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1. Productivity Dispersion, Misallocation, and Reallocation Frictions: Theory and Evidence from Policy Reforms

   https://doi.org/10.1057/s41294-021-00157-0  

   Brown, J. David; Dinlersoz, Emin; Earle, John S. (January 2021, Comparative Economic Studies)

   null (Ed.)

   Recent research maintains that the observed productivity variation across firms reflects resource misallocation and concludes that large GDP gains may be obtained from market-liberalizing polices. Our theoretical analysis examines the impact on productivity dispersion of reallocation frictions in the form of costs of entry, operation, and restructuring, and shows that reforms reducing these frictions may raise dispersion of productivity across firms. Contrary to conventional wisdom, the model does not imply a negative relationship between aggregate productivity and productivity dispersion. Our empirical analysis focuses on episodes of liberalizing policy reforms in the US and six East European transition economies. We find that deregulation of US telecommunications equipment manufacturing is associated with increased, not reduced, productivity dispersion, and that every transition economy in our sample shows a sharp rise in dispersion after liberalization. Productivity dispersion under communist central planning is similar to that in the US, and it rises faster in countries liberalizing more quickly. We also find that lagged productivity dispersion predicts higher future productivity growth, likely because dispersion reflects experimentation by both entering and incumbent firms. The analysis suggests there is no simple relationship between the policy environment and productivity dispersion. 

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2. Missing Novelty in Drug Development

   https://doi.org/10.1093/rfs/hhab024  

   Krieger, Joshua; Li, Danielle; Papanikolaou, Dimitris (March 2021, The Review of Financial Studies)

   Koijen, Ralph (Ed.)

   Abstract We provide evidence that risk aversion leads pharmaceutical firms to underinvest in radical innovation. We introduce a new measure of drug novelty based on chemical similarity and show that firms face a risk-reward trade-off: novel drug candidates are less likely to obtain FDA approval but are based on more valuable patents. Consistent with a simple model of costly external finance, we show that a positive shock to firms’ net worth leads firms to develop more novel drugs. This suggests that even large firms may behave as though they are risk averse, reducing their willingness to investment in potentially valuable radical innovation. 

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3. The Darwinian Returns to Scale

   https://doi.org/10.1093/restud/rdad061  

   Baqaee, David Rezza; Farhi, Emmanuel; Sangani, Kunal (June 2023, Review of Economic Studies)

   Abstract How does an increase in market size, say due to globalization, affect welfare? We study this question using a model with monopolistic competition, heterogeneous markups, and fixed costs. We characterize changes in welfare and decompose changes in allocative efficiency into three different effects: (1) reallocations across firms with heterogeneous price elasticities due to intensifying competition, (2) reallocations due to the exit of marginally profitable firms, and (3) reallocations due to changes in firms’ markups. Whereas the second and third effects have ambiguous implications for welfare, the first effect, which we call the Darwinian effect, always increases welfare regardless of the shape of demand curves. We nonparametrically calibrate demand curves with data from Belgian manufacturing firms and quantify our results. We find that mild increasing returns at the microlevel can catalyze large increasing returns at the macrolevel. Between 70 and 90% of increasing returns to scale come from improvements in how a larger market allocates resources. The lion’s share of these gains are due to the Darwinian effect, which increases the aggregate markup and concentrates sales and employment in high-markup firms. This has implications for policy: an entry subsidy, which harnesses Darwinian reallocations, can improve welfare even when there is more entry than in the first best. 

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4. Behavioral mechanisms underlying trait-mediated survival in a coral reef fish

   https://doi.org/10.3389/frish.2023.1276343  

   Rankin, Tauna L; Cowen, Madeline C; Kandlikar, Gaurav S; Shulzitski, Kathryn; Sponaugle, Su (January 2024, Frontiers in Fish Science)

   Fast growth and large size generally increase survivorship in organisms with indeterminate growth. These traits frequently covary, but where they do not, trade-offs often exist in the behavioral choices of organisms. Juvenile bicolor damselfishStegastes partitusthat settle on coral reefs at larger sizes generally experience enhanced survivorship but have slower juvenile growth rates. We hypothesized that differences in behavior may mediate this trade-off. To test whether it is trait-related behaviors or the traits themselves that enhance early survival, we combined individual behavioral observations with otolith (ear stone)-based daily growth measurements for juvenileS. partitusin the Florida Keys. Foraging, sheltering, and chasing behaviors of 256 fish were measured during 5 different months (2008–2009), and patterns of differential survival were similar to those from a 6-year (2003–2008) recruitment time series. We found a trade-off between sheltering and foraging that significantly explained patterns in size-at-settlement: damselfish that settled at larger sizes spent less time sheltered and more time feeding high in the water column. Juvenile growth rates were unrelated to any of the sheltering–foraging behaviors but instead were inversely related to adult conspecific density. Damselfish that settled near higher densities of conspecifics were subjected to increased territorial chasing. Chasing intensity interacted with settlement size such that large juveniles who were chased more frequently exhibited slower growth rates, whereas smaller settlers did not experience this energetic cost. Thus, the dominant survival strategy ofS. partitusis to settle at a large size and spend more time foraging high in the water column while dodging conspecifics at an energetic cost to their growth rates. Size-at-settlement is determined during the larval period and after settlement, this trait is key to subsequent behaviors and the strength of trait-mediated survival. Understanding how somatic growth, body size, and survival are intertwined in early life is necessary to help explain population dynamics. 

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5. Parents’ Beliefs about Their Children’s Academic Ability: Implications for Educational Investments

   https://doi.org/10.1257/aer.20171172  

   Dizon-Ross, Rebecca (August 2019, American Economic Review)

   Schools worldwide distribute information to parents about their children’s academic performance. Do frictions prevent parents, particularly low-income parents, from accessing this information to make decisions? A field experiment in Malawi shows that, at baseline, parents’ beliefs about their children’s academic performance are often inaccurate. Providing parents with clear, digestible performance information causes them to update their beliefs and adjust their investments: they increase the school enrollment of their higher-performing children, decrease the enrollment of lower-performing children, and choose educational inputs that are more closely matched to their children’s academic level. Heterogeneity analysis suggests information frictions are worse among the poor. (JEL C93, D83, I21, I24, J13, O15) 

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