CES-WP-07-33
Democratizing Entry: Banking Deregulations, Financing Constraints, and Entrepreneurship
William Kerr, Ramana Nanda
December 01, 2007
We study how US branch-banking deregulations affected the entry and exit of firms in
the non-financial sector using establishment-level data from the US Census Bureau’s
Longitudinal Business Database. The comprehensive micro-data allow us to study how the entry
rate, the distribution of entry sizes, and survival rates for firms responded to changes in banking
competition. We also distinguish the relative effect of the policy reforms on the entry of startups
versus facility expansions by existing firms. We find that the deregulations reduced financing
constraints, particularly among small startups, and improved ex ante allocative efficiency across
the entire firm-size distribution. However, the US deregulations also led to a dramatic increase in
“churning” at the lower end of the size distribution, where new startups fail within the first three
years following entry. This churning emphasizes a new mechanism through which financial
sector reforms impact product markets. It is not exclusively better ex ante allocation of capital to
qualified projects that causes creative destruction; rather banking deregulations can also
“democratize” entry by allowing many more startups to be founded. The vast majority of these
new entrants fail along the way, but a few survive ex post to displace incumbents.
 View Paper 41 Pages 259174 Bytes
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CES-WP-07-32
The Role of Financial Conglomerates in Industry Formation: Evidence from Early Modern Japan
John Tang
December 01, 2007
Large conglomerates known as zaibatsu have long been credited with leading Japanese industrialization during the Meiji Period (1868-1912). I develop a new dataset collected from corporate genealogies and estimate the likelihood of first entry with discrete choice econometric methods. I find zaibatsu are indeed more likely to pioneer new industries relative to independent firms. This may be due to their ability to finance investments internally, autonomy from shareholder interference, and lower risk aversion from being diversified. Nevertheless, zaibatsu lag independent firms in introducing innovative technologies, possibly from their preference for scale and monopolistic industries, conservative ownership, and organizational complexity.
View Paper 35 Pages 723381 Bytes
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CES-WP-07-31
Regional Industrial Dominance, Agglomeration Economies, and Manufacturing Plant Productivity
Joshua Drucker, Edward Feser
December 01, 2007
In a seminal article, Benjamin Chinitz (1961) focused attention on the effects that
industry size, structure, and economic diversification have on firm performance and regional
economies. He also raised a related but conceptually distinct question that has been overlooked
since: how does the extent to which a regional industry is concentrated in a single or small
number of firms impact the performance of other local firms within that industry? He suggested
that such regional industrial dominance may impact input prices, limit capital accessibility, deter
entrepreneurial activity, and reduce the regional availability of agglomeration economies such as
specialized labor and supply pools In this paper, we use an establishment-level production
function to quantify the links between industrial dominance, agglomeration economies, and firm
performance. We consider two questions. First, do greater levels of regional industrial
dominance lead to lower economic performance by small, dominated manufacturing plants?
Second, are small plants in dominated regional industries more limited in capturing regional
agglomeration benefits and therefore do they face rigidities in deploying production factors to
maximum advantage? Our results suggest that regional industrial organization does influence
productivity but that the effect tends to be a direct one, rather than an indirect effect via its
influence on agglomeration economies.
View Paper 54 Pages 418071 Bytes
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CES-WP-07-30
Crime's Impact on the Survival Prospects of Young Urban Small Businesses
Timothy Bates, Alicia Robb
October 01, 2007
High prevailing levels of criminal activity have numerous impacts on the viability of
urban small businesses and the various impacts are not uniformly negative. It is the negative
impacts, however, that are most often noted. Either the perception or reality of rampant crime
can scare away customers, potential employees, lending institutions, even casualty insurance
underwriters. Yet, competitors may also be driven away. Operating in a high-crime area can be
advantageous, on balance, for some firms. Our analysis of nearly 5,000 urban businesses started
between 1986 and 1992 indicates that those most seriously impacted by crime exhibit no
measureable disadvantage regarding firm size, capitalization, survival rates, or other traits,
relative to firms whose owners report that crime has not impacted them negatively.
View Paper 30 Pages 91545 Bytes
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CES-WP-07-29
Diversification, Organizational Adjustment and Firm Performance: Evidence from Microdata
Evan Rawley
October 01, 2007
This paper proposes that diversification taxes firms’ existing organizational
systems by altering routines, formal contract structures and strategies. I test the proposition that
organizational adjustment costs associated with diversification erode incumbent competitive
advantage, using novel microdata on taxicab firms from the Economic Census. The tests exploit
exogenous local characteristics of taxi markets to identify the impact of diversification on firm
organization and performance. Supporting the contention that diversification leads to
organizational adjustments, the results show that diversifying firms are less likely to adopt
computerized dispatching systems for their taxicabs and make significant changes in their formal
contract structures governing asset ownership. Consistent with the theory, diversification is
associated with falling taxi productivity. Comparing the productivity of diversified and focused
start-ups and incumbent firms reveals that the organizational change component of
diversification accounts for an 18% decrease in paid ride-miles per taxi. The results support the
core contention of the paper that diversification taxes firms’ existing organizational capital.
View Paper 66 Pages 432770 Bytes
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CES-WP-07-28
Electricity Pricing to U.S. Manufacturing Plants, 1963-2000
Steven Davis, Cheryl Grim, John Haltiwanger, Mary Streitwieser
October 01, 2007
We construct a large customer-level database and use it to study electricity pricing
patterns from 1963 to 2000. The data show tremendous cross-sectional dispersion in the
electricity prices paid by manufacturing plants, reflecting spatial price differences and quantity
discounts. Price dispersion declined sharply between 1967 and 1977 because of erosion in
quantity discounts. To estimate the role of cost factors and markups in quantity discounts, we
exploit differences among utilities in the purchases distribution of their customers. The
estimation results reveal that supply costs per watt-hour decline by more than half over the range
of customer-level purchases in the data, regardless of time period. Prior to the mid 1970s,
marginal price and marginal cost schedules with respect to annual purchase quantity are
remarkably similar, in line with efficient pricing. In later years, marginal supply costs exceed
marginal prices for smaller manufacturing customers by 10% or more. The evidence provides no
support for a standard Ramsey-pricing interpretation of quantity discounts on the margin we
study. Spatial dispersion in retail electricity prices among states, counties and utility service
territories is large, rises over time for smaller purchasers, and does not diminish as wholesale
power markets expand in the 1990s.
View Paper 63 Pages 310100 Bytes
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CES-WP-07-27
A Unified Framework for Measuring Preferences for Schools and Neighborhoods
Patrick Bayer, Fernando Ferreira, Robert McMillan
October 01, 2007
This paper develops a comprehensive framework for estimating household preferences
for school and neighborhood attributes in the presence of sorting. It embeds a boundary
discontinuity design in a heterogeneous model of residential choice to address the endogeneity of
school and neighborhood attributes. The model is estimated using restricted-access Census data
from a large metropolitan area, yielding a number of new results. First, households are willing to
pay less than one percent more in house prices – substantially lower than previous estimates –
when the average performance of the local school increases by five percent. Second, much of the
apparent willingness to pay for more educated and wealthier neighbors is explained by the
correlation of these sociodemographic measures with unobserved neighborhood quality. Third,
neighborhood race is not capitalized directly into housing prices; instead, the negative
correlation of neighborhood race and housing prices is due entirely to the fact that blacks live in
unobservably lower quality neighborhoods. Finally, there is considerable heterogeneity in
preferences for schools and neighbors: in particular, we find that households prefer to selfsegregate
on the basis of both race and education.
View Paper 51 Pages 325935 Bytes
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CES-WP-07-26
The Dynamics of Market Structure and Market Size in Two Health Services Industries
Timothy Dunne, Shawn Klimek, Mark Roberts, Yi Xu
October 01, 2007
The relationship between the size of a market and the competitiveness of the market has
been of long-standing interest to IO economists. Empirical studies have used the relationship
between the size of the geographic market and both the number of firms in the market and the
average sales of the firms to draw inferences about the degree of competition in the market. This
paper extends this framework to incorporate the analysis of entry and exit flows. A key
implication of recent entry and exit models is that current market structure will likely depend
upon history of past participation. The paper explores these issues empirically by examining
producer dynamics for two health service industries, dentistry and chiropractic services. We find
that the number of potential entrants and past number of incumbent firms are correlated with
current market structure. The empirical results also show that as market size increases the
number of firms rises less than proportionately, firm size increases, and average productivity
increases. However, the magnitude of the correlations are sensitive to the inclusion of the market
history variables.
View Paper 35 Pages 130645 Bytes
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CES-WP-07-25
Access Methods for United States Microdata
Daniel Weinberg, John Abowd, Sandra Rowland, Philip Steel, Laura Zayatz
August 01, 2007
Beyond the traditional methods of tabulations and public-use microdata samples, statistical
agencies have developed four key alternatives for providing non-government researchers with
access to confidential microdata to improve statistical modeling. The first, licensing, allows
qualified researchers access to confidential microdata at their own facilities, provided certain
security requirements are met. The second, statistical data enclaves, offer qualified researchers
restricted access to confidential economic and demographic data at specific agency-controlled
locations. Third, statistical agencies can offer remote access, through a computer interface, to the
confidential data under automated or manual controls. Fourth, synthetic data developed from the
original data but retaining the correlations in the original data have the potential for allowing a
wide range of analyses.
View Paper 34 Pages 92493 Bytes
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CES-WP-07-24
Lessons for Targeted Program Evaluation: A Personal and Professional History of the Survey of Program Dynamics
Daniel Weinberg
August 01, 2007
The Survey of Program Dynamics (SPD) was created by the 1996 welfare reform
legislation to facilitate its evaluation. This paper describes the evolution of that survey, discusses
its implementation, and draws lessons for future evaluation. Large-scale surveys can be an
important part of a portfolio of evaluation methods, but sufficient time must be given to data
collection agencies if a high-quality longitudinal survey is expected. Such a survey must have
both internal (agency) and external (policy analyst) buy-in. Investments in data analysis by
agency staff, downplayed in favor of larger sample sizes given a fixed budget, could have
contributed to more external acceptance. More attention up-front to reducing the potentially
deleterious effects of attrition in longitudinal surveys, such as through the use of monetary
incentives, might have been worthwhile. Given the problems encountered by the Census Bureau
in producing the SPD, I argue that ongoing multi-purpose longitudinal surveys like the Survey of
Income and Program Participation are potentially more valuable than episodic special-purpose
surveys.
View Paper 31 Pages 85265 Bytes
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