Joint work with Francesco Del Prato; VisitINPS 2020 project. Under revision. NEW VERSION COMING SOON!
Abstract. We explore the effect of a reduction in overall labor costs, indirectly induced by an Italian reform that weakened employment protection legislation, on the productivity distribution of manufacturing firms. Due to the unique institutional features of the Italian collective bargaining system, in the manufacturing sector the reform led to a clean reduction in average worker compensation, without altering the average structure of employment relationships. This decrease in labor cost resulted in a reduction in average total factor productivity (TFP) among less productive firms, and an increase at the upper end of the distribution. We pair these findings with increased entry and exit dynamics among low-productivity firms, suggesting the presence of an adverse selection mechanism at the bottom of the TFP distribution, enhanced by the reform. We formalize this concept via a general equilibrium model that links productivity to frictions in the markets for inputs.
Abstract. We develop a model of staged entry: to operate, monopolistically competitive firms must pay two sequential entry costs, each time acquiring a more informative signal of future performance. This model yields two implications for fiscal policy. First, the equilibrium outcome is constrained-efficient if preferences are CES and entry costs are exogenous. Second, when entry costs depend on how many firms pass any entry stage (due to positive knowledge spillovers or negative congestion effects) the resulting externalities can be offset via Pigouvian taxes or subsidies that are timed around the relevant entry decisions. A calibration exercise based on U.S. firm-entry data shows that these policies would raise welfare through a wider pool of entrants and sharper selection of productive firms.