Research

Best Job Market Paper Award (the Korea-America Economic Association)

Finalist of the Best Paper Award in Entrepreneurial Cognition (the Academy of Management and Kauffman Foundation)

* Previously circulated under the title "Job Prospects, Compensation, and Young Firm Dynamics"

Abstract: This paper studies how workers' uncertain job prospects affect young firm pay and employment growth, and quantifies the macroeconomic implications. I propose that workers need to learn about young firms due to the firms' lack of history, and workers' beliefs about job prospects can affect young firm activity by generating wage differentials. Using a heterogeneous firm directed search model in which workers gradually learn about firm types, I show that workers' job prospects generate endogenous wage differentials for young firms. In particular, younger firms with high (low) demonstrated potential must pay wage premia (discounts) relative to otherwise similar mature firms to attract workers. This is because with limited track records, workers are less certain about young firms' performance as an indicator of the firms' fundamentals. I find that these wage differentials affect both hiring and retention margins of young firms and can dampen the growth of high-potential young firms. Furthermore, the model indicates that higher uncertainty about young firms can hamper overall young firm activity and aggregate productivity by amplifying the wage gaps. Using employee-employer linked data from the U.S. Census Bureau and regression specifications guided by the model, I find empirical evidence supporting the model predictions.

Presented at: MEA Annual Meeting (Minneapolis), North American Summer Meeting of the Econometric Society 2022 (Miami), Federal Reserve Bank of Chicago, Asian Meeting of the Econometric Society 2022 (virtual), RES Symposium of Junior Researchers 2022 (virtual), WEAI Annual Conference (virtual), Australasian Meeting of the Econometric Society 2022 (virtual), Academy of Management Annual Meeting (Seattle, invited as the Best Paper Award finalist), Young Economist Symposium 2022 (Yale), U.S. Census CES Seminar (virtual), Economics Graduate Student Conference 2022 (WUSTL), KAEA Job Market Conference (virtual, scheduled), Midwest Macro Fall 2022 Meeting (SMU), SEA Annual Meeting (Fort Lauderdale), Minneapolis Fed Junior Scholar Conference, IMF (scheduled), RES-SES Annual Conference (scheduled)

with Karam Jo

Working Paper [SSRN Paper Version] [Slides]

Abstract: This paper studies the effect of competition on firm innovation by developing a discrete-time endogenous growth model where multi-product firms do two types of innovation subject to friction in technology spillovers. Firms improve their existing products through internal innovation while entering others' product markets through external innovation. We introduce novel friction termed imperfect technology spillovers, which refers to friction in learning others' technology in the process of external innovation. In contrast to existing models, this friction allows incumbent firms to defend themselves from competitors by building technological barriers through internal innovation. Using firm-level data from the U.S. Census Bureau integrated with firm-level patent data, we find regression results consistent with the model predictions. Our counterfactual analysis shows that rising competition leads incumbent firms to undertake (i) more (less) internal innovation for the products they have a (no) technological advantage in, and (ii) less external innovation. This compositional change in firm innovation affects overall innovation in the aggregate economy in different directions depending on the costs of external innovation. Specifically, the shift in innovation composition in response to rising competition decreases overall innovation in the U.S. while increasing that in an economy with high external innovation costs. These findings highlight that the change in innovation composition resulting from firms' strategic choices is an important margin to understand the heterogeneous effect of increasing competition on overall innovation across different countries.

Presented at: WEAI Virtual International Conference (virtual, co-author presented), RES Annual Meeting (virtual), WEAI Annual Conference (virtual), Economics Graduate Student Conference 2021 (WUSTL), Sejong University (co-author presented), European Winter Meeting of the Econometric Society 2021 (virtual), MEA Annual Meeting (Minneapolis), U.S. Census CES Seminar (virtual, co-author presented), Korean Econometric Society 2022 Fall Conference (SNU, co-author presented), Korea International Economic Association 2022 Winter conference (SNU, scheduled)

with Yuheng Ding and Karam Jo

CES Working Paper No. 22-31 [CES Paper version]

Abstract: This paper constructs a patent assignee-firm longitudinal bridge between U.S. patent assignees and firms using firm-level administrative data from the U.S. Census Bureau. We match granted patents applied between 1976 and 2016 to the U.S. firms recorded in the Longitudinal Business Database (LBD) in the Census Bureau. Building on existing algorithms in the literature, we first use the assignee name, address (state and city), and year information to link the two datasets. We then introduce a novel search-aided algorithm that significantly improves the matching results by 7% and 2.9% at the patent and the assignee level, respectively. Overall, we are able to match 88.2% and 80.1% of all U.S. patents and assignees respectively. We contribute to the existing literature by 1) improving the match rates and quality with the web search-aided algorithm, and 2) providing the longest and longitudinally consistent crosswalk between patent assignees and LBD firms.

with Karam Jo

Working Paper

Abstract: Do firms seek a better product match and grow by dropping existing products and adding new ones? How does this behavior vary over the firm life-cycle and business cycle? This paper investigates a "match-quality ladder" channel empirically by using a detailed product-firm level administrative database for the U.S. manufacturing sector and documents salient features of product switching by firms. We newly estimate the match quality of product-firm pairs and obtain the following set of results: i) young firms are less likely to drop products with low match quality than mature firms; ii) dropping low match-quality products can increase the likelihood of adding products and the quality of products added subsequently, and iii) has a positive impact on firm performance and growth. These indicate that proper product switching is important for young firms to climb up the product match-quality ladder and achieve fast growth. Lastly, we further look into cyclical variations of the channel and find that iv) the product switching pattern of young firms gets even more pronounced in recessions. This provides a potential source accounting for procyclical young firm activities.

Presented at: WEAI International Conference (scheduled), Midwest Economic Association Conference (scheduled)

with Serguey Braguinsky, Joonkyu Choi, Yuheng Ding, and Karam Jo

Working Paper, Draft Available Upon Request

Abstract: We examine how increasing knowledge complexity and the accompanying rise in innovation cost affect firm innovation patterns and business dynamism in the U.S. economy. Using the administrative firm-level data from the U.S. Census Bureau integrated with the firm-level patent database, we document the increasing trend in knowledge complexity in firm innovation activities, which is even more pronounced among large firms. We offer a simple endogenous growth model which predicts that rising knowledge complexity in innovation process, proxied by higher complementarity (or interdependence) across different R&D inputs, can dampen innovation activities and impede entry and growth of small and young firms. We find empirical support for these predictions, where higher knowledge interdependence is associated with lower entry rates and employment shares of small patenting firms.

Presented at: 2022 FSRDC Annual Research Conference (Kansas City Fed, co-author presented)