Essays on firm-level shocks, expectations and uncertainty

Abstract

Recent literature of industry dynamics has considered productivity as one of the main source of firm heterogeneity that determines firm performance and growth. The goal of the first chapter on my thesis is to consider demand shocks as another unobserved dimension generating firm heterogeneity. I develop an empirical model combining a CES demand function with a Cobb-Douglas production function. I apply it at Bank of Italy’s Survey of Industrial and Service Firms, a dataset of Italian manufacturing firms containing unique set of information on firm-level prices. Once I obtained consistent estimation of demand elasticity and production function parameters and, as a consequence, estimations of demand and productivity shocks, I study the effect of these shocks on the main firm-level variable. Main findings are that productivity shocks positively affect quasi-fixed input as investments and employment while they have no effect on the variable input whilst demand shocks are able to affect both kind of input. In particular, demand shocks have a great positive impact not only on the most easily modifiable factors in the short run (works hours and capital utilization) but they also affect quasi-fixed input. In particular, the effect on investment are smaller with respect to the one of productivity shocks but the effect on employment is greater in magnitude and it realizes through a positive effect on hiring and a negative one on separations. In the second chapter on my thesis (coauthored with Roberto Casarin) I focus my attention on firms expectations and uncertainty about future business conditions because even if they are some of the main drivers of firm-level decisions concerning investment, employment and capacity utilization, in the empirical literature, there is no evidence of how firms create expectations and, moreover there is no general consensus on how to estimate uncertainty. Exploiting the rich information contained in the INVIND data set, a survey on manufacturing Italian firms collected yearly by the Bank of Italy, this paper goes in the direction to enrich this stream of literature. Precisely, the contribution of this paper is threefold: first, we present some stylized fact about firm expectations’ formation process and a measure of self-declared uncertainty; second, we propose two measures of firm-level and time-varying uncertainty based of the concept of forecast error; third, we construct micro-founded macro uncertainty measures and we compare them with the standard measures used in the literature Finally, the third chapter (co-authored with Agar Brugiavini) has the object to study the determinants of capacity utilization rate in manufacturing firms. The main motivation of this study is that according to the European Commission Investment Survey: low capacity utilization rates were one of the most important factors constraining investment in manufacturing in Italy during and after the crisis because, in general, high rate of capacity utilization implies positive output growth rate, need for investment and high level of demand whilst low rate of capacity utilization implies stagnant output growth rate together with inefficiency and slacks. As a consequence, increasing capacity utilization represents a means of accelerating growth and a well understanding of the determinants of the capacity utilization is essential from an economic policy point of view. This work goes in the direction to unravelling the different factors affecting capacity utilization from a firm-level perspective analysing a panel of Italian manufacturing firms. We find that capacity utilization is negatively affected by uncertainty (even if with strong differences at sectorial level) and that firms with high market power tend to exhibit higher rates of capacity utilization.