An Ideal Decomposition of Industry Dynamics: An Application to the Nationwide and State Level U.S. Banking Industry

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1 A Ideal Decompoo of Iduy Dyamc: A Applcao o he Naowde ad ae Level U.. Bakg Iduy Yogl Jeo Ceal Mchga Uvey e-mal: yjeo@mal.cmch.edu ad ephe M. Mlle* Uvey of Nevada La Vega La Vega NV UA e-mal: ephe.mlle@ccmal.evada.edu fax: elephoe: Jue 2005 Abac: Th pape code he aggegae pefomace of he bakg duy applyg a modfed ad exeded dyamc decompoo of bak eu o equy. The aggegae pefomace of ay duy deped o he udelyg mcoecoomc dyamc wh ha duy adjume wh bak eallocao bewee bak ey of ew bak ad ex of exg bak. Baley Hule ad Campbell 992 ad Halwage 997 develop dyamc decompoo of duy pefomace. We exed hoe aalye o deve a deal decompoo ha clude he decompoo a oe compoe. We alo exed he decompoo code geogaphy ad mpleme decompoo o a ae-by-ae ba lkg ha geogaphc decompoo back o he aoal level. We he code how deegulao of geogaphc eco o bak acvy affec he compoe of he ae-level dyamc decompoo coollg fo compeo ad he ae of he ecoomy wh each ae ad employg fxed- ad adom-effec emao fo a pael daabae aco he ffy ae ad he Dc of Columba fom 976 o Key Wod: aggegae flucuao dyamc decompoo poducvy JEL Clafcao: L G2 * Aa Pofeo of Ecoomc Ceal Mchga Uvey ad Pofeo ad Cha of Ecoomc Uvey of Nevada La Vega. Pevou veo of h pape wee peeed a he Uvey of Calfoa a Dego he Bak of Eglad ad Yoe Uvey.

2 A Ideal Decompoo of Iduy Dyamc: A Applcao o he Naowde ad ae Level U.. Bakg Iduy. Ioduco The U.. bakg duy povde fele goud fo culvag eeach o duy dyamc ude egulaoy chage. The hocal developme of U.. uo wh he og aveo o coceao of powe ad wh he gfca egulao he bakg eco eaced epoe o he Gea Depeo geeaed a duy ecompag may moe bak ha he om aoud he wold. Dug he 970 facal ovao fequely ccumveed exg egulao. Thoe ovao gadually eoded he effec of exg egulao ulmaely dmalg much of he egulaoy upeucue eeced dug he Gea Depeo. Thu he la wo decade of he 20 h ceuy weed a cha of deegulaoy aco ha ulocked he egulaoy hadcuff eaced dug he Gea Depeo. Fo example he pohbo aga aae ad eae bakg lowly devolved f wh a ee of elaxao of egulao o a ae-by-ae ba he by gowg ae-level aco pemg eae bakg acvy hough mulbak holdg compae ad fally wh he adopo of full eae bakg wh he paage of he Ieae Bakg ad Bachg Effcecy Ac of 994. I um he deegulao of geogaphc eco o bakg acvy a he ae ad aoal level povde a mo uuual ealwold expeme o he effec of uch deegulao o bakg behavo ad pefomace. 2 We exame he pefomace of he bakg duy meaued by he ae of eu o Kae 996 povde a excelle hocal accou of he deegulaoy moveme he U.. bakg eco. 2 Exg wok code he effec of deegulao o vaou bakg ue. Fo example how dd deegulao affec bak ew chae falue ad mege Amo 992; Cebula 994: Jeo ad Mlle 2005a ad bak pefomace Bege ad Mee 2003; Jayaae ad aha ; Jeo ad Mlle 2005b; Tglu Dael ad Tglu 2005.

3 equy a he aoal ad ae level. Aggegae bak pefomace decompoe o effec due o adjume wh bak eallocao bewee bak ey of ew bak ad ex of exg bak. We modfy he decompoo of duy pefomace meaue ypcally ued he exg leaue Baley Hule ad Campbell 992; Halwage 997 ad develop a deal decompoo. I addo we exed h ew decompoo o code geogaphc egoal effec. Tha exeo allow u o exploe he effec f ay of he deegulao of geogaphc eco o bakg o he ae-level decompoo of bak pefomace eu o equy. I ha aaly we cool fo compeo ad he ae of he ecoomy each ae employg fxed- ad adom-effec egeo he pael daabae aco he ffy ae ad he Dc of Columba fom 976 o The dyamc decompoo of duy pefomace eque mco-level fomao o fm bak wh a duy. The avalably of mco-level eablhme-level daa fo maufacug due pawed a ee of uch appled mcoecoomc eeach. 3 Tha eeach effo eveal moe heeogeey amog fm ad pla wh he ame duy ha bewee due. I um aggegae duy daa hde mpoa fm- ad pla-level dyamc ha collecvely deeme oveall duy dyamc. Baley Hule ad Campbell 992 povde a algebac decompoo of a duy oal faco poducvy TFP gowh o hee effec wh bewee ad e-ey effec. The wh effec meaue he cobuo of uvvg fm owad TFP gowh. The bewee o eallocao effec meaue he cobuo of chagg make hae of uvvg fm owad TFP gowh whle he e-ey effec meaue he cobuo of fm ey o ad ex fom he duy owad TFP gowh. Halwage 997 exed Baley Hule ad 3 McGuck 995 decbe he Logudal eeach Daabae LD a he U.. Bueau of he Ceu upo 2

4 Campbell 992 ad epaae he effec of fm ea o ad ex fom he duy. Moeove he alo dvde he bewee effec o wo compoe he hae ad covaace effec. The hae effec meaue he cobuo owad aggegae TFP gowh of he chagg hae of fm whle he covaace effec meaue he cobuo owad aggegae TFP gowh of he chagg hae of fm me he chagg TFP gowh of fm. 4 oh 999 ug U.. bakg daa fuhe decompoe Halwage 997 mehod by dvdg bak o hoe ha acqued ohe bak ad hoe ha dd o. uch decompoo mehod hae a commo dex-umbe ue he bae-yea choce. Baley Hule ad Campbell 992 Halwage 997 ad oh 999 chooe he al yea a he bae. Thu he wh effec meaue he chage TFP gowh a he fm level bewee he al ad fal yea weghed by he al yea make hae. Aleavely aohe decompoo ex of wh bewee eallocao ey ad ex effec whe he fal yea povde he bae. Tha he wh effec wegh he chage TFP gowh bewee he al ad fal yea fo each fm by he fm duy hae he fal yea. Fally a deal dyamc decompoo combe hee wo dyamc decompoo o a mple aveage. 5 Thu he weghg of he wh bewee eallocao ey ad ex effec all employ mple aveage of he al ad fal yea wegh. I addo he deal dyamc decompoo of he duy elmae he covaace effec deved by Halwage whch h eeach ele. 4 A lluaed below he covaace effec emege a a coequece of he decompoo mehod. Ou decompoo mehod caue he covaace effec o dappea. 5 Th dcuo poee a aalogy o he pce dex leaue. The Lapeye 87 pce dex ue he al yea he Paache 974 pce dex ue he fal yea ad he Fhe 922 deal pce dex fom a geomec ahe ha a ahmec aveage. Pgou 920 alo popoed he deal pce dex. 6 Glche ad egev 995 employ he deal decompoo mehod he udy of fm poducvy Iael duy. capea Hemmg Teel ad Woo 2002 befly decbe he Glche ad egev 995 ad Halwage 997 mehod of decompoo og how hey dffe. We howeve lk he dffeece o he 3

5 Fally ce he aggegae pefomace meaue poee moe meag o a egoal ba we exed ou decompoo o a ae-by-ae ba. 7 Tha decompoo clude wo compoe whee o he oe had he ao ema a he maco u whle dvdual ae eplace bak a he mco u o poduce oe compoe ad o he ohe had he ae eplace he ao a he maco u whle dvdual bak ema a he mco u o poduce he ohe compoe. Th pape ufold a follow. eco 2 dcue he exg dyamc decompoo ad deve a aleave dyamc decompoo ha whe combed wh he f decompoo yeld he deal dyamc decompoo. eco 3 lluae he echque ug he U.. commecal bakg duy. eco 4 exed he deal dyamc decompoo o a ae-by-ae aaly. eco 5 code how deegulao ae-level bakg coceao ad he ae of he ae ecoomy affec he compoe of he ae-by-ae dyamc decompoo. Tha aaly employ pael daa emao ug he fxed- ad adom-effec egeo echque. eco 6 coclude. 2. Aleave Dyamc Decompoo 8 ce we apply he deal dyamc decompoo o he U.. commecal bakg duy ou devao of he vaou dyamc decompoo employ duy eu o equy OE. The OE a me equal e come NI a me dvded by equy E a me. Tha NI E / bae-yea weghg ue. Fally afe compleg a eale daf of ou pape Baelma Halwage ad capea 2004 mo ecely alo oe ha he covaace em dappea fo he deal decompoo. 7 The decompoo ca alo exed o he meopola acal aea MA ad o-ma couy level of aaly. We do o make ha exeo oppg ho a he ae level ce we code he effec f ay of bakg ad bachg deegulao o bak pefomace. Tha bakg ad bachg deegulao occu a he ae ad aoal level ad o he MA o o-ma couy level. 8 Appedx A povde he deal of he devao. 4

6 whee NI NI ad. Thu afe ubuo ad eaageme we ge E E 2 whee equal he ao of e come o equy fo bak peod ad. equal he -h bak hae of duy equy. We wa o decompoe he chage duy eu o equy o wh bewee ey ad ex effec. Thu he chage duy eu o equy equal he followg:. 3 Now he umbe of bak peod equal he umbe of bak peod - plu he umbe of bak ea mu he umbe of bak ex. Tha ee ex eaagg em equao 4 yeld ee ex ay ee. 4 ay ; o 5 ay ex ay ay Noe ha. 9 Thu equao 3 adju a follow: ad. 6 ay ee ay ex. 7 Cae : Exg Dyamc Decompoo o fa we have epaaed he ay em fom he ey ad ex em. Now we eed o decompoe he ay em o wh ad bewee effec. Baley Hule ad Campbell 992 ad Halwage 997 each wegh he wh effec wh he dvdual fm duy 9 Code wo me peod ad -. We clafy bak a ayg f he bak ex boh ad -; eeg f he bak doe o ex - bu doe ; ad exg f he bak ex - bu o. 5

7 hae of equy he al yea. Tha we eed o add ad ubac fom he gh-had de of equao 7. Afe ome mapulao we ge ha ay ay ay ee ex 8 whee ad. The um of dvdual bak hae of equy ove all bak he duy boh peod ad - equal oe. Tha ay ee ex ay ay ee ay ; o 9 ex 0. 0 Noe ha we could alo ue ahe ha - equao 0 leadg o Cae a. The adad decompoo he leaue howeve ue equao 0. The dffeece decompoo eflec whehe oe compae he duy o whee aed - o eded. Fally addg he lef-had de of equao 0 whch equal zeo o equao 8 poduce afe ome algebac mapulao he followg elao: ay ay ee wh effec bewee effec ey effec ex ex effec. We evaluae he bewee ey ad ex effec elave o he duy eu o equy. Fo example he bewee effec um he dffeece bewee each bak eu o equy ad he duy eu o equy mulpled by ha bak chage equy hae. I h cae we evaluae he bak eu o equy peod ad he duy eu o equy peod -. Becaue of he mg dffeece Halwage 997 decompoe he bewee 6

8 eallocao effec o a hae effec ad a covaace effec by addg ad ubacg wh he em 0 coaed he bewee effec ummao. Tha we ge ay ay ay. 2 bewee effec covaace effec hae effec The covaace effec combe eleme of boh wh ad bewee eallocao effec. The covaace effec emege a a afac of he dcee aue of he decompoo mehod ad poee a ecod-ode-mall effec. If howeve we compae he duy o whee eu o equy eded he he covaace em doe o emege. Ou deal decompoo alo mgae h poblem a he covaace effec dappea. Cae 2: Aleave Dyamc Decompoo Now decompoe he chage duy eu o equy by weghg he wh effec by peod- dvdual bak hae of duy equy. Tha we eed o add ad ubac ay o equao 7. The follow he ame pocedue ued he f dyamc decompoo whee he duy eu o equy peod eplace he duy eu o equy peod - - equao 0. Afe eceay mapulao he fal fom equal: ay ay ee wh effec bewee effec ey effec ex. 3 ex effec Now we fuhe decompoe he bewee eallocao effec by addg ad ubacg de he em eul: coaed he bewee ummao ad geeae he followg 0 oh 999 fuhe decompoe he wh hae ad covaace effec o effec fo bak ha acque 7

9 ay ay ay 4 bewee effec - covaace effec hae effec I Cae he bewee effec decompoe o a hae effec evaluaed peod - plu he covaace effec. Now Cae 2 he bewee effec decompoe o a hae effec evaluaed peod mu he covaace effec. mla o Cae a aleave dyamc decompoo Cae 2a ue he ogal equao 0. Now he dyamc decompoo equal equao 3 whee - eplace eveywhee. Ad aga o covaace em emege fom h dyamc decompoo. The deal dyamc decompoo Cae 3 mply aveage Cae- ad Cae-2. Thu he bewee effec he deal decompoo equal he aveage of he hae effec evaluaed peod ad - ad he covaace effec cacel. Cae 3: Ideal Dyamc Decompoo The deal dyamc decompoo aveage Cae ad Cae 2 Cae a ad 2a a follow: ay ay ee wh effec bewee effec ey effec ex ex effec. 5 whee / 2 / 2 ad / 2. I um he deal dyamc decompoo clude fou effec. The wh effec equal he ummao of each bak chage eu o equy weghed by aveage hae of duy equy bewee peod ad -. The bewee eallocao effec equal he ummao ohe bak ad bak ha do o. 8

10 of he dffeece bewee each bak eu o equy ad he aveage duy eu o equy bewee peod ad - me he chage ha bak hae of duy equy. The ey effec equal he ummao of he dffeece bewee each ey bak eu o equy peod ad he aveage duy eu o equy bewee peod ad - me he ey bak hae of duy equy peod. Fally he ex effec equal he ummao of he dffeece bewee each ex bak eu o equy peod - ad he aveage duy eu o equy bewee peod ad - me he ex bak hae of duy equy peod -. chumpee 950 coed he phae ceave deuco o decbe h vew of he capalm evolvg hough a dyamc poce of mege ey ad ex of fm pued by ovao ad echcal chage. Baelma Halwage ad capea 2004 aocae he eallocao bewee ey ad ex effec of poducvy chage wh ceave deuco whch hey call eucug eallocao ad ceave deuco. The bakg duy opeae howeve ude egulao ce ably he bakg yem ca caue a bakg c ad eceo o woe. The publc mu maa cofdece he oude of he bakg duy. A poce of ceave deuco he bakg duy f oo lage may udeme he publc cofdece. Thu ce ably pove he hallmak of a oud bakg pacce we acpae ha he wh effec hould domae moveme aggegae bak pefomace. 3. Commecal Bak eu o Equy: Naowde Decompoo To lluae he deal dyamc decompoo we employ Call epo daa fo all commecal bak he U.. fom 976 o To calculae he dyamc decompoo bewee wo yea ay 999 ad 2000 we eed o defy ad epaae ea bak ha eeed he The daa fo ou aaly come fom he Fedeal eeve Bak of Chcago web e whch locaed a 9

11 duy ex bak ha exed he duy ad ay bak ha ayed he duy. To do o we mached bak ID umbe he daabae. If a bak ID umbe ex boh 999 ad 2000 he he bak ay he duy. If a bak ID umbe ex 999 bu o 2000 he he bak ex. If a bak ID umbe ex 2000 bu o 999 he he bak ee. Table povde he dyamc decompoo of aggegae eu o equy fo all commecal bak he U.. bewee 976 ad eveal obevao emege. F o a yea-o-yea ba he wh effec expla he chage eu o equy. The coelao bewee he wh bewee ey ad ex effec ad he chage eu o equy equal ad 0.30 epecvely. Fuhe mple oday lea quae egeo of he chage eu o equy oo he wh bewee ey ad ex effec oly poduce a gfca egeo fo he wh effec. 2 The wh effec howeve doe o cobue much o he cumulave log-u chage eu o equy a we how below. The yea 992 ad 993 eflec a mpoa ug po ou aaly. The egh of he lkage bewee he wh effec ad he chage eu o equy gow fo he ample fom 976 o 992 bu dmhe fo 993 o Cyclcal moveme of bak pefomace o a yea-o-yea ba eflec moveme he wh effec. Cyclcal moveme bak pefomace ely lagely o he foue of dvdual bak o aveage. The ed moveme of bak pefomace howeve eflec hp:// 2 The gfca egeo geeae a ecep of 0.00 o gfcaly dffee fom zeo a he -pece level ad a lope coeffce of 0.83 whch gfcaly le ha oe a he 5- bu o he 0- pece level. 3 The mple coelao ale o 0.99 ad 0.90 fo he 976 o 992 ad 993 o 2000 peod. I addo he lope coeffce fo he mple lea egeo chage o 0.97 ad 0.50 fo he ame wo ub-peod whee 0.97 o gfcaly dffee fom. 0

12 moveme he bewee effec. Now ed moveme bak pefomace ely o hf make hae fom low o hgh pefomace bak. ecod he bewee eallocao effec cobue povely o ceag he duy eu o equy 9 ou of he 24 yea ou ample. A oed above he 992 ad 993 yea emege a a mpoa ug po. I addo bewee 980 ad 992 he bewee eallocao effec ceae duy eu o equy fo 3 coecuve yea. Fom 993 o 2000 he cobuo of he bewee eallocao effec povde a much-le coe oy 4 pove ad 4 egave yea. Po o 992 mege ad acquo exhb moe aae acvy; afe 992 eae mege ad acquo become a lage pa of he oveall oy. Moeove eae mege ad acquo geeally volve much bgge bak. Ou fdg heefoe ugge ha aae mege ad acquo cobued moe o mpoved duy pefomace ha doe eae mege ad acquo. Jayaae ad aha 998 ad Tglu Dael ad Tglu 2005 make mla obevao. Thd he ey effec cobue egavely o duy eu o equy each ad evey yea. Tha ea o he bakg duy o aveage expeece a eu o equy below he aveage eu o equy he make. Thu ey lowe duy eu o equy whch o a upe. DeYoug ad Haa 998 ad DeYoug 999 oe ha bak ea geeally ae mall bak ha eque eveal yea befoe hey expeece a eu o equy compaable o he duy aveage aumg ha hey uvve. Fouh he ex effec mpove duy eu o equy bewee each pa of yea excep oe 999 o Tha ex fom he bakg duy o aveage expeece a eu o equy below he duy aveage. Tha fdg alo o a upe. Fo example oh ad aha 999 ague ha afe deegulao exg bak meged o bak ha

13 wee bee u moe pofable bak o aveage. Ou eul ugge ha h oucome wa o oly ue o aveage afe deegulao bu alo ue befoe deegulao. Fally oly bewee 999 ad 2000 wee exg bak o aveage moe pofable ha he duy aveage. 4 Fally he dyamc decompoo ha cove he 976 o 2000 peod meely eflec he ummao of he yea-by-yea effec. Tha he chage duy eu o equy equal Ad he aggegae wh bewee eallocao ey ad ex effec oal ad epecvely. 5 Thu he aggegae chage duy eu o equy eflec he pove cobuo of he bewee ad ex effec. 6 Moeove he ey effec lagely offe he ex effec whle he wh effec alhough egave mall. Thu he aggegae ceae he duy eu o equy fall ju above he aggegae pove cobuo of he bewee effec. Noe ha he wh effec pove mpoa udeadg yea-o-yea ho-u chage eu o equy bu umpoa udeadg cumulave log-u chage whee he bewee effec become he mpoa playe. The pee pove bewee effec epecally bewee 980 ad 992 povde he mo uexpeced eul. ome aaly would queo he examao of cumulave chage agug ha bak pofably eu o equy cao exhb a ed becaue compeve peue foce equlbum a a omal ae of eu. Ideed he wh effec uppo uch a compeve oy. Tha o a yea-o-yea ba he wh effec expla mo of he moveme eu o equy. The bewee effec evehele exhb og pove 4 oh ad aha 2003 go fuhe cocludg ha he elave pofably of exg bak mpove afe deegulao. Ou eul mply ha f moe above-aveage eu-o-equy bak ex afe deegulao he eough below-aveage eu-o-equy bak ex o keep he aggegae ex effec egave. The evee hold oly fo he 999 o 2000 ex. 5 The aveage effec equal ad epecvely ove he 25-yea peod. 6 Noe ha he ex effec whle egave cobue povely o he chage duy eu o equy ce ee he dyamc decompoo wh a egave g. 2

14 peece ha alhough geeally mall magude accumulae o a zeable value. 7 The pove peece of he bewee effec mple a poce of cooldao he U.. bakg duy o ceave deuco ha aocae wh g pofably. Tha he coveoal wdom ague ha he emegece of eae bakg ad bachg geeaed a gfca ceae mege ad acquo hoade 2000 ad Jeo ad Mlle Ad a pove bewee effec emege whee hoe bak wh a above aveage eu o equy ceae he equy hae. Oe vew of he cooldao poce he bakg duy ugge ha by ad lage a pove eve -- bak became moe effce Jayaae ad aha ; ad Tglu Dael ad Tglu 2005 ad bee-u moe pofable bak ceaed he make hae oh ad aha Aohe vew oe ha ece mege acvy ceaed meaue of duy coceao ad pofably whee coceao empoally lead pofably Jeo ad Mlle 2005b. Boh oe mply a pove cumulave bewee effec whch we obeve. 8 I um he cumulave log-u poce eveal gfca ceave deuco wh he U.. bakg duy. ho-u moveme howeve exhb eglgble ceave deuco. Tha ou eale cojecue ha he bakg duy hould o expeece ceave deuco pove accuae fo he ho u bu accuae fo he log u. 4. Dyamc Decompoo wh Geogaphc Aggegao Ou dcuo o fa code how o decompoe ome duy meaue of pefomace baed o he cobuo o ha pefomace of dvdual fm ou example commecal bak. 7 We goe fo he mome he ex ad ey effec ce hey povde expeced oucome ha lagely offe each ohe. 8 A hd vew ague ha al ovao ew ad bee bak evce ea exce pof he ho u. Compeve peue elmae hee exce eag he loge u. Bu coued ew ovao exed he me of exce eu Bege ad Mee Th vew alo uppo a pove bewee effec. 3

15 The egulao of bakg he U.. povde ome ee daa aggegaed o he ae ahe ha o he aoal level. I fac alhough o ued h udy he Fedeal Depo Iuace Copoao make much ae-level daa avalable o he web e hp://www2.fdc.gov/hob/dex.ap. Tha bakg ae he pobly of examg he pefomace of he duy a he ae level. uch codeao lead o wo exeo of ou decompoo aaly decompoe aoal pefomace meaue ug he ae ahe ha he dvdual bak a he mco u of aaly; ad decompoe ae-level pefomace meaue ug he dvdual bak a he mco u of aaly. Naoal Decompoo: ae a he Mco U 9 We a oce aga wh equao. Tha NI / E. We dex e come ad equy aco ae ad bak. Thu NI ad E whee NI ad E equal e come ad equy fo bak ae ad peod 5 equal he umbe of ae ad he Dc of Columba ad equal he umbe of bak ae. Thu ubug ad eaagg yeld he followg: 6 whee equal he ao of e come o equy fo bak ae ad peod ad. equal he -h bak hae of duy equy ae ad peod. Now he ecod 9 Appedx B povde he complee devao. Th aoal-o-ae-level decompoo poee poeal applcao o decompog aoal macoecoomc daa fo example he uemployme ae. 4

16 ummao equao 6 equal he eu o equy ae. Tha we have ha ; o 7. 8 Followg he ame ep o decompoe he chage he eu o equy a he aoal level bu ow ug ae aggegae a he mco u we ca ealy deve he followg elaohp: [ ] wh effec bewee effec 9 whee / 2 / 2 ad / 2. No ey o ex effec ex he decompoo ce ae do o ee o ex. The ey ad ex effec he aoal decompoo wll appea he decompoo of he ae-level chage eu o equy ha we dcu he ex ub-eco. Alo oe ha equao 9 epo he deal dyamc decompoo cae 3 ha aveage cae- ad cae-2 decompoo. Ad he poce he covaace em epoed by ohe auho dappea. Table alo epo he decompoo equao 9 fo he 976 o 2000 ample peod. eveal obevao ad ou. F oce aga he wh effec domae he bewee effec o a yea-by-yea ba eve moe ogly h cae. The g of he wh effec mache he g of he chage he eu o equy each yea excep bewee 993 ad 994 5

17 whe he chage eu o equy eeally equal zeo. I addo he wh effec equal 4 pece of he chage eu o equy o aveage excludg 994. The coelao bewee he wh ad bewee effec ad he chage eu o equy equal ad mple oday lea quae egeo of he chage eu o equy oo u he wh ad bewee effec oly yeld a gfca egeo fo he wh effec. 20 ecod whle he ummao of he dvdual wh effec ad he chage eu o equy equal ad epecvely he yea-by-yea value exceed zeo oly 9 ad 0 me ou of he 24 yealy obevao. Tha he um of he pove umbe mu exceed he um of he egave umbe abolue value o geeae a oveall pove oucome. Fally he bewee effec exceed zeo 20 ou of 24 yea. Moeove alhough he bewee effec geeally equal a malle faco of he chage he eu o equy ha he wh effec accumulaed value ove he 24 yea mache he wh effec magude. O aveage he wh ad bewee effec cobue abou half of he cumulave log-u chage eu o equy. I ohe wod he wh effec exhb peece ulke he eul fo he decompoo wh dvdual bak a he mco u. Ulke he aowde decompoo he wh effec ow cobue abou half of he cumulave chage eu o equy wh he bewee effec cobug he ohe half. Ug he ae a he dvdual u howeve mege he wh bewee ex ad ey effec ha occu wh each ae. Thu he peece ha we fd fo he ae-level wh effec pobably eflec he aggegao of he peece he bewee ey ad ex effec fo dvdual bak wh a ae. The ex eco code he decompoo of each ae eu o equy. Noehele eve hough he yea-o-yea cyclcal lk bewee he wh 20 Tha egeo poduce a coa of 0.00 whch o gfcaly dffee fom zeo a he -pece level 6

18 effec ad he eu o equy o og.e. coelao of he wh effec oly expla oe-half of he log-u chage eu o equy. Tha make-hae hf fom low- o hgh-pefomace bak expla much of he ed moveme bak pefomace. Oce aga ome aaly wll objec o cumulave effec becaue he compeve aue of he bakg make wll dve he eu o equy o omal level. The pee bewee effec bele ha agume. Moeove he bewee effec calculaed wh he ae a he mco u olae he accumulao of he bewee effec o wo ub-peod 986 o 990 ad 994 o The fome geeae ju exce of 40 pece of he oal accumulao ove he 976 o 2000 ample.e ou of The lae geeae aohe 40 pece 0.02 ou of The f ub-peod coepod o he peak he bak falue hadled by he FDIC dug he 980 whle he ecod ub-peod coepod o he mo ece leglao ha auhozed eae bakg acvy ad he gfca expao of eae mege acvy. The pove bewee effec mple ha dug hee wo peod of bak cooldao o ceave deuco he ae wh above aveage eu o equy expeeced a g equy hae. ae-level Decompoo: Bak a he Mco U Th eco decompoe he chage eu o equy a he ae level. The poce of devg he decompoo follow he ame oule ha we employ eco 2 excep ha he eu o equy a he ae level eplace he eu o equy fo he ao. We epo hee oly he deal dyamc decompoo cae 3 ha aveage cae- ad cae-2 dyamc decompoo. Afe he equed mapulao we come o he followg decompoo: ay ay ee ad a lope coeffce of 0.99 whch o gfcaly dffee fom oe a he -pece level. 7

19 wh effec bewee effec ey effec ex. 20 ex effec whee / 2 / 2 ad / 2. Table 2 epo he ummao ad aveage of he decompoo ove he 24-yea peod fo each ae. 2 eveal em deeve oce. F he ey effec fall below zeo o aveage evey ae excep Meoa. Tha o aveage ove he whole 24-yea ample peod Meoa expeeced bak ea ha eaed a eu o equy ha exceeded he aveage of all bak Meoa whe hoe bak eeed. New bak ypcally exhb mall ze ad geeally low pefomace fo he f few yea. Thu Meoa bucked ha ed. ecod he ex effec fall below zeo o aveage 4 of he 5 ae. The 0 excepo Akaa Dc of Columba Geoga Iowa Idaho Idaa Mchga Mou ouh Caola ad We Vga each expeeced o aveage bak ex wh a hghe eu o equy ha he aveage of all bak he ae whe hoe bak exed. Typcally whe bak ex ome ohe bak acque ha bak ae ad lable. Tha he ex aocae wh a ake-ove o mege. A ake-ove o mege whee he exg bak exhb hghe ha aveage pefomace geeae a pove ex effec. Wh he excepo of Idaho hoe ae come fom he ouh o he Md-We. I addo ad moe mpoaly wh he excepo of Akaa Geoga Iowa ad ouh 2 The yea-by-yea eul fo all ae ae avalable fom he auho o eque. 8

20 Caola hee ae alo expeeced a ubaal.e. moe a 39 pece aveage deceae he umbe of bak ove he 976 o 2000 me fame. Moeove wh he excepo of Akaa Geoga Iowa Mou ad ouh Caola each expeeced a ubaal.e. moe ha 6.25 aveage ceae bache pe bak. 22 I um hoe ae exhbed a moe eve cooldao o ceave deuco o aveage. Tha he exe of he cooldao poce eceaed he ex of moe ha ju weak-pefomace bak. To vegae ha cojecue moe yemacally he ex eco code pael-daa emao of he compoe of he decompoo ha clude deegulao ad ae ecoomc pefomace vaable. Thd he aveage wh effec exceed he aveage bewee effec ove all ae ad me. Tha fdg evee he fdg a he aoal level whee he bewee effec exceeded he wh effec o aveage. How h poble? Noe ha he wh ad bewee effec exhb he decal effec magude fo he dyamc decompoo of he aoal eu o equy whee he ae mco u of aaly. Thu he hfg of ae bewee bak acheve moe mpoace a he aoal level becaue of moe ueve gowh of ae bewee ae ha bewee bak wh a gve ae. Fouh he wh effec exceed zeo fo 37 of he 5 ae. A egave wh effec mple ha bak pefomace deeoae o aveage. The 4 ae wh a egave wh effec clude Alaka Coeccu Maachue Mae Meoa Moaa Nebaka New Jeey New Yok Oklahoma Peylvaa Texa Vemo ad Wahgo. May of hoe ae fall he Noh Ea ego. Ohe ae come fom he eegy ae. Thu he eceo expeeced by hoe ae may povde ome commo goud. Bu 22 Vewed aohe way hoe e ae we fom 3 u-bakg ae 4 lmed-bachg ae ad 3 aewde- 9

21 ha obevao doe o cove all 4 ae. A oed befoe he ex eco exame uch cojecue moe yemacally ug pael-daa egeo of he compoe of he decompoo. Fally he bewee effec exceed zeo 39 of he 5 ae. A egave bewee effec mple ha ae hfed fom hghe- o lowe-pefomace bak a ae. The 2 ae wh a egave bewee effec clude Azoa he Dc of Columba Geoga Hawa Idaho Illo Maylad Mae Mpp Oego ouh Dakoa ad Uah. The geogaphc pae of hoe ae defe a logcal explaao. Ad we do o fd ohe eay awe. We do oe ha half of hee ae Azoa he Dc of Columba Idaho Mae Oego ad Uah oduced aowde mulbak holdg compay acquo whou ecpocy befoe he 994 leglao ha exeded he leglao o all ae. The pael-daa aaly of he ex eco addee he ue moe yemacally. Cloe peco of Table 2 eveal poeal aomalou fdg fo he wh ad bewee effec epecally Alaka ad Azoa ad pobly Hawa. The wh ad bewee effec each poe lage value wh oppoe g. Examao of he yea-by-yea ae-byae fomao yeld he followg explaao. I all hee ace a damac dop equy occu fo oe bak each ae bewee wo yea 985 o 986 Alaka 998 o 999 Azoa ad 994 o 995 Hawa bu o mla decle come expee ad hu e come. Thu he eu o equy hoo up magude fo oe bak oe yea each of hoe hee ae pece Alaka pece Azoa 999 ad pece Hawa 995. The eula cobuo o he aggegae wh ad bewee effec exceed 90 pece each cae. I addo he bak queo ex he bachg ae 976 o 4 lmed-bachg ae ad 6 aewde-bachg ae

22 duy he followg yea Alaka ad Azoa bu o Hawa. The bak Hawa doe o ex 996. I ll opeae wh lowe equy bu ow alo expeece lowe come expee ad e come. The cobuo o he wh ad bewee effec Hawa 996 whe boh e come ad equy expeece much lowe level o loge poee a lage effec becaue he weghg faco ow aveage much malle wegh 995 ad Explag ae-by-ae Dyamc Decompoo Dffeece bak pefomace aco ae may eflec dffeece bak coceao dffeece he egulaoy evome ad dffeece he ae of he ecoomy. Moeove hoe ae-by-ae dffeece may affec he dvdual compoe of he dyamc decompoo dffeely he wh bewee ey ad ex effec. We exploe uch dffeece hough he applcao of pael daa fxed- ad adom-effec egeo emae. We calculae he decompoo o a ae-by-ae ba compug he wh bewee ey ad ex effec fo each ae ove he 976 o 2000 peod h pape. We collec ohe vaable o capue coceao egulaoy ad ecoomc effec. We meaue coceao bakg hh wh he Hchma-Hefdahl dex each ae. 24 eveal vaable capue he egulaoy ace of ae wh epec o mege ad acquo. Oe he ao of bache o bak b_b meaue he effecve egulaoy ace he ae wh epec o 23 Had develop mehod fo deemg mulple oule mulvaae daa. Applyg ha mehodology o ou daa e fo he wh ad bewee effec defe fve addoal oule whee he wh ad bewee effec expeece ealy equal magude geae ha 0.2 ad oppoe g Maachue bewee 990 ad 99 Texa bewee 987 ad 988 Idaa bewee 982 ad 983 ad 983 ad 984 ad Mou bewee 982 ad 983 ode of mpoace accodg o Had pocedue. 24 Iue of edogeey of he coceao meaue ex. The Hchma-Hefdahl dex eflec he cumulave effec of ey ad ex a well a he elave gowh of exg bak. Ou decompoo of ae-level eu o equy exame he effec of ey ex ad he gowh of exg bak. Tha he chug of bak ulmaely affec he coceao meaue. Jeo ad Mlle 2005b fd howeve ha he Hchma-Hefdahl dex Gage-caue he eu o equy o ve vea. Noehele eade eed o exece cae epeg ou fdg. 2

23 bachg. 25 I addo hee dummy vaable pecfy he egulaoy ace each ae v-àv bak mege hough mulbak holdg compae. A ae could allow ou-of-ae bak holdg compae o acque bak wh bode wh o whou codo ecpocy. Fo example ome ae allow bak holdg compae fom ohe ae o acque a bak wh bode oly fo he e of ae ha alo allow bak holdg compae fom h ae o acque bak wh he bode. All uch egulao became abogaed wh he paage of he Ieae Bakg ad Bachg effcecy Ac of 994 whch pemed bak holdg compay opeao o a aoal ba whou geogaphc eco. The f dummy vaable egd oe f a ae poee egoal ecpocy zeo ohewe; he ecod ao oe f a ae poee aoal ecpocy zeo ohewe; ad he hd o oe f a ae poee aoal o-ecpocy zeo ohewe. 26 Fally ae-level ecoomc fomao clude he uemployme ae uem. Table 3 epo he eul of he pael-daa fxed- ad adom-effec emao. 27 Noe ha he fxed- ad adom-effec echque cool fo ae-pecfc vaable ha do o chage ove me e.g. geogaphc locao ad ze. Moeove we pefom he Hauma pecfcao e o elec he fxed- o adom-effec model. The depede vaable clude he wh bewee ey ad ex effec. Fo he wh-effec egeo he adom-effecmodel pove he upeo choce whle fo he bewee- ey- ad ex-effec egeo he 25 May ude clude dummy vaable fo u lmed ad aewde bachg egulao. Kapaak Mlle ad Noula 994 ue he ao of bache o bak o caegoze ae o hee hee caegoe. We ue he acual ao of bache o bak o capue he bachg egulaoy effec. 26 Amel 993 povde he al pecfcao fo he hee dummy vaable. Dael ad Tglu 998 updaed Amel pecfcao hough 995. We exed he dummy vaable o 2000 whee aoal oecpocy wa leglaed o become effecve epembe 995 a oed he ex. 27 Table 3 epo he fxed- ad adom-effec egeo ha exclude all obevao wh boh he wh ad bewee effec geae ha 0.2 abolue value. The fdg geeally do o dffe qualavely fom hoe ha do o exclude hoe oule obevao. Thoe eul ae avalable o eque. 22

24 fxed-effec model domae. eveal obevao deeve oce. F he wh effec gfcaly epod o he ae of he ecoomy ad o bak coceao bu o o he egulaoy vaable. If he ae ecoomy mpove.e. expeece lowe uemployme o exhb hghe coceao he he wh effec ceae uggeg ha he pefomace of each bak o aveage mpove. The coceao effec pove gfca oly a he 0-pece level. I ohe wod ae wh hghe bakg coceao ad good ecoome uppo he gowh eu o equy wh each bak o aveage. ecod he bewee effec e wh ae-level coceao ad fall hoe ae ha pem eae bak holdg compay acquo. I ohe wod a moe coceaed ae bakg make ha doe o face exeal compeo aocae wh hf ae o aveage fom lowe o hghe eu o equy bak. Tha he mpoace of he bewee eallocao effec ceae wh le compeo wheeby moe hghly coceaed ae expeece a hghe bewee effec ad ae ha allow moe compeo fom eae bak holdg compay acquo exhb a lowe bewee effec. 28 Thd he ey ad ex effec gfcaly epod o hghe coceao. The moe coceaed a ae he hghe he ey effec ad he lowe he ex effec. Tha moe coceaed ae bak ha ee ed o pefom bee ad bak ha ex ed o pefom woe ha bak ha ee ad ex le coceaed ae. 29 I ohe wod moe compeve ae bakg make expeece moe ey ad ex of bak ce he hehold 28 Jeo ad Mlle 2005b povde a moe dealed aaly of he coceao ad bak pefomace elaohp cocludg ha chage coceao Gage caue bak pefomace ove h peod ahe ha he evee. 29 Thee fdg geeally cofom o hoe of oh ad aha 2003 albe wh a dffee mehodology. 23

25 hudle fo ey ad ex le below ha hudle fo le-compeve ae bakg make. Fouh ae wh a hgh ao of bache o bak.e. elavely moe-pemve ae bachg egulao o aveage expeece a lage ex effec. Tha mea ha hoe bak ha do ex wll exhb hghe pefomace. Coveely ae ha pemed bak holdg compay opeao wh bode ee o aveage lowe ey ad ex effec mplyg ha hoe bak ha do ee ad ex exhb lowe pefomace. Ffh a hghe uemployme ae aocae wh a lowe ex effec a he 0-pece level weakly uggeg ha ae wh hghe uemployme ae expeece he ex of bak wh pooe pefomace ha ae wh a lowe uemployme ae. Wha magude ca we aocae wh hoe gfca effec? Tha ae he effec mpoa a paccal way? Table 4 epo he mea adad devao mmum value ad maxmum value fo all he vaable ued he egeo aaly. The followg obevao emege. The Hchma-Hefdahl coeffce each poe mpoa magude. Fo a 000 u chage he Hchma-Hefdahl dex abou oe-adad devao of ample moveme he coeffce mple a chage he wh bewee ey ad ex effec equal o aoud ad 200-pece epecvely of oe adad devao of he ample moveme. I um ceag coceao a ae mpove he aveage pefomace ha ae hough he wh bewee ey ad ex effec. A 2 pece ceae he uemployme ae abou oe-adad devao of ample moveme geeae abou a 60-pece of a oe-adad devao educo wh effec ad abou a 80-pece of a oe-adad devao educo he ex effec. mlaly a ceae bache pe bak of 7 abou oe-adad devao of ample moveme poduce abou a 400-pece of a oe-adad devao ceae he ex effec. Ad fo 24

26 each of he gfca eae bak holdg compay acquo dummy vaable he oduco of uch eae acvy alway poduce a chage he bewee ey ad ex effec ha exceed a lea a oe-adad devao moveme he epecve effec. I um he coeffce epee mpoa magude elave o moveme he wh bewee ey ad ex effec. Wha do hee fdg ell u? The cyclcal moveme bak pefomace.e. he wh effec epod o he ae of he ecoomy wh lowe uemployme geeag a lage wh effec a expeced. The egulaoy chage aae ad eae bakg ad bachg acvy do o affec he cyclcal moveme bak pefomace bu affec ed moveme. Fo a gve level of coceao.e. Hchma-Hefdahl dex ceag aae ad eae bakg ad bachg oppoue geeally deceae bak pefomace bu uually a he e-pece level of gfcace. Moe coceao he ae bakg make holdg aae ad eae bakg ad bachg oppoue coa howeve lead o hghe bak pefomace eu o equy whee he coceao effec pove gfca a he oe-pece level each cae ave he wh equao. 30 I um egulaoy chage aocae wh ceave deuco he U.. bakg duy. 6. Cocluo The deegulao of he U.. bakg duy ove he pa quae ceuy affeced bak opeao ad pefomace mpoa way. We code he dyamc decompoo of he eu o equy aggegaed f o he aoal level ad he o he ae level. Fuhe we code he effec of deegulao of geogaphc eco a well a bakg coceao 30 A oed above Jeo ad Mlle 2005b povde a moe dealed aaly of he coceao ad bak pefomace elaohp cocludg ha chage coceao Gage caue bak pefomace ove h peod. oh ad aha 2003 ague ha mpoveme bak pefomace aocae wh hghe make 25

27 ad he ae of he ecoomy o a ae-by-ae ba o bak opeao. We apply ou deal dyamc decompoo o he eu o equy he commecal bakg duy bewee 976 ad 2000 whee he mcoecoomc u he bak. 3 We fd ha he bewee ad ex effec cobued povely ad ogly o he bakg duy ed eu o equy. The ey effec alo cobued egavely ad ogly o he duy ed eu o equy. Bu he wh effec alhough egave dd o cobue much o he log-u chage duy eu o equy. Ieegly alhough he wh effec doe o cobue o he cumulave log-u chage eu o equy ove he ample peod he wh effec domae he bewee ey ad ex effec o a yea-o-yea ba. I um he wh effec domae he cyclcal moveme bak pefomace bu he ed moveme bak pefomace eflec he bewee effec. Tha he gowg make hae of hghpefomace bak a he expee of low-pefomace bak expla he ed moveme bak pefomace ove ou ample peod. 32 Tha he ed moveme duy pefomace eflec a poce of ceave deuco. Nex we apply he deal dyamc decompoo o he eu o equy he commecal-bakg duy whee he mcoecoomc u he ae. Now he ey ad ex effec loe ay paccal meag. Hee he wh ad bewee effec exhb ome eeg pae. A fo he aoal decompoo he wh effec oce aga domae he bewee effec cobuo o he chage ae eu o equy o a yea-by-yea ba. The bewee effec alhough eemgly gfca each yea poduce a gfca effec o he hae bu hey do o code caualy ue aumg ha bak pefomace lead make hae chage. 3 Ulke maufacug duy mco daa we do o have fomao a he bach level ha would coepod o he pla level fo maufacug fm. 32 oh ad aha 2003 ug a dffee mehodology each a mla cocluo. 26

28 chage eu o equy ove he log u eachg pay wh he wh effec ove he ee 25-yea ample peod. Thoe fdg pove coe wh he eul fo he aoal decompoo excep ha he wh effec ll expla oe-half of he ed moveme bak pefomace. Bu he aggegao of daa o he ae level foce he dvdual bak bewee ey ad ex effec o he wh effec a he ae level of aggegao. The we apply he deal dyamc decompoo o a ae-by-ae ba whee he mcoecoomc u he bak. Hee he cumulave log-u wh effec each ae domae he bewee effec. Tha he bewee effec poee moe clou o aveage bewee bak dffee ae ha bewee bak he ame ae. We employ ou ae-by-ae decompoo o pefom pael-daa fxed- ad adomeffec egeo of he compoe of he decompoo oo bak coceao bak egulao ad ae ecoomc vaable. The ae of he ecoomy ad bak coceao affec he cyclcal compoe of bak pefomace wh effec whle bak coceao a well a aae ad eae bakg ad bachg deegulao affec he ed moveme bak pefomace bewee ey ad ex effec. Tha deegulao affec he poce of ceave deuco wh he U.. bakg duy. Lowe uemployme ad hghe bak coceao wh a ae boo he wh effec o aveage. Tha a good ecoomy wh a coceaed bakg make ae he eu o equy a ae. A he ame me hgh bak coceao ad he abece of eae compeo boo he bewee effec o aveage wheeby ae move fom low o hgh eu-o-equy bak. Fally hgh bak coceao aocae wh ey of bak wh hghe eu o equy ad ex of bak wh lowe eu o equy o aveage. Combg he effec he po paagaph ugge a pove lkage bewee bak 27

29 pofably ad bak coceao a well-documeed fac he leaue. The coveoal wdom ugge ha he cooldao wh he U.. bakg duy howe beef o coume of bak evce agug ha bak became moe effce Jayaae ad aha Th effce ucue vew pulae ha moe effce bak become moe pofable whch lead o ceaed coceao Bege The make powe vew o he ohe had ugge ha mpoved pofably follow fom ceaed coceao Jeo ad Mlle 2005b. I um he bak cooldao poce poduced ceaed aveage bak pefomace each ae hough all aveue wh bewee ey ad ex effec. Ieegly he moveme o eae acquo hough mulbak holdg compae caued a educo aveage bak pefomace each ae hough he bewee ad ey effec bu a ceae pefomace hough he ex effec. 33 Bege ad Mee 2003 ague ha al ovao bak evce capue exce pof he ho u bu ha a poce of coued ovao ua ha exce pofably beyod he ho u. 28

30 efeece: Amel D. F. ae Law Affecg he Geogaphc Expao of Commecal Bak. Maucp Boad of Goveo Fedeal eeve yem epembe 993. Amo O. M. J. egoal Dbuo of Bak Clog he Ued ae fom 982 o 988. ouhe Ecoomc Joual 58 Jauay Baley M. N. Hule C. ad Campbell D. The Dbuo of Poducvy. Bookg Pape o Ecoomc Acvy: Mcoecoomc Baelma E. Halwage J. ad capea. Mcoecoomc Evdece of Ceave Deuco Idual ad Developg Coue. Wold Bak Polcy eeach Wokg Pape ee No 3464 Ocobe Bege A. N. The Pof-ucue elaohp Bakg Te of Make-Powe ad Effce-ucue Hypohee. Joual of Moey Ced ad Bakg 27 May Bege A. N. ad L. J. Mee. Explag he Damac Chage Pefomace of U Bak: Techologcal Chage Deegulao ad Dyamc Chage Compeo. Joual of Facal Iemedao 2 Jauay Cebula. J. The egoal Dbuo of Bak Clog he Ued ae: A Exeo of he Amo Aaly. ouhe Ecoomc Joual 6 July DeYoug. ad Haa I. The Pefomace of De Novo Commecal Bak: A Pof Effcecy Appoach. Joual of Bakg ad Face 22 May DeYoug. "Bh Gowh ad Lfe o Deah of Newly Chaeed Bak." Fedeal eeve Bak of Chcago Ecoomc Pepecve 23 Thd Quae Fhe I. The Makg of Idex Numbe. Boo: Hougho Mffl 922. Glche Z. ad egev H. Fm Poducvy Iael Iduy Joual of Ecoomec Had A.. Idefyg Mulple Oule Mulvaae Daa. Joual of he oyal acal ocey ee B Had A.. A Modfcao of a Mehod fo he Deeco of Oule Mulvaae ample. Joual of he oyal acal ocey ee B Halwage J. C. Meaug ad Aalyzg Aggegae Flucuao: The Impoace of 29

31 Buldg fom Mcoecoomc Evdece. Fedeal eeve Bak of. Lou evew 79 May/Jue Jayaae J. ad P E aha. The Beef of Bachg Deegulao. Fedeal eeve Bak of New Yok Polcy evew Decembe Jayaae J. ad P E aha. Ey eco Iduy Evoluo ad Dyamc Effcecy: Evdece fom Commecal Bakg. Joual of Law ad Ecoomc 4 Apl Jeo Y. ad. M. Mlle. Deegulao ad ucual Chage he U.. Commecal Bakg Iduy. Eae Ecoomc Joual 29 umme Jeo Y. ad. M. Mlle. Ha Deegulao Affeced Bh Deah ad Maage he U.. Commecal Bakg Iduy?. Maucp Uvey of Nevada La Vega Jauay 2005a. Jeo Y. ad. M. Mlle. Bak Pefomace: Make Powe o Effce ucue? Maucp Uvey of Nevada La Vega Novembe 2005b. Kae E. De Jue Ieae Bakg: Why Oly Now? Joual of Moey Ced ad Bakg 28 May Kapaak E. I.. M. Mlle ad A. G. Noula. "ho-u Co Ieffcecy of Ued ae Commecal Bak: A Flexble ochac Foe Appoach." Joual of Moey Ced ad Bakg 26 Novembe Lapeye E. De Beechug ee mlee Waebpeegeug. Jahbüche fü Naoalökoome ud ak McGuck. H. Eablhme Mcodaa fo Ecoomc eeach ad Polcy Aaly: Lookg Beyod he Aggegae. Joual of Bue ad Ecoomc ac 3 Jauay Paache H. Übe de Peewcklug de leze Jahe ach de Hambuge Böeouge. Jahbüche fü Naoalökoome ud ak Pgou A. C. The Ecoomc of Welfae. Lodo: MacMlla 920. hoade. A. Bak Mege ad Bakg ucue he Ued ae Boad of Goveo of he Fedeal eeve yem aff udy #74 Augu capea. Hemmg P. Teel T. ad Woo J. The ole of Polcy ad Iuo fo Poducvy ad Fm Dyamc: Evdece fom Mco ad Iduy Daa. Ogazao 30

32 fo Ecoomc Coopeao ad Developme Wokg Pape chumpee J. A. The Poce of Ceave Deuco. I Capalm ocalm ad Democacy 3 d edo Chape VII. New Yok: Hape & ow 950. oh K. J. Compooal Dyamc ad he Pefomace of he U.. Bakg Iduy. Fedeal eeve Bak of New Yok wokg pape Decembe 999. oh K. J. ad P. E. aha. Compeve Dyamc of Deegulao: Evdece fom U.. Bakg. Joual of Moey Ced ad Bakg Ocobe Tglu D. K. Dael ad E. Tglu. Deegulao Iey of Compeo Iduy Evoluo ad he Poducvy Gowh of U Commecal Bak. Joual of Moey Ced ad Bakg fohcomg

33 Table : Dyamc Decompoo of U.. Bakg Iduy: YEA WITHIN BETWEEN ENTY EXIT OE T_WTHN T_BTWN UM AVE Noe: The chage eu o equy bewee ay wo yea e.g. OE bewee 999 ad 2000 equal equal he um of he WITHIN BETWEEN ad ENTY effec mu he EXIT effec e.g I alo equal he um of he ae wh T_WTHN ad ae bewee T_BTWN effec. 32

34 Table 2: ae-by-ae Dyamc Decompoo of U.. Bakg Iduy: UMMATION AVEAGE WITHIN BETWEEN ENTY EXIT WITHIN BETWEEN ENTY EXIT Alabama Alaka Azoa Akaa Calfoa Coloado Coeccu Delawae D. Columba Floda Geoga Hawa Idaho Illo Idaa Iowa Kaa Keucky Louaa Mae Maylad Maachue Mchga Meoa Mpp Mou Moaa Nebaka Nevada New Hamphe New Jeey New Mexco New Yok Noh Caola Noh Dakoa Oho Oklahoma Oego Peylvaa hode Ilad ouh Caola

35 Table 2: ae-by-ae Dyamc Decompoo of U.. Bakg Iduy: coued UMMATION AVEAGE WITHIN BETWEEN ENTY EXIT WITHIN BETWEEN ENTY EXIT ouh Dakoa Teeee Texa Uah Vemo Vga Wahgo We Vga Wco Wyomg AVEAGE T. DEV Noe: The UMMATION equal he um aco all yea fo a gve ae whle he AVEAGE equal he UMMATION dvded by

36 Table 3: Pael Fxed- ad adom-effec egeo of Decompoo Compoe Fxed- Effec Model FE Wh Effec Bewee Effec Ey Effec Ex Effec Vaable Coef. -a Coef. -a Coef. -a Coef. -a hh * * * bch_b * 4.06 egd o ** * -3.3 ao uem ** adom- Effec Model E Hauma Te Noe: hh ** bch_b ** 2.32 egd o ** ** ao uem ** coa * χ p-value Deco E FE FE FE The depede vaable ae he wh bewee ey ad ex effec. The depede vaable clude Hchma-Hefdahl dex hh baed o bak ae he aveage umbe of bache pe bak bch_b hee dummy vaable fo eae bakg acvy [he f dummy vaable egd oe f a ae poee egoal ecpocy zeo ohewe; he ecod ao oe f a ae poee aoal ecpocy zeo ohewe; ad he hd o oe a ae poee aoal o-ecpocy zeo ohewe] ad he ae uemployme ae uem. The Hauma e chooe bewee he adom-effec model he ull-hypohe ad he fxed-effec model. The coeffce emae appea he f colum followed by -ac he ex. The coeffce of hh ae mulpled by 000. * mea gfcaly dffee fom zeo a he -pece level. ** mea gfcaly dffee fom zeo a he 5-pece level mea gfcaly dffee fom zeo a he 0-pece level. 35

37 Table 4: ummay ac o Daa egeo Vaable Numbe of Obevao Mea adad Devao Mmum Maxmum Wh Effec Bewee Effec Ey Effec Ex Effec hh bch_b egd o ao uem

38 Appedx A: Ideal Naowde Dyamc Decompoo DEIVATION OF POPOITION: We ca ewe he chage eu o equy a follow: A ex ay ey ay ex ay ey ay Decompoo : [Ue peod - a he bae peod.] Addg he em whch equal zeo o he gh had de of A poduce he followg: ay ay ex ey ay ay ex ey ay ay ex ey ay ay ay ay ay ay ex ay ey ay ] [ ] [ ] [ Noe ha ad. Thu we have ha ey ay ad 2 A ex ay Theefoe we have ha 37

39 3 ] [ ] [ ] [ ] [ ] [ ] [ A ex ey ay ay ex ey ay ay ay ex ey ay ay ay ex ex ey ey ay ay ay ay ey ay ey ay ex ey ay ay Decompoo 2: [Ue peod a he bae peod.] Addg he em whch equal zeo o he gh had de of A poduce he followg: ay ay ex ey ay ay ex ey ay ay ex ey ay ay ay ay ay ay ex ay ey ay ] [ ] [ ] [ Wh A2 we have ha 38

40 4 ] [ ] [ ] [ ] [ ] [ ] [ A ex ey ay ay ex ey ay ay ay ex ey ay ay ay ex ex ey ey ay ay ay ay ey ay ey ay ex ey ay ay Decompoo 3 [Deeme he deal dyamc decompoo.] Add he pevou wo decompoo ogehe A3 plu A4. Thu [ ] [ ] [ ]... 2 Q E D ex ey ay ay ex ey ay ay ex ey ay ay ex ey ay ay whee 2 / 2 ad / 2 /. 39

41 Appedx B: Ideal ae-level Dyamc Decompoo ce ou lluao ue he U.. commecal bakg duy ou devao of he vaou dyamc decompoo employ duy eu o equy. The eu o equy a me equal e come NI a me dvded by equy E a me. Tha E E E E E NI E E E NI E NI E NI E NI o whee. 40

42 Thu we ca calculae ug peod - a he bae peod ha I ha devao we ued he fac ha Now we ca ecalculae ug peod a he bae peod a follow:. 4