Hosted by Professor: Martin Rotemberg- email@example.com
This paper studies the short- and long-run effects of large firms on economic development. We use evidence from one of the largest multinationals of the 20th Century: The United Fruit Company (UFCo). The firm was given a large land concession in Costa Rica — one of the so-called “Banana Republics”— from 1889 to 1984. Using administrative census data with census-block geo-references from 1973 to 2011, we implement a geographic regression discontinuity (RD) design that exploits a quasi-random assignment of land. We find that the firm had a positive and persistent effect on living standards. Regions within the UFCo were 26% less likely to be poor in 1973 than nearby counterfactual locations, with only 63% of the gap closing over the following 3 decades. Company documents explain that a key concern at the time was to attract and maintain a sizable workforce, which induced the firm to invest heavily in local amenities that likely account for our result. We then build a dynamic spatial model in which a firm’s labor market power within a region depends on how mobile workers are across locations and run counterfactual exercises. The model is consistent with observable spatial frictions and the RD estimates, and shows that the firm increases aggregate welfare by 2.9%. This effect is increasing in worker mobility: If workers were half as mobile, the firm would have decreased aggregate welfare by 6%. The model also shows that a local monopsonist compensates workers mostly through local amenities keeping wages low, and leads to higher welfare levels than a counterfactual with perfectly competitive labor markets in all regions, if we assume amenities have productivity spillovers.