Luis M. B. Cabral

On the Evolution of the Firm Size Distribution: Facts and Theory

Using a comprehensive data set of Portuguese manufacturing firms, we show that the firm size distribution is significantly right-skewed, evolving over time toward a log-normal distribution. We also show that selection accounts for very little of this evolution. Instead, we propose a simple theory based on financing constraint. A calibrated version of our model does a good job at explaining the evolution of the firm size distribution.

Sunk Costs, Firm Size and Firm Growth

For several decades, the conventional wisdom has been that expected firm growth rates are independent of firm size, a property known as Gibrats Law. However, recent empirical work has found a negative relation between firm growth and firm size. This paper provides a theoretical explanation for this negative relation in a model of new firm growth where capacity and technology choices involve some degree of sunkness. Additional empirical implications of the theory of sunk costs are also developed. These relate to profit rates, Tobins Q, exit rates, degree of sunkness of capacity costs, as well as size and growth rates. Copyright 1995 by Blackwell Publishing Ltd.

The Learning Curve, Market Dominance and Predatory Pricing

Strategic implications of the learning curve hypothesis are analyzed in the context of a price-setting, differentiated duopoly selling to a sequence of heterogeneous buyers with uncertain demands. A unique Markov perfect equilibrium is characterized and sufficient conditions are provided for market dominance to be self-reinforcing. Increasing market dominance implies that learning is privately disadvantageous. Finally, introducing avoidable fixed costs and possible exit into the model yields a new theory of predatory pricing based on the learning curve hypothesis. Copyright 1994 by The Econometric Society.

Incentives for Cost Reduction under Price Cap Regulation

In this article, we present a formal analysis of the incentives for cost reduction under a regime of price-cap regulation. We assume price-cap regulation establishes a ceiling below which a monopolist has complete price flexibility, while prices above the ceiling are subject to cost-based regulation. Our main conclusions are that a marginal reduction in the price cap increases the regulated firm’s investment in cost reduction. However, very low price caps might destroy investment incentives completely. Therefore, investment is a discontinuous function of the price-cap level.

Stretching Firm and Brand Reputation

I consider an adverse selection model of product quality. Consumers observe the performance of the firms products, and product performance is positively related to the firms (privately observed) quality level. If a firm is to launch a new product, should it use the same name as its base product (reputation stretching), or should it create a new name (and start a new reputation history)? I show that for a given level of past performance (reputation), firms stretch if and only if quality is sufficiently high. Stretching thus signals high quality.

Merger policy in open economies

Abstract We extend Farrell and Shapiros (1990) analysis of horizontal mergers to the case of an open economy. We show how the rules for approving a merger ought to be adapted to account for the fact that the regulator is only concerned with domestic welfare, that is, ignores the effect of the merger on foreign firms and consumers. We also explore the consequences of this externality in a model of a ‘single market’ which includes consumers and producers of different countries. In particular, we provide conditions under which a decentralized process of evaluating merger proposals a la Farrell-Shapiro can survive the externality mentioned above.

On the adoption of innovations with ‘network’ externalities

Abstract We present a simple dynamic model of adoption of an innovation when there are ‘network’ externalities, that is, when one agents benefit from adoption increases with the number of other adopters. We assume there is a continuum of differentiated potential adopters who are perfectly informed rational agents. Our main conclusion is that if network externalities are strong, then the equilibrium adoption path is discontinuous, even when there is no coordination between potential adopters. We also argue that a steep S-shaped adoption path can be interpreted as the approximation to a discontinuous point (catastrophe) of the equilibrium adoption path.

Conjectural variations as a reduced form

Abstract The conjectural variations solution is usually seen as the reduced form of the equilibrium of an (unmodeled) dynamic game. We show that, in linear oligopolies and for an open set of values of the discount factor, this correspondence holds exactly for a quantity-setting repeated game with minimax punishments during T periods.

Increasing Dominance with No Efficiency Effect

I uncover a new force towards increasing dominance. The new effect results from the strategic choice of covariance in races. I assume that players must choose not the amount of resources to spend but how to allocate those resources. I show that the laggard has an incentive to chose a different path from the leader.

Intrinsic and instrumental reciprocity: An experimental study ✩

In the context of an indefinitely repeated veto game, we devise an experiment to distinguish between alternative explanations of generous behavior (accepting negative payoffs): altruism, intrinsic backward-looking reciprocity, and instrumental forward-looking reciprocity. Our results are broadly consistent with the hypothesis that observed sacrifices are motivated by equilibrium selfish, forward-looking reciprocal behavior although we find a more subtle way in which past kindness affects behavior.