnitude in California increases national output 46% more than in Florida" (27). They can "infer the regional distribution of income from land and structures across U.S. states" (8). And there's this:

We find that eliminating U.S. regional trading costs associated with distance would result in aggregate TFP gains of approximately 50 percent, and in aggregate GDP gains on the order of 126 percent. These figures are evidently significant, and may be interpreted as upper bounds on the extent to which advances in shipping and other transportation technology can eventually contribute to productivity and value added.

I wonder what 3D printers will do.

This regional stuff is really important. In the past I've looked a bit at startup activity by region ([1], [2]). I thoroughly enjoyed Moretti's book on the geography of jobs (that's a quick and easy read, by the way). Thinking about transportation, regions, and sectors may help us move toward a formal theory of the Leamer business cycle model ("supply-chain bull whip", etc.). The authors mention a large relevant literature, another reminder that the macro field likes to think about heterogeneity (and the derivative is positive).