Industrial organisation

Elena Paltseva, Gerhard Toews, Marta Troya-Martinez, 29 June 2022

The poor formal enforcement of contracts in countries with weak institutions can deter firms from investing. This column explores how multinational firms manage their relationships with governments in response to the threat of expropriation, focusing on the oil and gas industry. The results suggest that to decrease the risk of expropriation, multinationals delay investment, production, and tax payments by more than five years in countries with weak institutions relative to those with strong institutions. This may be a second-best outcome in the absence of formal enforcement. 

Alex Edmans, Doron Levit, Jan Schneemeier, 17 June 2022

Responsible investing has become an increasingly popular practice, with the blanket exclusion of ‘brown’ industries – such as tobacco, gambling, and fossil fuels – widely regarded as its purest form. This column suggests that in some cases, ‘tilting’ (leaning away from a brown sector but keeping an industry leader) is a more effective strategy than shunning the industry outright. Though exclusion may work best for such industries as controversial weapons, tilting is preferable for an industry, such as fossil fuels, in which managers can be pressured to take corrective action.

Frank Verboven, Biliana Yontcheva, 25 May 2022

Entry restrictions can help correct market failures, but also serve to maximise industry profits. This column studies how geographic entry regulation of the Latin notary system balances consumer and producer interests. Using a spatial demand model, it shows that the state places significantly more weight on industry profits than consumer surplus when granting entry licenses. Furthermore, it estimates high markups for notaries, particularly in real estate transactions. Reforms such as reducing fees and liberalising entry can have substantial welfare-improving effects.

Michele Cascarano, Filippo Natoli, Andrea Petrella, 18 May 2022

The question of whether firms are able to adapt to a changing climate is central to understanding the long-run economic effects of climate change. This column presents evidence from Italy showing that high temperatures affect firm demography by reducing the entry of newborn firms in the market and increasing business closures, while relocation to colder areas plays a minor role. Balance sheet data reveal a dichotomy between large firms, which successfully adapt improving their profitability, and smaller ones for which negative temperature spillovers become entrenched.

Bo Cowgill, Andrea Prat, Tommaso Valletti, 16 May 2022

Industry concentration leads to increased market power, but can it also lead to increased political power? This question, first asked by Brandeis in 1914, is receiving renewed attention. This column investigates the effect of a merger on the amount of political activity of the merging firms. While theoretical predictions are ambiguous, US data from the past 20 years indicate that the average merger involving listed companies is associated with a 30% increase in lobbying spending. 

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