Kanishka Kacker

 

University / Organisation : Indian Statistical Institute

Paper or project ? paper

Title : Firm Exit and Input Specificity: Evidence from the COVID 19 Pandemic and the Great Recession of 2008

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Abstract : Firms often construct contractual safeguards between their buyers or suppliers to protect assets that are highly customized to a specific transaction. How do such firms behave when facing a major recession? Will this vary by country-specific institutions that might impact the safeguards constructed? We argue firms that customize their inputs to a specific supplier find it optimal to shut down temporarily in a recession. Exploiting the COVID pandemic as an unforeseen shock in a panel dataset covering over 6,000 firms in 24 countries, we find, regardless of country level institutions, higher input customization implies a higher probability of temporary, but not permanent, exit - as our theoretical model predicts. Relative to standard characteristics like firm size, customization exerts an equal or greater influence on exit. Using comparable specifications, customized firms behaved similarly during the Great Recession of 2008, suggesting customization is a fundamental tenet of firm conduct.