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on Business Economics |
| By: | Christian Bayer (IGIER – Università Commerciale Luigi Bocconi, Italy); Carsten Burhop (Max Planck Institute for Research on Collective Goods) |
| Abstract: | This paper proposes to exploit a reform in legal rules of corporate governance to identify contractual incentives from the correlation of executive pay and firm performance. In particular, we refer to a major shift in the legal and institutional environment, the reform of the German joint-stock companies act in 1884. We analyze a sample of executive pay for 46 firms for the years 1870 to 1911. In 1884, a law reform substantially enhanced corporate control, strengthened the monitoring incentives of shareholders, and reduced the discretionary power of executives in Germany. Pay-performance sensitivity decreased significantly after this reform. While executives received a bonus of about three to five per cent in profits before 1884, after the reform this parameter decreased to a profit share of about two per cent. At least the profit share that is eliminated by the reform must have been incentive pay before. This incentive mechanism was replaced by other elements of corporate governance. |
| Keywords: | pay-performance sensitivity, natural experiment, legal reform, corporate governance |
| JEL: | G30 J33 N23 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2008_11&r=bec |
| By: | Michael Rauh (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Abhijit Ramalingam (Indiana University) |
| Abstract: | In this paper, we study the development of intrinsic motivation in the form of the work ethic in the firm and the market. To do so, we combine the theory of the firm based on asset ownership in Holmstr¨om and Milgrom (1991) and the formalization of the work ethic in Casadesus-Masanell (2004), where the effective work ethic is an equilibrium phenomenon and the product of individual and rational self-interest. We show that the idealized firm is an institution that operates solely on the basis of the endogenous work ethic; incentives are necessarily zero because of multi-tasking issues. In contrast, the market is an institution characterized by high-powered incentives. We then show that the firm is the more ethical institution over an intermediate range of perceived risk, whereas the market never is. When the level of perceived risk is sufficiently high or low, however, the ethical ranking is ambiguous. We briefly compare these results to the writings of such classical thinkers as Weber and Durkheim. |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:iuk:wpaper:2008-04&r=bec |
| By: | Ellen R. McGrattan; Edward C. Prescott |
| Abstract: | The U.S. Bureau of Economic Analysis (BEA) estimates the return on investments of foreign subsidiaries of U.S. multinational companies over the period 1982--2006 averaged 9.4 percent annually after taxes; U.S. subsidiaries of foreign multinationals averaged only 3.2 percent. Two factors distort BEA returns: technology capital and plant-specific intangible capital. Technology capital is accumulated know-how from intangible investments in R&D, brands, and organizations that can be used in foreign and domestic locations. Used abroad, it generates profits for foreign subsidiaries with no foreign direct investment (FDI). Plant-specific intangible capital in foreign subsidiaries is expensed abroad, lowering current profits on FDI and increasing future profits. We develop a multicountry general equilibrium model with an essential role for FDI and apply the BEA's methodology to construct economic statistics for the model economy. We estimate that mismeasurement of intangible investments accounts for over 60 percent of the difference in BEA returns. |
| JEL: | F32 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13983&r=bec |
| By: | Boyan Jovanovic; Peter L. Rousseau |
| Abstract: | Growth of technological variety offers more scope for the division of labor. And when a division of labor requires some specific training, the technological specificity of human capital grows and, with it, probably the firm specificity of that capital. We build a simple model that captures this observation. The model implies that a rising specialization of human and physical capital raises the rents in the average match between a firm and its human and physical capital. We document that in the last 40 years the firm’s share of those rents has also grown, and we use the model to explain why this shift may have taken place. |
| JEL: | O0 O4 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13998&r=bec |
| By: | Paulo Bastos (ECFIN, European Commission); Natália P. Monteiro (Universidade do Minho - NIPE); Odd Rune Straume (Universidade do Minho - NIPE and University of Bergen (Health Economics Bergen, Department of Economics), Norway) |
| Abstract: | In many countries wages are set in two stages, where industry-level collective bargaining is followed by firm-specific arrangements determining actual paid wages as a mark-up on the industry wage floor. What explains the wage set in each of these stages? In this paper we show that both the industry wage floor and the average wage cushion are systematically associated with the degree of firm heterogeneity in the industry: The former (latter) is negatively (positively) associated with the productivity spread. Furthermore, since the response of the wage floor dominates that of the wage cushion, workers in more heterogeneous industries tend to get lower actual paid wages. These conclusions are reached in a model of Cournot oligopoly with firm productivity heterogeneity and a two-tiered wage setting system. They are then confirmed by administrative data covering virtually all workers, firms and collective bargaining agreements of the Portuguese private sector for the period 1991-2000. |
| Keywords: | Wage determination; Trade unions; Firm heterogeneity |
| JEL: | D21 J31 J51 L13 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:nip:nipewp:14/2008&r=bec |
| By: | Robert J. Gordon; Ian Dew-Becker |
| Abstract: | This paper provides a comprehensive survey of seven aspects of rising inequality that are usually discussed separately: changes in labor's share of income; inequality at the bottom of the income distribution, including labor mobility; skill-biased technical change; inequality among high incomes; consumption inequality; geographical inequality; and international differences in the income distribution, particularly at the top. We conclude that changes in labor's share play no role in rising inequality of labor income; by one measure labor's income share was almost the same in 2007 as in 1950. Within the bottom 90 percent as documented by CPS data, movements in the 50-10 ratio are consistent with a role of decreased union density for men and of a decrease in the real minimum wage for women, particularly in 1980-86. There is little evidence on the effects of imports, and an ambiguous literature on immigration which implies a small overall impact on the wages of the average native American, a significant downward effect on high-school dropouts, and potentially a large impact on previous immigrants working in occupations in which immigrants specialize. The literature on skill-biased technical change (SBTC) has been valuably enriched by a finer grid of skills, switching from a two-dimension to a three- or five-dimensional breakdown of skills. We endorse the three-way "polarization" hypothesis that seems a plausible way of explaining differentials in wage changes and also in outsourcing. To explain increased skewness at the top, we introduce a three-way distinction between market-driven superstars where audience magnification allows a performance to reach one or ten million people, a second market-driven segment consisting of occupations like lawyers and investment bankers, and a third segment consisting of top corporate officers. Our review of the CEO debate places equal emphasis on the market in showering capital gains through stock options and an arbitrary management power hypothesis based on numerous non-market aspects of executive pay. Data on consumption inequality are too fragile to reach firm conclusions. We introduce two new issues, disparities in the growth of price indexes and also of life expectancy between the rich and the poor. We conclude with a perspective on international differences that blends institutional and market-driven explanations. |
| JEL: | D12 D3 D31 D63 I3 J24 J31 J62 R10 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13982&r=bec |
| By: | Boyan Jovanovic |
| Abstract: | This paper studies optimal investment policies when the production function depends on capital of various vintages. In such an environment it is natural to ask whether the firm will invest in old-vintage capital at all. In this paper I derive such a condition. Predictably, investment in old capital takes place if the elasticity of substitution between old and new capital is low, and when the depreciation of capital is high. But other parameters such as the rates of technological progress and depreciation matter as well. |
| JEL: | D21 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14000&r=bec |
| By: | Lileeva, Alla |
| Abstract: | This paper investigates the productivity effects of the Canada-United States Free Trade Agreement (FTA) on Canadian manufacturing. It finds that Canadian tariff cuts increased exit rates among moderately productive non-exporting plants. This led to the reallocation of market share toward highly productive plants, which helps explain why aggregate productivity gains were observed when Canadian tariffs were reduced. The paper also finds that all of the within-plant productivity gains resulting from the U.S. tariff cuts involved exporters and, especially, new entrants into the export market. It demonstrates that any lack of output responses and labour-shedding as a consequence of the FTA were experienced by Canadian plants who were non-exporters, while exporters captured the gains from the FTA. |
| Keywords: | International trade, Manufacturing, Business performance and ownership, Business adaptation and adjustment |
| Date: | 2008–05–07 |
| URL: | http://d.repec.org/n?u=RePEc:stc:stcp5e:2008051e&r=bec |
| By: | Markus Quirin (University of Osnabrueck); Martin Beckenkamp (Max Planck Institute for Research on Collective Goods); Julius Kuhl (University of Osnabrueck) |
| Abstract: | Socio-economic decisions are commonly explained by rational cost vs. benefit considerations, whereas person variables have not usually been considered. The present study aims at investigating the degree to which dispositional power motivation and affective states predict socio-economic decisions. The power motive was assessed both indirectly and directly using a TAT-like picture test and a power motive self-report, respectively. After nine months, 62 students completed an affect rating and performed on a money allocation task (Social Values Questionnaire). We hypothesized and confirmed that dispositional power should be associated with a tendency to maximize one’s profit but to care less about another party’s profit. Additionally, positive affect showed effects in the same direction. The results are discussed with respect to a motivational approach explaining socio-economic behaviour. |
| Keywords: | economic decision-making, rational choice theory, personality, implicit power motive, positive affect, operant motive test |
| JEL: | C91 D01 Z13 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2008_15&r=bec |
| By: | Papahristodoulou, Christos |
| Abstract: | We formulate a non-linear integer programming model and use plausible parameters to examine: (i) the effects of wage differences between Super- and Normal- players in the performance of four teams which participate in the UEFA CL group matches; (ii) whether the expected qualification bonus received by UEFA and paid to the players of the non-qualified teams, enhances effort and the teams manage to qualify. When performance is measured by points’ maximization, higher wage equality seems to improve the performance of three teams, irrespectively if the elasticity of substitution between Super- and Normal- players is high or low, while the most efficient team of the tournament is not affected by the wage structure. The U-formed performance for that team is not excluded. When performance is measured by profits’ maximization, the performance depends on both the “production” technology and on wage differences. When all teams operate under increasing returns and all pay the same, but varying relative wages, or when they operate under decreasing returns and pay the marginal value product of their players, the most “balanced” team performs better. The most “unbalanced” team performs best under increasing returns to scale and egalitarian wages. In the last case, the non-qualified teams did not manage to improve their performance and qualify, even if their players should receive the expected qualification bonus that UEFA pays. |
| Keywords: | Players; Teams; Wages; Bonus; Performance; Tournament |
| JEL: | D0 C6 D7 L83 |
| Date: | 2008–05–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:8719&r=bec |
| By: | Bertrand Crettez; Marie-Cécile Fagart |
| Abstract: | We consider a simple general equilibrium model with imperfect competition. Firms are price taker in the input market and compete à la Cournot in some or all of the product markets (their technology displays constant returns to scale). We show that an increase in the number of firms does not always improve welfare. We also provide a characterization in terms of mark-up rates of the sectors for which entry is welfare enhancing. Thus, this paper challenges the common idea that mergers with no cost synergy are not desirable for consumers. |
| Keywords: | Cournot competition, competition policy, general equilibrium and imperfect competition, effciency |
| JEL: | D50 L13 L40 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2008-14&r=bec |
| By: | Hagemejer, Jan; Kolasa, Marcin |
| Abstract: | This paper provides evidence on the relative performance of internationalized firms using Polish firm-level data spanning over the period of 1996-2005. We distinguish between three modes of internationalization: exporting, importing of capital goods and foreign direct investment. Our results point strongly at superior performance of exporters vs. non-exporters importers vs. non-importers and foreign affiliates vs. domestic firms. We also find evidence for significant horizontal and backward productivity spillovers from all three types of international activity. |
| Keywords: | internationalization; productivity; panel firm-level data |
| JEL: | F15 L25 F23 O12 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:8720&r=bec |
| By: | Nicholas C.S. Sim (Department of Economics, Boston College, USA); Kong-Weng Ho (Division of Economics,School of Humanities and Social Sciences, Nanyang Technological University, Singapore) |
| Abstract: | This note shows that indeterminacy arising from an economy exhibiting production with social constant returns to scale may be related to the instability of the consumption goods market equilibrium. Furthermore, trade does not contribute to indeterminacy; indeterminacy arises becasue each country’s equilibrium path is already indeterminate before trade. |
| Keywords: | Indeterminacy, Market Instability |
| JEL: | E32 F00 F11 F43 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:nan:wpaper:0705&r=bec |
| By: | Mirko Draca; Stephen Machin; John Van Reenen |
| Abstract: | Although there is a large literature on the economic effects of minimum wages on labour market outcomes (especially employment), there is much less evidence on their impact on firm performance. In this paper we consider a very under-studied area - the impact of minimum wages on firm profitability. The analysis exploits the changes induced by the introduction of a national minimum wage to the UK labour market in 1999, using pre-policy information on the distribution of wages to construct treatment and comparison groups and implement a difference in differences approach. We report evidence showing that firm profitability was significantly reduced (and wages significantly raised) by the minimum wage introduction. This emerges from separate analyses of two distinct types of firm level panel data (one on firms in a very low wage sector, UK residential care homes, and a second on firms across all sectors). We find that net entry rates have fallen, but that the changes in exit and entry rates are statistically insignificant. |
| JEL: | J23 L25 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13996&r=bec |
| By: | Sabien Dobbelaere; Jacques Mairesse |
| Abstract: | Embedding the efficient bargaining model into the R. Hall (1988) approach for estimating price-cost margins shows that both imperfections in the product and labor markets generate a wedge between factor elasticities in the production function and their corresponding shares in revenue. This article investigates these two sources of discrepancies both at the industry level and the firm level using an unbalanced panel of 10646 French firms in 38 manufacturing industries over the period 1978-2001. By estimating standard production functions and comparing the estimated factor elasticities for labor and materials and their shares in revenue, we are able to derive estimates of average price-cost mark-up and extent of rent sharing parameters. For manufacturing as a whole, our estimates of these parameters are of an order of magnitude of 1.17 and 0.44 respectively. Our industry-level results indicate that industry differences in these parameters and in the underlying estimated factor elasticities and shares are quite sizeable. Since firm production function, behavior and market environment are very likely to vary even within industries, we also investigate firm-level heterogeneity in estimated mark-up and rent-sharing parameters. To determine the degree of true heterogeneity in these parameters, we adopt the P.A. Swamy (1970) methodology allowing to correct the observed variance in the firm-level estimates from their sampling variance. The median of the firm estimates of the price-cost mark-up ignoring labor market imperfections is of 1.10, while as expected it is higher of 1.20 when taking them into account and the median of the corresponding firm estimates of the extent of rent sharing is of 0.62. The Swamy corresponding robust estimates of true dispersion are of about 0.18, 0.37 and 0.35, showing indeed very sizeable within-industry firm heterogeneity. We find that firm size, capital intensity, distance to the industry technology frontier and investing in R&D seem to account for a significant part of this heterogeneity. |
| JEL: | C23 D21 J51 L13 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13975&r=bec |
| By: | Martina Gianecchini (University of Padua); Barbara Imperatori (SDA Bocconi School of Management); Anna Grandori (Bocconi University); Giovanni Costa (University of Padua) |
| Abstract: | The paper presents an organizational analysis of so-called 'atypical work contracts', the purpose being to gain better understanding of their variety and to provide useful indications for their assessment, considering not only the legal alternatives but also the organization of work. Exploratory research was conducted on two groups of Italian workers (flexible and permanent) and a group of firms. The Italian labour market has recently undergone a reform which introduced a number of flexible contracts, and it is therefore a good context for analyzing the use of these employment arrangements. Workers were requested to describe their 'ideal employment contract', ranking its characteristics and comparing it with their actual contract. At the same time, we interviewed a group of HR managers, asking them to make a similar evaluation. The results show that different legal contracts are sometimes used for jobs with the same contents. Hence, the 'atypical features' of some contracts are not confirmed in practice, and the choice of a flexible employment relationship appears to be the result of a complex evaluation, in which the contractual form is just one (but not the most important) element. Then identified are some 'critical' areas to be considered in designing effective employment relationships (flexibility; contract architecture; risk allocation). |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0075&r=bec |
| By: | Norbäck, Pehr-Johan; Persson, Lars |
| Abstract: | We construct a model where an entrepreneur could either innovate for entry or for sale. It is shown that increased product competition tends to increase the relative profitability of innovation for sale relative to entry. Increased competition reduces entrants' and acquirers' profits in a similar fashion, but also reduces the profit of non-acquirers. Therefore, incumbents' valuations of innovations are less negatively affected by increased competition than entrants' profits. This, in turn, implies that the incentive for innovation for sale can increase with increased competition. Finally, we show that a stricter, but not too strict, merger policy tends to increase the incentive for innovations for sale by ensuring the bidding competition for the innovation, without reducing the total rents for innovations too much. |
| Keywords: | Antitrust; Competition; Competition Policy; Entrepreneurs; Innovations |
| JEL: | L13 L40 O31 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6823&r=bec |
| By: | Giovanni Peri (UC Davis and NBER); Chad Sparber (Colgate University) |
| Abstract: | Many workers with low levels of educational attainment immigrated to the United States in recent decades. Large inflows of less-educated immigrants would reduce wages paid to comparably-educated native-born workers if the two groups are perfectly substitutable in production. In a simple model exploiting comparative advantage, however, we show that if less-educated foreign and native-born workers specialize in performing different tasks, immigration will cause natives to reallocate their task supply, thereby reducing downward wage pressure. We merge occupational task-intensity data from the O*NET and DOT datasets with individual Census data across US states from 1960-2000 to demonstrate that foreign-born workers specialize in occupations that require manual and physical labor skills while natives pursue jobs more intensive in communication and language tasks. Immigration induces natives to specialize accordingly. Simulations show that this increased specialization might explain why economic analyses commonly find only modest wage and employment consequences of immigration for less-educated native-born workers across U.S. states. This is especially true in states with large immigration flows. |
| Keywords: | Immigration, Less-Educated Labor, Manual Tasks, Communication Skills, Comparative Advantages, US States. |
| JEL: | F22 J61 J31 R13 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:crm:wpaper:0802&r=bec |
| By: | Andrea Attar; Eloisa Campioni; Gwenaël Piaser (CREFI-LSF, University of Luxembourg); Uday Rajan |
| Abstract: | In multiple-principal multiple-agent models of moral hazard, we provide sufficient conditions for the outcomes of pure-strategy equilibria in direct mechanisms to be preserved when principals can offer indirect communication schemes. The conditions include strong robustness in the direct mechanism game, as developed in the literature on competing mechanisms by Peters (2001) and Han (2007a), and a no-correlation property we define. We provide a rationale for restricting attention to take-it or leave-it offers, as is typically done in applications. We show via examples that it is necessary to allow direct mechanisms to be stochastic and to include private recommendations from principals to agents to preserve the corresponding equilibrium outcomes, and that the no-correlation condition is tight. |
| Keywords: | Moral hazard, multiple principal, multiple agent, direct mechanisms. |
| JEL: | D82 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:crf:wpaper:07-01&r=bec |