How do firms adjust when trade stops? Labor markets, industrial linkages, and macroeconomic effects


[UPDATE on 2020.12.2] This webinar is rescheduled to 4pm 18 February 2021 for reasons related to the pandemic.  


This paper investigates how firms adjust to a sudden, unanticipated and long-lasting negative demand shock such as complete trade ban. We explore a unique event when due to political reasons, unrelated to concerned firms, the exporters lost access to a major export market. In 2014, Russia imposed sanctions on food imports from European Union, and this has resulted in an abrupt negative trade shock to food production and food wholesaler sectors in Lithuania, for which Russia was a major trade partner. By using a dataset, consisting of all firms in the country, we find that part-time employment is used as the first shock absorber, followed by the capital investment and full-time employees. We also find evidence that the differences in labor market adjustment are partly driven by the sectoral variation in the costs of exploiting revenue-increasing strategies such as the search of new export markets. Our findings can be explained by a theory where firms are forward-looking and face non-convexities in the labor market along with convex capital adjustment costs and costly revenue-increasing prospects.

About the Speaker

Alminas Žaldokas is an Associate Professor of Finance at the HKUST. He received his Ph.D. in Finance from INSEAD (France). Professor Žaldokas’s research papers have been published in the leading academic journals such as the Journal of Financial Economics, Review of Financial Studies, Management Science, Journal of Accounting Research, RAND Journal of Economics, Journal of International Economics, and Journal of Financial Intermediation. His research focuses on the interaction between firm decisions in the financial and in the product markets. In particular, he studies corporate finance decisions that relate to the firm investment in innovation and the formation of collusive arrangements between firms. His work on international antitrust laws and M&A transactions was awarded Jerry S. Cohen Award for Antitrust Scholarship for the best antitrust work in 2019.

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