The Long-Term Effects of Management and Technology Transfer

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Michela Giorcelli

Michela Giorcelli

A long-standing question in Economics is whether differences in performance across firms can be explained by differences in management practices, especially in developing countries where the spread between the best and worst firms is particularly large. Two major constraints have limited research on this topic. First, firms endogenously decide whether to adopt management practices, so it could be that higher-productivity firms find it more profitable to make such adoption. Second, there is lack of data measuring both the management practices adoption and firm performance over time.

In her paper “The Long-Term Effects of Management and Technology Transfer”, Professor Michela Giorcelli examines the long-run effects of the adoption of management practices on firm performance, using evidence from a unique historical episode, the US Productivity Program in Italy. During the 1950s, as part of the Marshall Plan, the US administration sponsored training trips for European managers to learn modern management practices at US firms. This was part of America’s efforts to help Europe recover after the war and to prevent the much-feared spread of communism in the 1950s. Visiting Italian managers participated in formal training and seminars in addition to more informal visits to U.S. firms to shadow managers. The Productivity Program also gave Italian firms loans to purchase state-of-the-art machines from the United States.

Professor Giorcelli assembled new panel data, collected from numerous historical archives, on more than 6,000 Italian firms from 5 years before to 15 years after the Productivity Program.

Her results indicate that businesses that participated in the Productivity Program largely increased sales and productivity, and stayed in business longer than comparable companies that were not part of the program. The training also boosted firms’ success much more than the newer machines. While the machinery purchases did make firms more productive, the effects only lasted about 10 years – the plausible lifespan of a machine. Without local know-how to repair foreign machines, malfunctions and disrepair likely spelled the end of their benefit.

In contrast, the trainings had a compounding effect on business success, with impacts increasing over time and persisting even 15 years after the program ended. Professor Giorcelli documents the program helped managers use better firm organization and make better investment decisions – investing in new plants or new machines, for example – which made their production more efficient. The result was a virtuous cycle of higher profits and profit-enhancing investments. Finally, she finds that management and technology have a complementary effect on firm productivity.

Did the positive effect of the program spill-over to other firms that were not part of it? Professor Giorcelli finds little evidence of such effects, a result that could be explained by the competition among firms and the very limited labor mobility that prevented managerial knowledge diffusion.

Professor Giorcelli’s research raises parallels for development aid now, since the income levels in Italy post-World War II are similar to some of today’s developing countries. As nongovernmental and international organizations seek to spur economic growth through support to small businesses, computer literacy or financial management training may prove much more effective in lifting people out of poverty than just giving them the latest technology.

Simon Board wins Scoville Teaching Award

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Simon-Board

Simon Board

The winner of the Warren C. Scoville Distinguished Teaching Award  for Fall 2016 is Simon Board.

Professor Board teaches Econ 106T: The Economics of e-Commerce and Technology. The class uses tools from game theory to study business strategy, including topics such as platform markets, innovation and reputation. The course then uses these insights to discuss recent cases like Uber, Square and Zillow, where new technology is disrupting traditional business models.

 

Jerry Hausman gives Inaugural MAE Lecture

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Jerry Hausman, the John and Jennie S. MacDonald Professor of Economics at MIT, gave the inaugural Lecture of the Masters in Applied Economics Distinguished Speakers Series.

Jerry Hausman giving a presentation

Jerry Hausman

The talk was entitled “Future Productivity: Pessimistic and Optimistic Viewpoints” and discussed the future evolution of productivity. Professor Hausman spoke about the changing roles of human and intellectual capital, and their relation to social welfare. He described the pessimistic view espoused by Robert Gordon of Northwestern University, that declining marginal productivity is an inevitable historical trend. Professor Hausman then described his own, more optimistic, perspective. He sees the technological advancements in Biotechnology and Artificial Intelligence to be the key driver for productivity growth. Keeping in mind the productive “Bell Labs” model, he suggested more governmental support for research and development.

The MAE Distinguished Speakers Series will feature three speakers a year. The next speaker will be Professor Richard Blundell, University College London on Thursday, February 9, 2017 at 4:00pm in Public Affairs #1246.

 

Lee Ohanian on Trump’s economics plan

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The following is from the San Diego Tribune

Trump policies not good for growth, says UCLA economist

On the eve of inauguration day, UCLA economist Lee Ohanian told a local audience Wednesday that President Donald Trump’s policies may not achieve his desired levels of economic growth and job gains.

Speaking to the San Diego Regional Chamber of Commerce’s annual cross-border vision lunch, Ohanian said restricting immigration, erecting trade barriers and imposing new import tariffs, as Trump has proposed, are just the opposite of what is needed.

“One thing that came from President-elect Trump was the trade deals weren’t working for us,” Ohanian said.

But he said numerous economic studies show that the average household actually benefits to the tune of $10,000 a year in lower prices paid for imported goods.

“That statistic suggests maybe they are working for us,” he said.

One example of counterproductive trade policy? Ohanian points to U.S. subsidies and import quotas for the sugar industry that date to the 1790s. American sugar prices range between 100 and 180 percent of world levels, he said, and consequently, candy makers have relocated to Canada where sugar costs less.

“For every sugar job we saved, we lost three confectionery jobs,” he said. “These are the types of indirect effects economic policies often have.”

On immigration, Ohanian said while Trump’s focus has been on keeping out unskilled, undocumented workers, it is the high-skilled workers the U.S. should be going after. He noted that half the Fortune 500 companies were founded by an immigrant or the child of an immigrant.

He also noted that many high-skilled immigrant workers are educated at UC San Diego, UCLA and other universities and then managed to stay legally in the U.S. to work.

Many others wish they could remain here permanently after graduation but unless they can exchange their student visas for work visas, they have to return to their home countries — and the U.S. economy loses out.

“We don’t make it very easy for them to do that,” he said.

Ohanian said Trump would like to create 25 million jobs over the next 10 years and double the GDP growth rate to 4 percent. But with the accelerating retirement rate of aging baby boomers and the declining educational attainment levels in American schools, he said a looming talent gap could make those goals unattainable.

“The only way we can replace those (productive workers) is by bringing in more people,” he said.

Fifty years ago, he said American education and California’s in particular were at or near the top of the  world. High educational achievement translated into high productivity. But now in the U.S. 15-year-olds repeatedly rate below their peers in many other countries — a situation that bodes ill for future economic success.

“Since 2009 that’s really been the main challenge our country faces,” he said. “In particular this is going to confront our younger people, and the main challenge that faces President-elect Trump and Congress, as well as state and local government, is to improve productivity growth.”

Ohanian, who was an adviser to previous Republican presidential candidates, called NAFTA  a “great piece of legislation”  that reduced trade barriers with Canada and Mexico. But if NAFTA is renegotiated as Trump hopes, he said one benefit that Mexico might push for is an expansion of free-trade zones along the U.S. border.

“That would get more U.S. capital going to Mexico — and Mexico has a very bright economic future,” Ohanian said.

Trump speaks of bringing back manufacturing jobs from abroad. But Ohanian said the new reality in today’s world is that certain things can be manufactured at a lower cost outside  the U.S.  American workers can compete by demonstrating a higher productivity rate on other things here.

However, he did agree with Trump’s call for lowering corporate income taxes.

“That’s one of the reasons why we’re losing a lot of jobs,” he said, since companies find it more economical to expand where rates are lower.

As Trump settles into the White House, Ohanian said he hopes the new president will listen to his advisers and change course if necessary.

“I hope Trump is a guy that can pivot and change if something isn’t working the way he wants,” he said.

Adriana Lleras-Muney Named by President as a Top Scientist

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Adriana Lleras-Muney

Adriana Lleras-Muney

On January 9th, President Obama named Adriana Lleras-Muney as a recipients of the Presidential Early Career Awards for Scientists and Engineers (PECASE), the highest honor bestowed by the United States Government on science and engineering professionals in the early stages of their independent research careers.

“I congratulate these outstanding scientists and engineers on their impactful work,” President Obama said. “These innovators are working to help keep the United States on the cutting edge, showing that Federal investments in science lead to advancements that expand our knowledge of the world around us and contribute to our economy.”

Lleras-Muney is a Professor of Economics, whose research is funded by the Department of Health and Human Services and other agencies. In her recent research, published in 2016, Lleras-Muney and her co-authors documented that cash transfers given to poor women early in the 20th century led to substantial improvements in lives of their children, who obtained more education, had higher incomes and lived longer lives as a result. This was the first paper estimating the lifetime causal effects of anti-poverty cash programs on children growing up in poverty. This project is continuing to investigate how the behavior of mothers was affected by the transfers, whether they remarried, who they remarried and how the transfers affected their participation in the labor force and ultimately their mortality. In other work Lleras-Muney is investigating the long term effects of New Deal programs implemented during the Great Recession. This research aims to provide evidence on the full costs and benefits of government policies designed to help those in need.

Read the official White House announcement

Measuring the Financial Soundness of Firms

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Pierre-Olivier Weill writing on a board

Pierre-Olivier Weill

A commonly held view is that adverse macroeconomic shocks are greatly amplified when firms are financially unsound.  For example a large adverse macroeconomic shock will trigger the bankruptcy of highly levered firms. When it does not trigger bankruptcies, this shock will create a debt overhang amongst highly levered firms, slowing down investment.  A related amplification effect goes through financial firms. Indeed when banks are financially unsound, they have poor incentives to identify good investment opportunities, and low capacity to make new loans.

Motivated by these observations, Andrew Atkeson (UCLA Economics), Andrea Eisfeldt (UCLA Anderson) and Pierre-Olivier Weill (UCLA Economics) have recently developed a macroeconomic measure of the financial soundness of U.S. firms called Distance to Insolvency, or DI. DI measures a firm’s leverage adjusted for its business risk. This adjustment, which follows insights from the corporate finance literature, is crucial: for example, holding leverage constant, a higher business risk will deteriorate financial soundness because it is now more likely that an adverse shock will be large enough to push the firm into bankruptcy.  Professors Atkeson, Eisfeldt and Weill show that DI can be approximated in a very simple way by the inverse of a firm equity volatility. Because data on equity prices are readily available, this allows them to construct and study the distribution of DI in the economy, for the entire universe of U.S. publicly traded firms, for a long time period (1926-2012). They obtain three main empirical findings.

Andrew-Atkeson

Andrew Atkeson

First, they find that over this time period a number of episodes occurred in which the distribution of DI deteriorated sharply. During these episodes, which they call “insolvency crises” the median firm’s DI fell to extremely low levels, normally associated with junk credit rating or worse. They find that the largest recessions in the sample, namely 1932–1933, 1937, and 2008, are indeed episodes of insolvency crises. But the other recessions are not. While this shows that financial frictions matter for the worse U.S. postwar recessions, this also casts some doubt on their importance in most of the other recession.

Second, they find that the sharp deterioration of firms’ DI during the insolvency crisis of 2008 appears to be mainly a result of an increase in business risk. The contribution of a rise in leverage due to excess borrowing or to a fall in asset values is relatively small.  This highlights the importance of considering business risk to evaluate macroeconomic financial soundness.

Third, they find that during the recession of 1932-1933, 1937 and 2008, the timing and magnitude of the insolvency crisis were the same for all firms, financial or nonfinancial, large or small. They find that the DI of systemically important financial institutions deteriorated significantly during the crisis, but not before. This highlights that one major challenge for prudential financial regulation is to identify weak financial institutions in advance of financial crises.

For more details see “Measuring the Financial Soundness of U.S. Firms, 1926-2012”.

Conference in honor of Hugo Hopenhayn

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Hugo Hopenhayn

Hugo Hopenhayn

This weekend the department hosted a conference in honor of Hugo Hopenhayn. Since receiving his Ph.D. from Minnesota, Professor Hopenhayn has made fundamental contributions to industrial organization, macroeconomics and finance. Professor Hopenhayn is perhaps best known for his work on the evolution of industries, where he has provided elegant, tractable and quantitatively accurate models of industry transitions. He has also published path breaking papers on patents, unemployment insurance, and financial contracts.

Reflecting Professor Hopenhayn’s broad interests, the conference featured papers on topics as diverse as gender wage gaps, dynamic bidding in auctions, and capital misallocation. Participants included Professor Hopenhayn’s colleagues and coauthors, including Nobel prize winner Edward Prescott (ASU), Richard Rogerson (Princeton) and VV Chari (Minnesota). Also in attendance were many of Professor Hopenhayn’s former students, including Andy Skrzypacz (Stanford), Gianluca Clementi (NYU), and Matt Mitchell (Toronto).

The conference was co-sponsored by the Center of the Advanced Study in Economics Efficiency at ASU.

Investigating Income Inequality

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Till Von Wachter

Till Von Wachter

It is well known that income inequality in the United States has risen substantially since the early 1980s. However, the sources of the ongoing rise in inequality are still debated. Yet, an understanding of these sources is important for assessing potential policy options to address potential adverse consequences of inequality. In his recent paper “Firming Up Inequality,” Professor Till von Wachter substantially improves our understanding of these issues by examining the role firms have played in the observed rise in inequality.

The major economic hypotheses put forward to explain rising inequality are intimately related to workers’ employers. Yet, very few studies had access to the necessary information to analyze the evolution of income inequality within and between firms.  A classic hypothesis is that adoption of more computer-intensive technologies has increased the demand of more skilled workers and reduced the demand for routine, manual labor. If some firms adopt new technologies earlier than others and share some of the resulting profits with their workers, this could lead to a rise in differences in mean pay between firms. Alternatively, if early adopters raise wages of higher skilled workers this could imply within-firm wage inequality to rise faster in some firms than others. Changes in technology can also affect the organization of production and which workers firms hire. While this has received less attention in the literature, such reorganization can have profound consequences for inequality. For example, if high-wage firms increasingly hire high-skilled workers, such changes in worker composition can also lead to a rise in differences in mean pay between firms and an increase in income inequality as a whole.

In his paper, Professor von Wachter studies the role of firms for rising inequality using a massive, new longitudinal data set from the Social Security Administration that contains information on earnings for all workers ever employed in the United States since 1980 to the present time. Professor von Wachter obtains three key findings. The first finding is that firms appeared to have played a key role in rising inequality –over two thirds of the rise in inequality in the United States from 1980 to today occurred due to a rise in inequality in average pay between firms. Strikingly, Professor von Wachter documents that this rise in differences in mean pay between firms was entirely driven by changes in which workers firms hired. In contrast, differences in wage premiums between firms, holding constant worker composition, have remained roughly stable in the United States since the early 1980s. Finally, the paper also documents that for workers at large firms and for top employees in general, a more substantial rise in inequality has actually occurred within firms.

The fact that changes in worker composition between firms plays such an important role in explaining rising inequality has important implications. The findings suggest the rise in inequality in the United States has been related to a substantial reorganization in production that has led to a concentration of high-skilled (and hence high-wage) workers at firms that pay above average wages. Professor von Wachter also presents evidence that high- and low-skilled workers are increasingly like to be working in different firms, even independently of firm pay. These findings are consistent with other evidence documenting a rise in both domestic and foreign outsourcing of U.S. companies, as well as a rising concentration of low-wage and high-wage occupations between firms in the U.S. and other countries. It appears firms have increasingly reorganized their production around more homogeneous work forces.

This ongoing reorganization has shaped the way Americans work, with important consequences for inequality and for the economic opportunities of lower-skilled individuals. Obtaining a job at a high-wage firm has increasingly become a privilege for high-skilled workers. In contrast, in the 1960s and 1970s low-skilled workers had access to high-wage employers and work environments with high-skilled workers. In other words, it does not appear that the availability of high-wage jobs has been changing, but that these good jobs have been increasingly been taken by high-skilled workers. At the same time, lower-skilled workers are now less likely to work with high-skilled workers, potentially limiting their productivity. What the underlying economic forces behind the ongoing reorganization of production are is an important question for future research.