Macro Roundup

interesting view of principal-agent problem, when low productivity Spanish firms were exposed to import competition the family managed firms

"...we use rich, firm-level data from Spain and changes in EU-imposed import tariffs between 1993 and 2007 to study how stiffer import competition affects productivity of firms depending on their manager type. We find that family-managed firms with initially low productivity show significant productivity increases after a reduction of import tariffs. This is in contrast to initially very productive family firms as well as non-family firms, whose productivity is not affected by import competition. This finding is driven by family management rather than family ownership or other characteristics of family firms. In addition, these productivity increases seem to be driven by a more efficient use of input materials rather than innovation activities like R&D or patenting. This shows that family managers that face increased bankruptcy risk try to improve their cash flow position in order to ensure survival into the next period. We propose a model featuring heterogeneity in managers’ preferences in order to rationalize the empirical findings. Motivated by the literature, we assume that family managers receive additional private benefits when their firm exists. When import competition increases, the bankruptcy risk of the initially unproductive firms increases. Family managers increase effort which makes the firm more productive and ensures survival, while professional managers let the firm exit. Consistent with this notion of the preferences of family managers, our findings are empirically stronger for multigenerational family firms. Our results shed light on the behavior of family firms, which contribute to a large share of economic activities in many countries throughout the world. Economists have long been worried about the implications of unsatisfactory performance of family firms on welfare and aggregate productivity. At the same time, the surge of China’s exports in recent decades has increased the bankruptcy risk of these vulnerable firms. Our findings suggest that the attachment of family managers to their firms creates a stronger motive to “fight” against bankruptcy when the import shock hits. This mechanism may help to reconcile the mixed evidence in existing empirical studies, which have found positive effects for emerging economies that typically host a large number of family managers. Also, this positive effect of import competition is in contrast to the literature that has pictured family managers as less able or less productive. However, all is not well: The increased efforts are targeted towards improving short-term efficiency (to ensure survival) rather than long-term productivity based on innovation or research and development. Future research should focus on embedding these findings into a general equilibrium trade model that can help us understand how the difference in managers’ preferences affects gains in aggregate productivity and welfare after trade liberalization..."
Cheng Chen, Claudia Steinwender, "Import Competition, Heterogeneous Preferences of Managers, and Productivity," National Bureau of Economic Research, February 2019, https://www.nber.org/papers/w25539

Jason Delisle, "Are low-scoring students at elite colleges mostly wealthy?," American Enterprise Institute, April 2, 2019, https://www.aei.org/education/higher-education/are-low-scoring-students-at-elite-colleges-mostly-wealthy/

Are low-scoring students at elite colleges mostly wealthy?

The college admissions scandal has led some researchers to wonder why wealthy families felt the need to cheat to get their kids into elite colleges. They argue that selective universities already admit large numbers of students with low test scores who are “disproportionately wealthy.”

Most people have heard about so-called legacy admissions at elite colleges and how these institutions often recruit high-income students who can pay the full tuition price, so it stands to reason that admissions offices might be less picky about the test scores of these students. When we examine the claim against a representative data set of college students, it is hard to conclude, however, that these low-scoring students are disproportionately wealthy.

The researchers have defined a low test score as an SAT score “hundreds of points below the median of other students,” and wealthy as the top income quartile of US households. The median SAT score (combined math and verbal) at selective institutions is about 1220. Therefore, the low test scores referenced must mean students who scored below 1020.

The chart below shows the income distribution for three groups of students. The first group is all students at selective colleges. The second group is made up of students from the same set of selective schools, but only those with test scores below 1020 (note that this sample size is relatively small, only about 500 students). And the third shows the income distribution of students enrolled in bachelor’s degree programs at all colleges and universities regardless of selectivity who also have test scores below 1020.

The third bar, the one showing all students with low test scores, offers another comparison to test the claim. Here the data suggest that students with low test scores at selective schools are about as likely to be wealthy as students with low test scores at any college or university (due to the small sample, the difference shown in the chart is within the margin of error). Moreover, low-scoring students are also about as likely to be poor at either set of schools.

All in all, there just isn’t strong evidence to support the claim that students with low test scores at elite colleges are disproportionately wealthy. It remains a mystery how some researchers have managed to conclude otherwise.