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on Business Economics |
| By: | Yi Wen |
| Abstract: | This paper develops an analytically tractable general equilibrium model of inventory dynamics. Inventories are introduced into a standard RBC model through a precautionary stockout-avoidance motive. Under persistent aggregate demand shocks, the model is broadly consistent with the U.S. business cycle and key features of inventory behavior, including (i) a large inventory stock-to-sales ratio and a small inventory investment-to-sales ratio in the long run, (ii) excess volatility of production relative to sales, (iii) procyclical inventory investment but countercyclical stock-to-sales ratio over the business cycle, and (iv) more volatile input inventories than output inventories. Similar results can also be obtained under persistent aggregate supply shocks. |
| Keywords: | Inventories ; Business cycles |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2008-008&r=bec |
| By: | Acharya, Viral V; Volpin, Paolo |
| Abstract: | We argue that the choice of corporate governance by a firm affects and is affected by the choice of governance by other firms. Firms with weaker governance give higher payoffs to their management to incentivize them. This forces firms with good governance to also pay their management more than they would otherwise, due to competition in the managerial labour market. This externality reduces the value to firms of investing in corporate governance and produces weaker overall governance in the economy. The effect is stronger the greater the competition for managers and the stronger the managerial bargaining power. While standards can help raise governance towards efficient levels, market-based mechanisms such as (i) the acquisition of large equity stakes by raiders and (ii) the need to raise external capital by firms can help too, and we characterize conditions under which this happens. |
| Keywords: | corporate governance; executive compensation; externality; governance standards; ownership structure; regulation |
| JEL: | G34 J63 K22 K42 L14 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6627&r=bec |
| By: | Canova, Fabio; López-Salido, J David; Michelacci, Claudio |
| Abstract: | We analyze the effects of neutral and investment-specific technology shocks on hours and output. Long cycles in hours are captured in a variety of ways. Hours robustly fall in response to neutral shocks and robustly increase in response to investment specific shocks. The percentage of the variance of hours (output) explained by neutral shocks is small (large); the opposite is true for investment specific shocks. `News shocks' that generically change expectations about future productivity, are uncorrelated with the estimated technology shocks. |
| Keywords: | Long cycles; News shocks; Structural VARs; Technology disturbances |
| JEL: | E00 J60 O33 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6720&r=bec |
| By: | Bartel, Ann P; Lach, Saul; Sicherman, Nachum |
| Abstract: | This paper presents a dynamic model that analyzes how firms’ expectations with regards to technological change influence the demand for outsourcing. We show that outsourcing becomes more beneficial to the firm when technology is changing rapidly. As the pace of innovations in production technology increases, the firm has less time to amortize the sunk costs associated with purchasing the new technologies. This makes producing in-house with the latest technologies relatively more expensive than outsourcing. The model therefore provides an explanation for the recent increases in outsourcing that have taken place in an environment of increased expectations for technological change. We test the predictions of the model using a panel dataset on Spanish firms for the period 1990 through 2002. The empirical results support the main prediction of the model, namely, that all other things equal, the demand for outsourcing increases with the probability of technological change. |
| Keywords: | outsourcing; technological change |
| JEL: | J21 L11 L24 O33 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6731&r=bec |
| By: | Eberly, Janice; Rebelo, Sérgio; Vincent, Nicolas |
| Abstract: | Which investment model best fits firm-level data? To answer this question we estimate alternative models using Compustat data. Surprisingly, the two best-performing specifications are based on Hayashi's (1982) model. This model's foremost implication, that Q is a sufficient statistic for determining a firm's investment decision, has been often rejected because cash-flow and lagged-investment effects are present in investment regressions. However, we find that these regression results are quite fragile and ineffectual for evaluating model performance. So, forget what investment regressions tell you. Models based on Hayashi (1982) provide a very good description of investment behaviour at the firm level. |
| Keywords: | Cash flow; Tobin's q |
| JEL: | E22 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6737&r=bec |
| By: | Bertola, Giuseppe; Navaretti, Giorgio Barba; Sembenelli, Alessandro |
| Abstract: | We propose and solve a simple model of firm-level decisions to offshore production stages of lower skill intensity than that of activities that remain in the domestic location. In theory, offshoring is optimal only for the more productive among heterogeneous firms if it entails a fixed cost. In a large sample of Italian firms, offshoring - especially of intermediate production stages - is indeed more prevalent among firms that are larger and more productive, and is predicted by arguably relevant firm-level characteristics. We also document that offshoring decreases the share of unskilled employment in domestic production facilities as well as firms’ propensity to employ immigrant workers, and we discuss the possible determinants and policy implication of the latter finding. |
| Keywords: | Foreign Direct Investment; Migration; Outsourcing; Skilled Labour |
| JEL: | F2 J61 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6743&r=bec |
| By: | Thomas Kirchmaier; Konstantinos Stathopoulos |
| Abstract: | This paper investigates the relationship between a CEO’s social network, firm identity, and firm performance. There are two competing theories that predict contradictory outcomes. Following social network theory, one would expect a positive relation between social networks and firm performance, while agency theory in general and Bebchuk’s managerial power approach in particular predicts a negative relationship between social networks and firm performance. Based on a new and comprehensive measure of CEOs social networks, we observe for 363 non-financial firms in the UK that the size of a CEO’s social network affects firm performance negatively. Even so, growth companies are actively seeking CEOs with a large social network, which is in line with the social network theory. Still, we find evidence in support of the argument that well-connected CEOs use the power they obtain through their social network to the detriment of shareholders. |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp608&r=bec |
| By: | Eugenio Pinto |
| Abstract: | We propose an explanation for the rapid post-entry growth of surviving firms found in recent studies. At the core of our theory is the interaction between adjustment costs and learning by entering firms about their efficiency. We show that linear adjustment costs, i.e., proportional costs, create incentives for firms to enter smaller and for successful firms to grow faster after entry. Initial uncertainty about profitability makes entering firms prudent since they want to avoid incurring superfluous costs on jobs that prove to be excessive ex post. Because higher adjustment costs imply less pruning of inefficient firms and faster growth of surviving firms, the contribution of survivors to growth in a cohort's average size increases. For the cohort of 1988 entrants in the Portuguese economy, we conclude that survivors' growth is the main factor behind growth in the cohort's average size. However, initial selection is higher and the survivors' contribution to growth is smaller in services than in manufacturing. An estimation of the model shows that the proportional adjustment cost is the key parameter to account for the high empirical survivors' contribution. In addition, firms in manufacturing learn relatively less initially about their efficiency and are subject to larger adjustment costs than firms in services. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2008-14&r=bec |
| By: | Alejandro Justiniano; Giorgio E. Primiceri; Andrea Tambalotti |
| Abstract: | Shocks to the marginal efficiency of investment are the most important drivers of business cycle fluctuations in U.S. output and hours. Moreover, like a textbook demand shock, these disturbances drive prices higher in expansions. We reach these conclusions by estimating a dynamic stochastic general equilibrium (DSGE) model with several shocks and frictions. We also find that neutral technology shocks are not negligible, but their share in the variance of output is only around 25 percent and even lower for hours. Labor supply shocks explain a large fraction of the variation of hours at very low frequencies, but not over the business cycle. Finally, we show that imperfect competition and, to a lesser extent, technological frictions are the key to the transmission of investment shocks in the model. |
| Keywords: | Business cycles ; Capital investments ; Stochastic analysis ; Equilibrium (Economics) ; Labor supply ; Competition |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:322&r=bec |
| By: | Maarten Goos; Jozef Konings |
| Abstract: | This paper is the first which provides evidence for rent-sharing in Belgium using firm level data. It uses a panel of annual firm level data and shows that a rise in the firm’s profitability leads after some years to an increase in worker’s income. The profit-per-head elasticity of wages is about 0.1 and Lester’s range of wages is estimated at approximately 60 percent of the mean wage. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0019&r=bec |
| By: | Oleg Badunenko; Michael Fritsch; Andreas Stephan |
| Abstract: | This paper investigates the factors that explain the level and dynamics of manufacturing firm productive efficiency. In our empirical analysis, we use a unique sample of about 39,000 firms in 256 industries from the German Cost Structure Census over the years 1992-2005. We estimate the efficiencies of the firms and relate them to firm-specific and environmental factors. We find that (1) about half the model's explanatory power is due to industry effects, (2) firm size accounts for another 20 percent, and (3) location of headquarters explains approximately 15 percent. Interestingly, most other firm characteristics, such as R&D intensity, outsourcing activities, or the number of owners, have extremely little explanatory power. Surprisingly, our findings suggest that higher R&D intensity is associated with being less efficient, though higher R&D spending increases a firm's efficiency over time. |
| Keywords: | Frontier analysis, determinants of efficiency, firm performance, industry effects, regional effects, firm size |
| JEL: | D24 L10 L25 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp775&r=bec |
| By: | Reisinger, Markus; Schnitzer, Monika |
| Abstract: | This paper develops a model of successive oligopolies with endogenous market entry, allowing for varying degrees of product differentiation and entry costs in both markets. Our analysis shows that the downstream conditions dominate the overall profitability of the two-tier structure while the upstream conditions mainly affect the distribution of profits. We compare the welfare effects of upstream versus downstream deregulation policies and show that the impact of deregulation may be overvalued when ignoring feedback effects from the other market. Furthermore, we analyze how different forms of vertical restraints influence the endogenous market structure and show when they are welfare enhancing. |
| Keywords: | Deregulation; Free Entry; Price Competition; Product Differentiation; Successive Oligopolies; Two-Part Tariffs; Vertical Restraints |
| JEL: | D43 L13 L40 L50 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6730&r=bec |
| By: | Ravn, Morten O.; Schmitt-Grohé, Stephanie; Uribe, Martín |
| Abstract: | A number of empirical studies document that marginal cost shocks are not fully passed through to prices at the firm level and that prices are substantially less volatile than costs. We show that in the relative-deep-habits model of Ravn, Schmitt-Grohé, and Uribe (2006), firm-specific marginal cost shocks are not fully passed through to product prices. That is, in response to a firm-specific increase in marginal costs, prices rise, but by less than marginal costs leading to a decline in the firm-specific markup of prices over marginal costs. Pass-through is predicted to be even lower when shocks to marginal costs are anticipated by firms. In our model unanticipated firm-specific cost shocks lead to incomplete pass-through (or a decline in markups) of about 20 percent and anticipated cost shocks are associated with incomplete pass-through of about 50 percent. The model predicts that cost pass-through is increasing in the persistence of marginal cost shocks and U-shaped in the strength of habits. The relative-deep-habits model implies that conditional on marginal cost disturbances, prices are less volatile than marginal costs. |
| Keywords: | cost pass-through; deep habits; markups |
| JEL: | D1 D4 L1 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6674&r=bec |
| By: | Danny Leung |
| Abstract: | Many empirical studies have examined the cyclical nature of the markup ratio. Until recently, few have attempted to ascertain the changes in the markup over a longer time horizon. These changes are of no less interest in view of the posited effects of increasing import competition and lower inflation on the markup. This paper offers evidence on the evolution of the markups for the Canadian business sector and 33 disaggregate industries over the 1961–2004 period. It is found that the business sector markup has declined since the mid-1980s, and that import competition has made a statistically significant but small contribution to this decline. |
| Keywords: | Econometric and statistical methods |
| JEL: | E31 F41 L11 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:08-7&r=bec |
| By: | Moshe Buchinsky (UCLA, CREST-INSEE and NBER); Denis Fougère (CNRS, CREST-INSEE, CEPR and IZA); Francis Kramarz (CREST-INSEE, CEPR and IZA); Rusty Tchernis (Indiana University Bloomington) |
| Abstract: | In this paper, we follow on the seminal work of Altonji and Shakotko (1987) and Topel (1991) and reinvestigate the returns to seniority in the U.S. These papers specify a wage function, in which workers’ wages can change through two channels: (a) returns to their seniority; and (b) returns to their labor market experience. We start from the same wage equation as in previous studies, and, following our theoretical model, we explicitly include a participation-employment equation and an interfirm mobility equation. The employment and mobility decisions define the individual’s experience and seniority. Because experience and seniority are fully endogenized, we introduce into the wage equation a summary of the workers’ entire career and past jobs. The three-equation system is estimated simultaneously using the Panel Study of Income Dynamics (PSID). For all three education groups that we study, returns to seniority are quite high, even higher than what was previously obtained by Topel. On the other hand, the returns to experience appear to be similar to those previously found in the literature. |
| Keywords: | wage mobility, interfirm mobility, returns to seniority, panel data, Markov Chain, Monte Carlo methods |
| JEL: | C11 C15 J31 J63 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2008-006&r=bec |
| By: | Greenwood, Robin; Vayanos, Dimitri |
| Abstract: | We examine empirically how the maturity structure of government debt affects bond yields and excess returns. Our analysis is based on a theoretical model of preferred habitat in which clienteles with strong preferences for specific maturities trade with arbitrageurs. Consistent with the model, we find that (i) the supply of long- relative to short-term bonds is positively related to the term spread, (ii) supply predicts positively long-term bonds' excess returns even after controlling for the term spread and the Cochrane-Piazzesi factor, (iii) the effects of supply are stronger for longer maturities, and (iv) following periods when arbitrageurs have lost money, both supply and the term spread are stronger predictors of excess returns. |
| Keywords: | bond prices; limited arbitrage; preferred habitat; return predictability |
| JEL: | G1 H6 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6694&r=bec |
| By: | Martinez-Miera, David; Repullo, Rafael |
| Abstract: | A large theoretical literature shows that competition reduces banks' franchise values and induces them to take more risk. Recent research contradicts this result: When banks charge lower rates, their borrowers have an incentive to choose safer investments, so they will in turn be safer. However, this argument does not take into account the fact that lower rates also reduce the banks' revenues from non-defaulting loans. This paper shows that when this effect is taken into account, a U-shaped relationship between competition and the risk of bank failure generally obtains. |
| Keywords: | Bank competition; Bank failure; Credit risk; Default correlation; Franchise values; Loan defaults; Loan rates; Moral hazard; Net interest income; Risk-shifting |
| JEL: | D43 E43 G21 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6669&r=bec |
| By: | Anisha Ghosh; George Constantinides |
| Abstract: | The Bansal and Yaron (2004) model of long run risks (LLR) in aggregate consumption and dividend growth and its extension that captures potential co-integration of the consumption and dividend levels, are tested on a cross-section of asset classes and rejected using annual data over the period 1930-2006 and using both annual and quarterly data over the post-war period. The reversalof earlier empirical conclusions is partly due to the increase in the power of the tests resulting from two observations under the null. First, the latent state variables and, therefore, the pricing kernel are known affine functions of observablessuch as the interest rate and the market-wide price-dividend ratio. Second, the parameters of the time-series processes of consumption and dividend growth, theLLR variable, and its conditional variance impose constraints on the parameters of the pricing kernel. The value of the persistence parameter of the LRR variablethat best fits the data implies that its half-life is shorter than that of the business cycle. |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp609&r=bec |
| By: | Blanchard, Olivier J; Galí, Jordi |
| Abstract: | We characterize the macroeconomic performance of a set of industrialized economies in the aftermath of the oil price shocks of the 1970s and of the last decade, focusing on the differences across episodes. We examine four different hypotheses for the mild effects on inflation and economic activity of the recent increase in the price of oil: (a) good luck (i.e. lack of concurrent adverse shocks), (b) smaller share of oil in production, (c) more flexible labour markets, and (d) improvements in monetary policy. We conclude that all four have played an important role. |
| Keywords: | Great Moderation; Monetary policy credibility; Real wage rigidities; Sticky Prices |
| JEL: | E32 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6631&r=bec |