Foreign competition and the reallocation of economic activity within and across firms: measuring the productivity gains and the impacts on workers

This thesis consists of three chapters on the influence of firms' market power on derived factor demand and the reallocation of productive resources. 

In the first chapter, I investigate how imperfect competition impacts resource reallocation and how we tend to measure it. The covariance between firms’ productivity and market shares is commonly used to analyze how the allocation of resources evolves within an industry in the aftermath of a policy change. In particular, any observed increase in this covariance has been interpreted as a sign of improved allocative efficiency. In this paper, I verify the validity of this interpretation in models of monopolistic competition where the allocation of resources is influenced both by firm markups and by policy distortions of the business environment. In particular, I examine what happens to the productivity-size covariance after policy interventions that reduce market access barriers, entry and fixed costs of doing business for firms. My comparative statics analyses indicate that a higher covariance term rarely provides meaningful insights into welfare and allocative efficiency improvements. As a result, caution is warranted when employing and interpreting this measure in both academic and policy work.

As this reallocation process is ultimately tied to the decisions of individual producers, in the second chapter of the thesis, I examine how competition influences the incentive of firms to expand or contract in response to changes in their productivity. Under perfect competition, productivity growth leads profit-maximizing firms to expand production and demand more input factors. If firms have market power, I prove this is not always true. In particular when more productive firms have the incentive to raise their markups. At high levels of markups, firms may reduce their factor demand when they become more productive. The contribution of my work is to identify the theoretical conditions under which this decoupling of factor demand from productivity growth takes place. As the critical mechanism is the incomplete pass-through of productivity to output, I characterize the conditions that lead to this behavior in terms of the shape of output demand and market structure. Many widely used demand functions meet these conditions in workhorse models of monopolistic and oligopolistic competition. I also discuss how this decoupling can be detected in the data. In an empirical illustration based on Chinese manufacturing firms, I find patterns consistent with this result in many narrowly defined industries. 

In the third chapter, I examine the changing patterns of business dynamism in Europe together with my S. Inferrera, M. Mertens, and J. Miranda. In the US, the slowdown in the process of birth, expansion, and contraction of firms has received ample attention because of its far-reaching implications for aggregate productivity growth. However, this phenomenon is still poorly documented in Europe, mainly because of a lack of comparable data across countries. We address this challenge by collecting indicators on business dynamism from administrative data for 19 European countries through the Competitiveness Research Network (CompNet) infrastructure. Equipped with this novel micro-aggregated data, we document a decline in job reallocation rates in all these countries over the last two decades. To understand this widespread decline, we first analyze the dynamics of job reallocation rates based on relevant firm characteristics. This decline concerned most economic sectors and was mainly driven by dynamics within sectors, size classes, and age classes rather than by compositional changes. In particular, large and mature firms experienced the most substantial decline in job reallocation rates. Simultaneously, the shares of employment and sales of young firms declined, suggesting that European countries are experiencing a structural aging of their economies. Consistent with US evidence, we find that the responsiveness of firms’ employment changes to productivity has declined in many European countries. However, the dispersion of productivity shocks has decreased too. To enhance our understanding of these patterns, we derive a firm-level framework that relates variations in firms’ productivity, market power, and technology (rather than adjustment costs) to firms’ responsiveness. 

These chapters have been written independently and should be read as standalone papers.