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on Business Economics |
| By: | W. Bentley MacLeod (Columbia University and IZA Bonn) |
| Abstract: | This paper discusses the literature on the enforcement of incomplete contracts. It compares legal enforcement to enforcement via relationships and reputations. A number of mechanisms, such as the repeat purchase mechanism (Klein and Leffler (1981)) and efficiency wages (Shapiro and Stiglitz (1984)), have been offered as solutions to the problem of enforcing an incomplete contract. It is shown that the efficiency of these solutions is very sensitive to the characteristics of the good or service exchanged. In general, neither the repeat purchase mechanism nor efficiency wages is the most efficient in the set of possible relational contracts. In many situations, total output may be increased through the use of performance pay and through increasing the quality of law. |
| Keywords: | contract, law and economics, reputation, repeated games, incomplete contracts, transactions costs, institutional economics, contract enforcement |
| JEL: | K12 C7 O17 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp1978&r=bec |
| By: | Christopher F. Baum (Boston College); Dorothea Schaefer (DIW Berlin); Oleksandr Talavera (DIW Berlin) |
| Abstract: | This paper investigates the link between the optimal level of non-financial firms' liquid assets and industry-level uncertainty. We develop a structural model of a firm's value maximization problem that predicts that as industry-level uncertainty increases the firm will increase its optimal level of liquidity. We test this hypothesis using a panel of German firms drawn from the Bundesbank's balance sheet database and show that greater uncertainty at the industry level causes firms to increase their cash holdings. The strength of these effects differ among subsamples of the firms with different characteristics. |
| Keywords: | Uncertainty, cash holdings, liquidity, non-financial firms |
| JEL: | G31 G32 L14 |
| Date: | 2006–02–13 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:637&r=bec |
| By: | Hanno Lustig |
| Date: | 2005–03–19 |
| URL: | http://d.repec.org/n?u=RePEc:cla:uclaol:352&r=bec |
| By: | Christian Hellwig |
| Date: | 2005–10–12 |
| URL: | http://d.repec.org/n?u=RePEc:cla:uclaol:369&r=bec |
| By: | Hanno Lustig |
| Date: | 2005–03–22 |
| URL: | http://d.repec.org/n?u=RePEc:cla:uclaol:353&r=bec |
| By: | Yadira González de Lara (Universidad de Alicante) |
| Abstract: | This paper proposes a historically-grounded mechanism-design model of corporate finance, with two-side risk aversion under limited contract enforceability, where (inside) equity held by entrepreneurs, debt and (outside) equity coexist. This capital structure shares optimally the non-diversifiable risk associated with costly and risky ventures. Furthermore, it uniquely sustains the optimal risk allocation if agents' personal wealth is contractible at a higher enforcement cost than the projects' returns. Otherwise, the irrelevance theorem of Modigliani and Miller applies. Consistent with the theoretical predictions, we observe that (i) risk-averse merchants-entrepreneurs financed part of their ventures (hold inside equity) and raised additional funds from risk-averse investors through debt-like sea loan and equity-like commenda contracts when long-distance medieval trade was indeed highly costly and risky and that (ii) maritime insurance, with higher protection against the non-diversifiable "risk of loss at sea or from the action of men" but higher enforcement costs, did not develop until the mid-fourteenth century, when the ventures' costs and risk had decreased significantly. Whereas the model emphasizes the entrepreneurs' equity holdings and the limited-liability aspects of debt and equity, the choice between debt or equity derives from simple, although historically backed, information assumptions. The analysis is therefore complementary to other capital-structure theories based on agency costs, information asymmetries, signalling, transaction costs and incomplete contracting. |
| Keywords: | debt contracts, capital structure, creditworthiness, enforceability, inside and outside equity, insurance, limited liability, private information, risk-sharing |
| JEL: | D81 D82 G22 G32 N23 |
| Date: | 2004–04 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2004-16&r=bec |
| By: | Ralph de Haas |
| Abstract: | We use a two-country model to examine how endogenous changes in monitoring intensity and exogenous changes in monitoring efficiency affect multinational-bank lending. First, an endogenous decline in monitoring intensity limits the amount of deposits that banks can attract. This lowers bank lending. Shocks that reduce bank capital relative to firm capital therefore have a stronger negative effect on bank lending compared to a model with exogenous monitoring intensity. Second, international differences in monitoring efficiency create a lending bias towards the country where monitoring is performed most efficiently. Multinational-bank subsidiaries that monitor efficiently attract more deposits and lend more than less efficient subsidiaries. |
| Keywords: | multinational banks; monitoring; credit supply. |
| JEL: | F15 F23 F36 G21 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:088&r=bec |
| By: | M. Hashem Pesaran; Ron Smith |
| Abstract: | This paper provides a synthesis and further development of a global modelling approach introduced in Pesaran, Schuermann and Weiner (2004), where country specific models in the form of VARX* structures are estimated relating a vector of domestic variables to their foreign counterparts and then consistently combined to form a Global VAR (GVAR). It is shown that VARX* models can be derived as the solution to a dynamic stochastic general equilibrium (DSGE) model where over-identifying long-run theoretical relations can be tested and imposed if acceptable. Similarly, short-run over-identifying theoretical restrictions can be tested and imposed if accepted. The assumption of the weak exogeneity of the foreign variables for the long-run parameters can be tested, where foreign variables can be interpreted as proxies for global factors. Rather than using deviations from ad hoc statistical trends, the equilibrium values of the variables reflecting the long-run theory embodied in the model can be calculated. |
| Keywords: | Global VAR (GVAR), DSGE models, VARX* |
| JEL: | C32 E17 F42 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0604&r=bec |
| By: | David Newbery |
| Abstract: | Europe is liberalising electricity in accordance with the European Commission’s Electricity Directives. Different countries have responded differently, notably in the extent of restructuring, treatment of mergers, market power, and vertical unbundling. While Britain and Norway have achieved effective competition, others like Germany, Spain and France are still struggling to deal with dominant and sometimes vertically integrated companies. The Netherlands offers an interesting intermediate case, where good economic analysis has sometimes been thwarted by legalistic interpretations. Investment under the new Emissions Trading system could further transform the electricity industry but may be hampered by slow progress in liberalising European gas markets. |
| Keywords: | Competition, liberalisation, restructuring, electricity, market power |
| JEL: | G34 K23 L51 L94 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0615&r=bec |
| By: | Louis Coulomb; Karsten Neuhoff |
| Abstract: | The heuristic concept of learning curves describes cost reductions as a function of cumulative production. A study of the Liberty shipbuilders suggested that product quality and production scale are other relevant factors that affect costs. Significant changes of attributes of a technology must be corrected when assessing the impact of learning-by-doing. We use an engineering-based model to capture the cost changes of wind turbines that can be attributed to changes in turbine size. We estimate the learning curve and turbine size parameters using more than 1500 price points from 1991 to 2003. The fit between model and empirical data confirms the concept. |
| Keywords: | Learning curve, Turbine scale, Wind turbines |
| JEL: | O33 N70 L64 L94 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0618&r=bec |
| By: | Masanao Aoki |
| Date: | 2005–01–19 |
| URL: | http://d.repec.org/n?u=RePEc:cla:uclaol:339&r=bec |
| By: | Fershtman, Chaim; Markovich, Sarit |
| Abstract: | R&D is an inherently dynamic process which involves different intermediate steps that need to be developed before the completion of the final invention. Firms are not necessarily symmetric in their R&D abilities; some may have advantages in early stages of the R&D process while others may have advantages in other stages of the process. The paper uses a simple two-firm asymmetric ability multistage R&D race model to analyse the effect of different types of patent policy regimes and licensing arrangement on the speed of innovation, firm value and consumers' surplus. The paper demonstrates the circumstances under which a weak patent protection regime, which facilitates free imitation of any intermediate technology, may yield a higher overall surplus than a regime that awards patent for the final innovation. This result holds even in cases where the length of the patent is optimally calculated. |
| Keywords: | licensing; patent protection; R&D race |
| JEL: | D43 L1 O3 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5481&r=bec |
| By: | Kramarz, Francis; Thesmar, David |
| Abstract: | This paper provides empirical evidence consistent with the facts that (1) social networks may strongly affect board composition and (2) social networks may be detrimental to corporate governance. Our empirical investigation relies on a unique dataset on executives and outside directors of corporations listed on the Paris stock exchange over the 1992-2003 period. This data source is a matched employer employee dataset providing both detailed information on directors/CEOs and information on the firm employing them. We first find a very strong and robust correlation between the CEO's network and that of his directors. Networks of former high ranking civil servants are the most active in shaping board composition. Our identification strategy takes into account (1) differences in unobserved directors 'abilities' and (2) the unobserved propensity of firms to hire directors from particular networks, irrespective of the CEO's identity. We then show that the governance of firms run by former civil servants is relatively worse on many dimensions. Former civil servants are less likely to leave their CEO job when their firm performs badly. Secondly, CEOs who are former bureaucrats are more likely to accumulate directorships, and the more they do, the less profitable is the firm they run. Thirdly, the value created by acquisitions made by former bureaucrats is lower. All in all, these firms are less profitable on average. |
| Keywords: | board of directors; corporate governance; social networks |
| JEL: | G34 J44 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5496&r=bec |
| By: | Landier, Augustin; Sraer, David; Thesmar, David |
| Abstract: | In many instances, 'independently-minded' top-ranking executives can impose strong discipline on their CEO, even though they are formally under his authority. This paper argues that the use of such a disciplining mechanism is a key feature of good corporate governance. We provide robust empirical evidence consistent with the fact that firms with high internal governance are more efficiently run. We empirically label as 'independent from the CEO' a top executive who joined the firm before the current CEO was appointed. In a very robust way, firms with a smaller fraction of independent executives exhibit (1) a lower level of profitability and (2) lower shareholder returns after large acquisitions. These results are unaffected when we control for traditional governance measures such as board independence or other well-studied shareholder-friendly provisions. |
| Keywords: | acquisition; corporate governance; corporate performance; executives |
| JEL: | D23 G14 G34 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5500&r=bec |
| By: | Wolfers, Justin |
| Abstract: | A vast labour literature has found evidence of a 'glass ceiling', whereby women are under-represented among senior management. A key question remains the extent to which this reflects unobserved differences in productivity, preferences, prejudice, or systematically biased beliefs about the ability of female managers. Disentangling these theories would require data on productivity, on the preferences of those who interact with managers, and on perceptions of productivity. Financial markets provide continuous measures of the market’s perception of the value of firms, taking account of the beliefs of market participants about the ability of the men and women in senior management. As such, financial data hold the promise of potentially providing insight into the presence of mistake-based discrimination. Specifically if female-headed firms were systematically under-estimated, this would suggest that female-headed firms would outperform expectations, yielding excess returns. Examining data on S&P 1500 firms over the period 1992-2004 I find no systematic differences in returns to holding stock in female-headed firms, although this result reflects the weak statistical power of our test, rather than a strong inference that financial markets either do or do not under-estimate female CEOs. |
| Keywords: | CEO pay; CEOs; chief executive officer; discrimination; event study; excess returns; female CEOs; statistical discrimination |
| JEL: | G14 G3 J16 J4 J7 K31 M5 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5507&r=bec |
| By: | Boot, Arnoud W A; Gopalan, Radhakrishnan; Thakor, Anjan |
| Abstract: | We analyze a publicly-traded firm’s decision to stay public or go private when managerial autonomy from shareholder intervention affects the supply of productive inputs by management. We show that both the advantage and the disadvantage of public ownership relative to private ownership lie in the liquidity of public ownership. While the liquidity of public ownership lets shareholders trade easily and supply capital at a lower cost, the liquidity-engendered trading also results in stochastic shocks to a firm’s shareholder base. This exposes management to uncertainty regarding the identity of future shareholders and their extent of intervention in management decisions and in turn curtails managerial incentives. By contrast, because of its illiquidity, private ownership provides a stable shareholder base and improves these input provision incentives but results in a higher cost of capital. Thus, capital market liquidity, while being a principal advantage of public ownership, also has a surprising 'dark side' that discourages public ownership. Our model takes seriously a key difference between private and public equity markets in that, unlike the private market, the firm’s shareholder base, namely the extent of investor participation, is stochastic in the public market. This allows us to extract predictions about the effects of investor participation on the stock price level and volatility and on the public firm’s incentives to go private, thereby providing a link between investor participation and firm participation in public markets. Lesser investor participation induces lower and more volatile stock prices, encouraging public firms to go private, whereas greater investor participation encourages younger firms to go public. Moreover, IPO underpricing is optimal because it is shown to lead to a higher and less volatile post-IPO stock price, greater autonomy for the manager and a higher supply of privately-costly managerial inputs. |
| Keywords: | corporate finance |
| JEL: | G10 G24 G32 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5510&r=bec |
| By: | Lamo, Ana; Messina, Julian; Wasmer, Etienne |
| Abstract: | Countries react differently to large labour reallocation shocks. Some minimize the costs by adapting rapidly, while others suffer long periods of costly adjustment, typically high and persistent unemployment and temporary output losses. We argue that the existence of large amounts of specific human capital slows down the transitions and makes them costly. We illustrate this point by building a theoretical framework in which young agents' careers are heavily determined by the type of initial education, and analyze the transition to a new steady-state after a sectoral demand shift. In the absence of mobility, it can take as much as a generation for the economy to absorb the shock. An interesting case study is the European Union enlargement, which led to a modernization of many sectors in Eastern countries and to a fast decline of traditional industries and agriculture. Using labour force data from a large economy with rigid labour markets, Poland, and a small open economy with increased flexibility, Estonia, we document our main claim, namely that specialized education reduces workers' mobility and hence their ability to cope with economic changes. We find that holding a vocational degree is associated with much longer unemployment duration spells, relatively large wage penalties when changing jobs and higher likelihood of leaving activity for elder workers. Quantitative exercises suggest that the over-specialization of the labour force in Poland led to much higher and persistent unemployment compared to Estonia during the period of EU enlargement. Traditional labour market institutions (wage rigidity and employment protection) increased, but to a much lesser extent, the unemployment gap. |
| Keywords: | enlargement; labour reallocation; matching; specific skills; unemployment; vocational education |
| JEL: | J30 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5503&r=bec |
| By: | Schwerdt, Guido; Turunen, Jarkko |
| Abstract: | Composition of the euro area workforce evolves over time and in response to changing labour market conditions. We construct an estimate of growth in euro area labour quality over the period 1983-2004 and show that labour quality has grown on average by 0.6% year-on-year over this time period. Labour quality growth was significantly higher in the early 1990s than in the 1980s. This strong increase was driven by an increase in the share of those with tertiary education and workers in prime age. Growth in labour quality moderated again towards the end of the 1990s, possibly reflecting the impact of robust employment growth resulting in the entry of workers with lower human capital. Labour quality growth has on average accounted for nearly one third of euro area labour productivity growth. The results point to a significant decline in the contribution of total factor productivity to euro area growth. |
| Keywords: | growth accounting; human capital; labour quality; total factor productivity |
| JEL: | E24 J24 O47 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5509&r=bec |
| By: | Pau, L-F. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | With the emergence of smart business networks, agile networks, etc. as important research areas in management, for all the attractiveness of these concepts, a major issue remains around their design and the selection rules. While smart business networks should provide advantages due to the quick connect of business partners for selected functions in a process common to several parties, literature does not provide constructive methods whereby the selection of temporary partners and functions can be done. Most discussions only rely solely on human judgment. This paper introduces both computational geometry, and genetic programming, as systematic methods whereby to display possible partnerships, and also whereby to plan for their effect on the organizations or functions of those involved. The two techniques are also been put in the context of emergence theory. Business maps address the first challenge with the use of Vorono? diagrams. Cellular automata, with genetic algorithms mimicking living bodies, address the second challenge. This paper does not include experimental results, which have been derived in the high tech area to determine especially the adequateness of systems integrators to set up joint ventures with smaller technology suppliers. |
| Keywords: | Smart Business Networks;Design of Smart business Network;Genetics;Cellular Automata;Emergence Theory;Computational Geometry;Vorono?;Smart Business Maps;Business Genetics;Technology Management; |
| Date: | 2006–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:30007959&r=bec |
| By: | Gielen,Anne C.; Kerkhofs,Marcel J.M.; Ours,Jan C. van (Tilburg University, Center for Economic Research) |
| Abstract: | This paper uses information from a panel of Dutch firms to investigate the labor productivity effects of performance related pay (PRP). We find that PRP increases labor productivity at the firm level with about 9%. |
| Keywords: | performance related pay; labour productivity |
| JEL: | C41 H55 J64 J65 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:20061&r=bec |
| By: | Thierry Post (Faculty of Economics, Erasmus Universiteit Rotterdam); Guido Baltussen (Faculty of Economics, Erasmus Universiteit Rotterdam); Martijn van den Assem (Faculty of Economics, Erasmus Universiteit Rotterdam) |
| Abstract: | The popular television game show 'Deal or No Deal' offers a unique opportunity for analyzing decision making under risk: it involves very large stakes, simple take-or-leave decisions that require minimal skill or strategy and near-certainty about the probability distribution. Based on a panel data set of the choices of contestants in all game rounds of 53 episodes from Australia and the Netherlands, we find an average Pratt-Arrow relative risk aversion (RRA) between roughly 1 and 2 for initial wealth levels between 0 and 50,000. The RRA differs substantially across the contestants and some even exhibit risk seeking behavior. The cross-sectional differences in RRA can be explained in large part by the previous outcomes experienced by the contestants during the game. Most notably, consistent with the 'break-even effect', the RRA strongly decreases following earlier losses and risk seeking arises after large losses. |
| Keywords: | Decision making under risk; Relative risk aversion; break-even effect; real incentives; game show |
| JEL: | D81 C23 C93 |
| Date: | 2006–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20060009&r=bec |
| By: | W. Allard Bruinshoofd; Clemens J. M. Kool |
| Abstract: | We provide new empirical evidence on non- linear liquidity management in Dutch firms. Our results reveal that liquidity adjustment from below the target is significantly faster than from above. We find no evidence for bands of inaction around the target. |
| Keywords: | Corporate liquidity management; Non-linear adjustment; Endogenous thresholds; Panel approach. |
| JEL: | C33 E41 G3 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:087&r=bec |
| By: | Dunkerley Fay (K.U.Leuven-Center for Economic Studies); Andre de Palma (Université de Cergy-Pontoise, ENPC and Member of Institut Universitaire de France, THEMA, 33,); Proost Stef (K.U.Leuven-Center for Economic Studies; UCL - CORE) |
| Abstract: | In this paper we study the problem of a city with access to two subcentres selling a differentiated product. The first subcentre has low free flow transport costs but is easily congested (near city centre, access by road). The second one has higher free flow transport costs but is less prone to congestion (ample public transport capacity, parking etc.). Both subcentres need to attract customers and employees by offering prices and wages that are sufficiently attractive to cover their fixed costs. In the absence of any government regulation, there will be an asymmetric duopoly game that can be solved for a Nash equilibrium in prices and wages offered by the two subcentres. This solution is typically characterised by excessive congestion for the nearby subcentre. We study the welfare effects of a number of stylised policies by setting up a general model and illustrating the model using competition between airports as an example. The first stylised policy is to extend the congested road to subcentre 1. This policy will not necessarily lead to less congestion as more customers will be attracted by the lower transport costs. The second policy option is to add congestion pricing (or parking pricing etc.) for the congested subcentre. This will decrease its profit margin and attract more customers. The third policy is acceptable for politicians: providing a direct subsidy to the remote subcentre, reducing its marginal costs. This policy will again ease the congestion problem for the nearby subcentre but will do this in a very costly way. |
| Keywords: | duopoly, imperfect competition, congestion, general equilibrium, airport competition |
| JEL: | L13 D43 R41 R13 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:ete:etewps:ete0509&r=bec |
| By: | Michel Fok (UPR10 - Systèmes cotonniers en petits paysannats - http://www.cirad.fr/fr/pg_recherche/ur.php?id=36 - CIRAD); Weili Liang (HEBAU-DA - Department of Agronomy of HEBAU - Hebei Agricultural University); Guiyan Wang (HEBAU-DA - Department of Agronomy of HEBAU - Hebei Agricultural University); Yuhong Wu (HEBAU-DA - Department of Agronomy of HEBAU - Hebei Agricultural University) |
| Abstract: | China is a big country in terms of biotech achievements. It is also a rare country demonstrating crop-differentiated policies in the dissemination of the GMOs. While the release of GMOs is authorized notably for cotton in 1998, it is still prohibited for food crops. In spite of the positive outcomes on cotton, at least in the short run, and of the persisting decrease of the cereal production, the hesitation to release GMO on food crops should keep on prevailing. This seems to be founded when the qualitative dimension of the food production is taken into consideration. |
| Keywords: | China; GMO; food security; cotton; foodcrops; productivity; biotechnology |
| Date: | 2006–02–08 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00008939_v1&r=bec |