Entrepreneurship, Job Creation, and Wage Growth

This paper analyses the importance of entrepreneurs for job creation and wage growth. Relying on unique data that cover all establishments, firms and individuals in the Danish private sector, we are able to distil a number of different subsets from the total set of new establishments – subsets which allow us to more precisely capture the "truly new" or "entrepreneurial" establishments than in previous studies. Using these data, we find that while new establishments in general account for one third of the gross job creation in the economy, entrepreneurial establishments are responsible for around 25% of this, and thus only account for about 8% of total gross job creation in the economy. However, entrepreneurial establishments seem to generate more additional jobs than other new establishments in the years following entry. Finally, the jobs generated by entrepreneurial establishments are to a large extent low-wage jobs, as they are not found to contribute to the growth in average wages.job creation; entrepreneurial establishments; wage growth

Foreign Firms, Domestic Wages

Many papers have documented a wage premium in foreign-owned and large firms. However, there is very little formal theory in the literature and empirical analyses are typically not based on hypotheses which are rigorously derived from theory. This paper contributes to the theory-empirics gap by developing a model that allows for two “pure” explanations for the wage premium. The first is a heterogenous-worker explanation along the lines of Yeaple (2005), where firms that select more scaleintensive technologies select ex-ante more productive workers. In this case, the wage premium is a pure selection phenomenon. The second explanation builds on the heterogeneous-firm model of Melitz (2003) combined with on-the-job learning as in Markusen (2001). Productivity differences between firms are internalized by ex-ante homogeneous workers, so the wage premium is a pure learning phenomenon due to ex-post higher productivity in foreign firms. Our model yields a number of precise empirical hypotheses. When these predictions are tested on Danish matched employer-employee data, we find that both explanations play a role in explaining the observed wage premium. Specifically, the foreign- and large-firm premiums explained by selection are in the neighborhood of 30-65% of the total premium, with the remainder consistent with learning. There is also considerable support for a number of other predictions specific to the worker-learning explanation.

Foreign Firms, Domestic Wages

Foreign-owned firms are often hypothesized to generate productivity "spillovers" to the host country, but both theoretical micro-foundations and empirical evidence for this are limited. We develop a heterogeneous-firm model in which ex-ante identical workers learn from their employers in proportion to the firm?s productivity. Foreign-owned firms have, on average, higher productivity in equilibrium due to entry costs, which means that low-productivity foreign firms cannot enter. Foreign firms have higher wage growth and, with some exceptions, pay higher average wages, but not when compared to similarly large domestic firms. The empirical implications of the model are tested on matched employer-employee data from Denmark. Consistent with the theory, we find considerable evidence of higher wages and wage growth in large and/or foreign-owned firms. These effects survive controlling for individual characteristics, but, as expected, are reduced significantly when controlling for unobservable firm heterogeneity. Furthermore, acquired skills in foreign-owned and large firms appear to be transferable to both subsequent wage work and self-employment.

Solving Dynamic Discrete Choice Models Using Smoothing and Sieve Methods

We propose to combine smoothing, simulations and sieve approximations to solve for either the integrated or expected value function in a general class of dynamic discrete choice (DDC) models. We use importance sampling to approximate the Bellman operators defining the two functions. The random Bellman operators, and therefore also the corresponding solutions, are generally non-smooth which is undesirable. To circumvent this issue, we introduce a smoothed version of the random Bellman operator and solve for the corresponding smoothed value function using sieve methods. We show that one can avoid using sieves by generalizing and adapting the `self-approximating' method of Rust (1997) to our setting. We provide an asymptotic theory for the approximate solutions and show that they converge with root-N-rate, where $N$ is number of Monte Carlo draws, towards Gaussian processes. We examine their performance in practice through a set of numerical experiments and find that both methods perform well with the sieve method being particularly attractive in terms of computational speed and accuracy

The dynamics of Bertrand price competition with cost-reducing investments

We extend the classic Bertrand duopoly model of price competition to a dynamic setting where competing duopolists invest in a stochastically improving production technology to “leapfrog” their rival and attain temporary low‐cost leadership. We find a huge multiplicity of Markov‐perfect equilibria (MPE) and show that when firms move simultaneously the set of all MPE payoffs is a triangle that includes monopoly payoffs and a symmetric zero mixed strategy payoff. When firms move asynchronously, the set of MPE payoffs is strictly within this triangle, but there still is a vast multiplicity of MPE, most of which involve leapfrogging.The authors would like to acknowledge the funding received from the Danish Council for Independent Research and Innovation Fund Denmark. Fedor Iskhakov gratefully acknowledges the support from the Australian Research Council projects CE110001029 and FL110100247 as well as from Frisch Centre project 1307 financed by the Ministry of Labor, Norwa

Entrepreneurship, Job Creation, and Wage Growth

This paper analyses the importance of entrepreneurs for job creation and wage growth. Relying on unique data that covers all plants, firms and individuals in the Danish private sector, we are able to distil a number of different measures of entrepreneurial plants from the set of new plants, including measures that much more precisely capture the "truly new” or "entrepreneurial” plants than in previous studies. Using these data, we find that while new plants in general account for one third of the gross job creation in the economy, entrepreneurial plants are responsible for between 15% and 25% of this, and thus only account for up to 8% of total gross job creation in the economy. However, entrepreneurial plants seem to generate more additional jobs than other new plants in the years following entry. Finally, the jobs generated by entrepreneurial plants are to a large extent low-wage jobs, as they are not found to contribute to the growth in average wages. However, this insight varies across the different types of entrepreneurial plants