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on Business Economics |
| By: | Joseph E. Harrington, Jr |
| Abstract: | This paper distills and organizes facts about cartels from about 20 European Commission decisions over 1999-2004. It describes the properties of a collusive outcome, monitoring and punishment methods for enforcing it, the frequency of meetings, the organizational structure of cartels, and what preceded cartel formation. |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:jhu:papers:531&r=bec |
| By: | Martin Hellwig (Max Planck Institute for Research on Collective Goods, Kurt Schumacher-Str. 10, Bonn) |
| Abstract: | The paper reviews and assesses our understanding of the notion of “market discipline” in corporate governance. It questions the wholesale appeal to this notion in policy discussion, which fails to provide an account of the underlying mechanisms in terms of theory and empirical analysis. Discipline that is provided by the “market” must be compared to discipline that is provided by other institutions, e.g., intermediaries acting as “delegated monitors”. The comparative assessment depends on (i) the information technology, (ii) the role of strategic interactions, and (iii) the disciplinary mechanism itself. Concerning (i), the question is whether the benefits of multiple sources of information exceed the costs. Concerning (ii), strategic interactions concern the free-rider problem in acquiring information that benefits all financiers, as well as distributive externalities involved in exploiting an information advantage to the detriment of other financiers. Concerning (iii), the question is whether investors have explicit intervention rights or whether “discipline” results from managerial acquiescence. As for the acquisition and aggregation of information in organized markets, positive welfare effects arise only if the information is put to productive use, either through improvements in real investment and managerial incentives, or through changes in corporate control. Necessary conditions for such benefits to arise are fairly restrictive, especially if the changes that occur are based on managerial acquiescence rather than the legal intervention rights of investors. The expansion of market-based managerial incentives in the nineties had little to do with these theoretical accounts. The experience of moral hazard that has accompanied this expansion, on the side of gate-keeping institutions as well as corporate management, confirms the predictions of theory about the potential for shortfalls in market discipline and the agency costs of equity finance through the open market. |
| Keywords: | Market Discipline, Financial Institutions, Information Processing, Corporate Governance |
| JEL: | G14 G20 G30 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:155&r=bec |
| By: | K. Huang; Z. Liu |
| Abstract: | Staggered price and staggered wage contracts are commonly viewed as similar mechanisms in generating persistent real effects of monetary shocks. In this paper, we distinguish the two mechanisms in a dynamic stochastic general equilibrium framework. We show that, although the dynamic price setting and wage setting equations are alike, a key parameter governing persistence is linked to the underlying preferences and technologies in different ways. Under the staggered wage mechanism, an intertemporal smoothing incentive in labor supply creates a real rigidity that is absent under the staggered price mechanism. Consequently, the two mechanisms have different implications on persistence. While the staggered price mechanism by itself does not contribute to, the staggered wage mechanism plays an important role in generating persistence. |
| Keywords: | Staggered contracts, business cycle persistence, monetary policy |
| JEL: | E24 E32 E52 |
| URL: | http://d.repec.org/n?u=RePEc:usu:wpaper:2000-08&r=bec |
| By: | L. Hunnicutt |
| Abstract: | Multi-plant organizations have trouble including both local and global information in their decisions. Outlets know local conditions but headquarters is able to coordinate outlets. In allocating decision-making power, firms must balance coordination and flexibility. I model this tradeoff, and show that the decentralized firm may standardize to avoid costs due to miscoordination. That is, increasingly variable local conditions cause ecentralized choices to become less variable. Ex ante, decentralization is more profitable; neither form dominates ex post. Signals from outlets to headquarters improve the performance of the centralized firm, but one can always find conditions under which decentralization is preferred. |
| Keywords: | decentralization, information, multi-plant firms |
| JEL: | L23 D21 |
| URL: | http://d.repec.org/n?u=RePEc:usu:wpaper:2000-32&r=bec |
| By: | Christopher D. Carroll; Miles S. Kimball |
| Abstract: | This is an entry for The New Palgrave Dictionary of Economics, 2nd Ed. |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:jhu:papers:530&r=bec |
| By: | Marco LiCalzi; Paolo Pellizzari (Department of Applied Mathematics, University of Venice) |
| Abstract: | This paper studies the performance of four market protocols with egard to allocative efficiency and other performance criteria such as volume or volatility. We examine batch auctions, continuous double auctions, specialist dealerships, and a hybrid of these last two. All protocols are practically implementable because the messages that traders need to use are simple. We test the protocols by running (computerized) experiments in an environment that controls for tradersÕ behavior and rules out any informational effect. We find that all protocols generically converge to the efficient allocation in finite time. An extended comparison over other performance criteria produces no clear winner, but the presence of a specialist is associated with the best all-round performance. |
| Keywords: | market microstructure, allocative efficiency, comparison of market institutions, performance criteria. |
| JEL: | G19 D61 D44 C63 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:vnm:wpaper:136&r=bec |
| By: | Felipe Meza; Erwan Quintin |
| Abstract: | Total factor productivity (TFP) falls markedly during financial crises, as we document with recent evidence from Mexico and Asia. These falls are unusual in magnitude and present a difficult challenge for the standard small open economy neoclassical model. We show in the case of Mexico’s 1994-95 crisis that the model predicts that inputs and output should have fallen much more than they did. Using models with endogenous factor utilization, we find that capital utilization and labor hoarding can account for a large fraction of the TFP fall during the crisis. However, these models also predict that output should fall significantly more than in the data. Given the behavior of TFP, the biggest challenge may not be explaining why output falls so much following financial crises, but rather why it falls so little. |
| Keywords: | Financial crises - Mexico |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddcl:0105&r=bec |
| By: | D. Dickinson |
| Abstract: | This paper reports on the use of carrot (positive) and stick (negative) incentives as methods of increasing effort among members of work teams. We study teams of four members in a laboratory environment in which giving effort towards the team goal is simulated by eliciting voluntary contributions towards the provision of a public good. We test the efficiency improving properties of four distinct environments: monetary prizes given to high contributors versus monetary fines assessed to low contributors, where high/low contributor is defined first in terms of absolute contributions and then in terms of contributions relative to abilities—which we call handicapping. Our results show that both carrot and stick increase efficiency levels by 11-29%. We find that handicapped incentives promise the highest efficiency levels, and when handicapping is not used certain types of penalties may be more effective than prizes. The implications for work teams and suggestions for practical implementation are discussed. |
| URL: | http://d.repec.org/n?u=RePEc:usu:wpaper:2000-06&r=bec |
| By: | Nick Bloom; John Van Reenen; Stephen Bond |
| Abstract: | This paper shows that, with (partial) irreversibility, higher uncertainty reduces the impact effect of demand shocks on investment. Uncertainty increases real option values making firms more cautious when investing or disinvesting. This is confirmed both numerically for a model with a rich mix of adjustment costs, time-varying uncertainty, and aggregation over investment decisions and time, and also empirically for a panel of manufacturing firms. These cautionary effects of uncertainty are large – going from the lower quartile to the upper quartile of the uncertainty distribution typically halves the first year investment response to demand shocks. This implies the responsiveness of firms to any given policy stimulus may be much lower in periods of high uncertainty, such as after major shocks like OPEC I and 9/11. |
| JEL: | D92 E22 D8 C23 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12383&r=bec |
| By: | Kathy Fogel; Randall Morck; Bernard Yeung |
| Abstract: | What is good for big business need not generally advance a country’s overall economy. Big business turnover correlates with rising income, productivity, and (in high income countries) faster capital accumulation; consistent with Schumpeter’s (1912) creative destruction and recent formalizations like Aghion and Howitt (1992). Turnover appears to “cause” growth; and disappearing behemoths, more than rising stars, drive our results. Stronger findings suggest more intense creative destruction in countries with higher incomes, as well as those with smaller governments, Common Law courts, smaller banking systems, stronger shareholder rights, and more open economies. Only the last matters more in lower income countries. |
| JEL: | O16 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12394&r=bec |
| By: | Catherine Fuss (National Bank of Belgium, Research Department); Philip Vermeulen (ECB, DG Research) |
| Abstract: | We test whether firms with a single bank are better shielded from loss of credit and investment cuts in periods of adverse cash flow shocks than firms with multiple bank relationships. Our estimates of the cash flow sensitivity of investment show that both types of firms are equally subject to financing constraints that bind only in the event of adverse cash flow shocks. In these periods, firms incur lower cuts in investment expenditures when they can obtain extra credit. In periods of adverse cash flow shocks, the probability of obtaining extra bank debt becomes more sensitive to the size and leverage of the firm. |
| Keywords: | financial constraints, lending relationships, firm investment, firm financing |
| JEL: | D92 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:200607-1&r=bec |
| By: | Kerwin Kofi Charles; Melvin Stephens, Jr. |
| Abstract: | We study how the level and composition of household expenditures changes over the business cycle for households at different positions in the income distribution. Using data from the Consumer Expenditure Survey, we find that transitory, state-specific increases in unemployment causes lower income groups to lower their total expenditure outlays, contrary to the prediction of the textbook account of consumption behavior. In addition, in bad economic times these groups raise the share of their total outlays devoted to relative fixed outlays like home or car payments. These adjustments are primarily concentrated among reductions in outlays devoted to entertainment and personal care expenditures. We find no similar effects for households at higher positions in the income distribution. It is difficult to attribute these differences across households to differences in credit constraints, both because the specific results for credit holdings are imprecisely estimated and because income losses experienced by higher SES households are so small that there is, for them, little need to adjust consumption. |
| JEL: | D12 E21 E24 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12388&r=bec |
| By: | L. Hunnicutt; D. Aadland |
| Abstract: | This paper incorporates inventory dynamics into an analysis of market power. A Cournot duopoly model of competition is presented in which firms account for the effects of current choices on their competitors’ current actions on future actions (both their own and their competitors’). We show that measures of market power which ignore inventory dynamics produce biased estimates of true market power, although the direction of the bias cannot be theoretically determined. We then apply the model to the beef packing industry using data on cattle stocks and slaughter from 1948-1999. Our estimates suggest that static measures underestimate true market power levels. |
| URL: | http://d.repec.org/n?u=RePEc:usu:wpaper:2000-34&r=bec |
| By: | L. Hunnicutt |
| Abstract: | Single-plant firms choose quantity/quality levels to maximize profits. Multi-plant firms face this decision and must also choose how many decision makers to have. This paper presents two case studies and a model of a multi-plant firm in which overhead costs are lower with one decision-maker (centralization), but the mass of information and the need for timely decisions make occasional mixups unavaoidable. Multiple decision makers (decentralization) solves the mixup problem. Standardization—treating different outlets similarly in response to costly mixups—appears in the case studies, and is demonstrated as a result in the model. |
| JEL: | D21 L23 |
| URL: | http://d.repec.org/n?u=RePEc:usu:wpaper:2000-35&r=bec |
| By: | Shuaizhang Feng (Shanghai University of Finance and Economics); Donald O. Parsons (George Washington University and IZA Bonn) |
| Abstract: | Displaced workers, especially long tenured workers, face large human capital losses. Private firms frequently offer insurance against this threat in the form of severance pay – scheduled benefits linked in expectation to the worker’s human capital loss. We explore this linkage, first reviewing common severance benefit algorithms and then comparing them with simple models of capitalized job displacement losses on data from the Displaced Worker Surveys of 2000 and of 2004. The standard benefit formula of one week’s pay per year of service offers payments roughly in proportion to expected capital losses, but with a proportionality factor of only one quarter of capitalized losses (at 9 percent). Despite the systematic relationship between tenure/age and displacement losses, these factors explain little of the total variation in displacement losses, raising obvious insurance efficiency concerns. Cross-sectional estimates from more complete models, however, uncover no admissible factors currently neglected in standard severance contracts, although the jump in earnings losses between displacements in the robust market of 1997-1999 and the difficult labor market of 2000-2003 does suggest conditioning benefits on market conditions. |
| Keywords: | job displacement, severance pay, unemployment insurance |
| JEL: | J65 J41 J33 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2238&r=bec |
| By: | Paul Haynes; Alessandra Vecchi; James Wickham |
| Date: | 2006–08–02 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp173&r=bec |