|
on Business Economics |
| By: | Nicolas Couderc; Laurent Weill (Laboratoire de Recherche en Gestion et Economie, Université de Strasbourg) |
| Abstract: | This paper conducts an analysis of the relationship between CEO compensation and managerial performance on a large panel of US public firms, by taking into account the different components of CEO compensation. We estimate a stochastic frontier model in which managerial performance is related to compensation components. We find a positive and significant influence of CEO compensation on managerial performance, with a differentiated impact for components of compensation. We show that increases in salary, bonus, and options grants tend to enhance managerial performance. Our findings tend therefore to support the view that compensation contracts can be designed to increase managerial performance. |
| Keywords: | Executive compensation, corporate governance, stochastic frontier. |
| JEL: | C30 G30 J33 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:lar:wpaper:2009-03&r=bec |
| By: | Buhai, Ioan Sebastian; Portela, Miguel; Teulings, Coen N; van Vuuren, Aico |
| Abstract: | This study documents two empirical regularities, using data for Denmark and Portugal. First, workers who are hired last, are the first to leave the firm (Last In, First Out; LIFO). Second, workers’ wages rise with seniority (= a worker’s tenure relative to the tenure of her colleagues). We seek to explain these regularities by developing a dynamic model of the firm with stochastic product demand and hiring cost (= irreversible specific investments). There is wage bargaining between a worker and its firm. Separations (quits or layoffs) obey the LIFO rule and bargaining is efficient (a zero surplus at the moment of separation). The LIFO rule provides a stronger bargaining position for senior workers, leading to a return to seniority in wages. Efficiency in hiring requires the workers’ bargaining power to be in line with their share in the cost of specific investment, Then, the LIFO rule is a way to protect their property right on the specific investment. We consider the effects of Employment Protection Legislation and risk aversion. |
| Keywords: | efficient bargaining; EPL; irreversible investment; LIFO; matched employer-employee data; seniority |
| JEL: | J31 J41 J63 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6933&r=bec |
| By: | Horny, Guillaume (BETA-CNRS); Mendes, Rute (University of Turin); van den Berg, Gerard J. (Free University Amsterdam) |
| Abstract: | We study job durations using a multivariate hazard model allowing for worker-specific and firm-specific unobserved determinants. The latter are captured by unobserved heterogeneity terms or random effects, one at the firm level and another at the worker level. This enables us to decompose the variation in job durations into the relative contribution of the worker and the firm. We also allow the unobserved terms to be correlated. For the empirical analysis we use a Portuguese longitudinal matched employer-employee data set. The model is estimated with a Bayesian Markov Chain Monte Carlo (MCMC) estimation method. The results imply that firm characteristics explain around 30% of the variation in log job durations. In addition, we find a positive correlation between unobserved worker and firm characteristics. |
| Keywords: | job transitions, assortative matching, Gibbs sampling, frailties, dynamic models, matched employer-employee data |
| JEL: | C11 C15 C41 J20 J41 J62 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3992&r=bec |
| By: | Thesmar, David; Thoenig, Mathias |
| Abstract: | Over the past decades, the real and financial volatility of listed firms has increased, while the volatility of private firms has decreased. We first provide panel data evidence that, at the firm level, sales and employment volatility are impacted by changes in the degree of ownership concentration. We then construct a model with private and listed firms where risk taking is a choice variable at the firm-level. Due to general equilibrium feedback, we find that an increase in stock market participation or integration in international capital markets generate opposite trends in volatility for private and listed firms. This pattern cannot be replicated by alternative comparative statics exercises, such as an increase in product market competition, an increase in product market size, an increase in the fraction of listed firms, or a decrease in aggregate volatility. |
| Keywords: | Financial Integration; Firm-level Volatility; Listed vs non-listed Firms; Stockmarket Participation |
| JEL: | E44 F41 G32 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7135&r=bec |
| By: | Dolado, Juan J.; Stucchi, Rodolfo |
| Abstract: | This paper evaluates the impact of the widespread use of fixed-term contracts in Spain on firms' TFP, via its effect on workers' effort. We propose a simple analytical framework showing that, under plausible conditions, workers' effort depends positively on their perception (for given level of effort) about firms' willingness to convert fixed-term contracts into permanent ones. We test this implication using manufacturing firm level data from 1991 to 2005 by means of nonparametric tests of stochastic dominance and parametric multivariate regression approaches. Our main findings are that high conversion rates increase firm's productivity while high shares of temporary contracts decrease it. Both effects are quantitatively relevant. |
| Keywords: | firms' TFP; temporary workers; workers' effort |
| JEL: | C14 C52 D24 J24 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7055&r=bec |
| By: | Eeckhout, Jan (University of Pennsylvania); Kircher, Philipp (University of Pennsylvania) |
| Abstract: | We argue that using wage data alone, it is virtually impossible to identify whether Assortative Matching between worker and firm types is positive or negative. In standard competitive matching models the wages are determined by the marginal contribution of a worker, and the marginal contribution might be higher or lower for low productivity firms depending on the production function. For every production function that induces positive sorting we can find a production function that induces negative sorting but generates identical wages. This arises even when we allow for non-competitive mismatch, for example due to search frictions. Even though we cannot identify the sign of the sorting, we can identify the strength, i.e., the magnitude of the cross-partial, and the associated welfare loss. While we show analytically that standard fixed effects regressions are not suitable to recover the strength of sorting, we propose an alternative procedure that measures the strength of sorting in the presence of search frictions independent of the sign of the sorting. |
| Keywords: | sorting, assortative matching, identification, linked employer-employee data, interpretation of fixed-effects |
| JEL: | J31 C78 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4004&r=bec |
| By: | Bandiera, Oriana; Barankay, Iwan; Rasul, Imran |
| Abstract: | We present evidence on the effect of social connections between workers and managers on productivity in the workplace. To evaluate whether the existence of social connections is beneficial to the firm's overall performance, we explore how the effects of social connections vary with the strength of managerial incentives and worker's ability. To do so, we combine panel data on individual worker's productivity from personnel records with a natural field experiment in which we engineered an exogenous change in managerial incentives, from fixed wages, to bonuses based on the average productivity of the workers managed. We find that when managers are paid fixed wages, they favor workers to whom they are socially connected irrespective of the worker's ability, but when they are paid performance bonuses, they target their effort towards high ability workers irrespective of whether they are socially connected to them or not. Although social connections increase the performance of connected workers, we find that favoring connected workers is detrimental for the firm's overall performance. |
| Keywords: | favoritism; managerial incentives; natural field experiments |
| JEL: | J33 M52 M55 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7114&r=bec |
| By: | Moscarini, Giuseppe (Yale University); Postel-Vinay, Fabien (University of Bristol) |
| Abstract: | We provide new evidence that large firms or establishments are more sensitive than small ones to business cycle conditions. Larger employers shed proportionally more jobs in recessions and create more of their new jobs late in expansions, both in gross and net terms. The differential growth rate of employment between large and small firms varies by about 5% over the business cycle. Omitting cyclical indicators may lead to conclude that, on average, these cyclical effects wash out and size does not predict subsequent growth (Gibrat’s law). We employ a variety of measures of relative employment growth, employer size and classification by size. We revisit two statistical fallacies, the Regression and Reclassification biases, that can affect our results, and we show empirically that they are quantitatively modest given our focus on relative cyclical behavior. We exploit a variety of (mostly novel) U.S. datasets, both repeated cross-sections and job flows with employer longitudinal information, starting in the mid 1970’s and now spanning four business cycles. The pattern that we uncover is robust to different treatments of entry and exit of firms and establishments, and occurs within, not across broad industries, regions and states. Evidence on worker flows suggests that the pattern is driven at least in part by excess layoffs by large employers in and just after recessions, and by excess poaching by large employers late in expansions. We find the same pattern in similar datasets in four other countries, including full longitudinal censuses of employers from Denmark and Brazil. Finally, we sketch a simple firm-ladder model of turnover that can shed light on these facts, and that we analyze in detail in companion papers. |
| Keywords: | job flows, firm size, business cycle, Gibrat's law |
| JEL: | J21 J63 E24 E32 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4014&r=bec |
| By: | Menzio, Guido; Moen, Espen R |
| Abstract: | We consider a frictional labor market in which firms want to insure their senior employees against income fluctuations and, at the same time, want to recruit new employees to fill their vacant positions. Firms can commit to a wage schedule, i.e. a schedule that specifies the wage paid by the firm to its employees as function of their tenure and other observables. However, firms cannot commit to the employment relationship with any of their workers, i.e. firms can dismiss workers at will. We find that, because of the firm's limited commitment, the optimal schedule prescribes not only a rigid wage for senior employees, but also a downward rigid wage for new hires. Moreover, we find that, while the rigidity of the wage of senior workers does not affect the allocation of labor, the rigidity of the wage of new hires magnifies the response of unemployment and vacancies to negative shocks to the aggregate productivity of labor. |
| Keywords: | Business Cycles; Competitive Search; Risk Sharing; Unemployment |
| JEL: | E24 E32 J64 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7075&r=bec |
| By: | Andrew Burke (Cranfield University, UK); André van Stel (University of Amsterdam) |
| Abstract: | The main contribution of entrepreneurship theory to economics is to provide an account of market performance in disequilibrium but little empirical research has examined firm entry and exit in this context. We redress this by modelling the interrelationship between firm entry and exit in disequilibrium. Introducing a new methodology we investigate whether this interrelationship differs between market ‘undershooting’ (the actual number of firms is below the equilibrium number) and ‘overshooting’ (vice versa). We find that equilibrium-restoring mechanisms are faster in over than in undershoots. The results imply that in undershoots a lack of competition between incumbent firms contributes to restoration of equilibrium (creating room for new-firm entry) while in overshoots competition induced by new firms (in particular strong displacement) helps restore equilibrium. |
| Keywords: | entry; exit; equilibrium; industrial organization; undershooting; overshooting |
| JEL: | B50 J01 L00 L1 L26 |
| Date: | 2009–01–16 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20090005&r=bec |
| By: | Ritschl, Albrecht; Sarferaz, Samad; Uebele, Martin |
| Abstract: | This paper reexamines U.S. business cycle volatility since 1867. We employ dynamic factor analysis as an alternative to reconstructed national accounts. We find a remarkable volatility increase across World War I, which is reversed after World War II. While we can generate evidence of postwar moderation relative to pre-1914, this evidence is not robust to structural change, implemented by time-varying factor loadings. However, we find moderation in the nominal series. Moreover, we reproduce the standard moderation since the 1980s. Our estimates confirm the NIPA data also for the 1930s but support alternative estimates of Kuznets (1952) for World War II. |
| Keywords: | dynamic factor analysis; U.S. business cycle; volatility |
| JEL: | C43 E32 N11 N12 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7069&r=bec |
| By: | Philip Du Caju (National Bank of Belgium, Research Department); Catherine Fuss (National Bank of Belgium, Research Department; Université Libre de Bruxelles); Ladislav Wintr (Central Bank of Luxembourg, Economics and Research Department) |
| Abstract: | This paper examines whether differences in wage rigidity across sectors can be explained by differences in workforce composition, competition, technology and wage-bargaining institutions. We adopt the measure of downward real wage rigidity (DRWR) developed by Dickens and Goette (2006) and rely on a large administrative matched employer-employee dataset for Belgium over the period 1990-2002. Firstly, our results indicate that DRWR is significantly higher for white-collar workers and lower for older workers and for workers with higher earnings and bonuses. Secondly, beyond labour force composition effects, sectoral differences in DRWR are related to competition, firm size, technology and wage-bargaining institutions. We find that wages are more rigid in more competitive sectors, in labour-intensive sectors, and in sectors with predominant centralised wagesetting at the sector level as opposed to firm-level wage agreements. |
| Keywords: | wage rigidity, matched employer-employee data, wage-bargaining institutions |
| JEL: | J31 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:200902-18&r=bec |
| By: | Franklin Allen; Elena Carletti; Robert Marquez |
| Abstract: | In countries such as Germany, the legal system is such that firms are necessarily stakeholder oriented. In others like Japan social convention achieves a similar effect. We analyze the advantages and disadvantages of stakeholder-oriented firms that are concerned with employees and suppliers compared to pure shareholder-oriented firms. We show that in a context of imperfect competition stakeholder firms have higher prices and lower output than shareholder-oriented firms. Surprisingly, we also find that firms can be more valuable in a stakeholder society than in a shareholder society. With globalization stakeholder firms and shareholder firms often compete. We identify the circumstances where stakeholder firms are more valuable than shareholder firms, and compare these asymmetric equilibria with symmetric equilibria with stakeholder and shareholder firms. Finally, we show that, in some circumstances, firms may voluntarily choose to be stakeholder-oriented because this increases their value. |
| Keywords: | stakeholder-oriented firms, shareholder-oriented firms, firm value, globalization |
| JEL: | G34 D43 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2009/10&r=bec |
| By: | Boris Hirsch (University of Erlangen-Nurnberg); Thorsten Schank (University of Erlangen-Nurnberg); Claus Schnabel (University of Erlangen-Nurnberg and IZA) |
| Abstract: | This paper investigates women's and men's labor supply to the firm within a structural approach based on a dynamic model of new monopsony. Using methods of survival analysis and a large linked employer-employee dataset for Germany, we find that labor supply elasticites are small (1.9-3.7) and the women's labor supply to the firm is less elastic than men's (which is the reverse of gender differences in labor supply usually found at the level of the market). Our results imply that about one third of the gender pay gap might be wage discrimination by profit-maximizing monopsonistic employers. |
| Keywords: | labor supply, monopsony, gender, gender pay gap, discrimination, monopsony papers |
| JEL: | J42 J60 J71 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:pri:indrel:1111&r=bec |
| By: | Nocke, Volker; Yeaple, Stephen R |
| Abstract: | We develop a theory of multiproduct firms to analyze the effects of globalization on the distributions of firm size, scope, and productivity. In the model, firms are heterogeneous in how well they cope with expanding their product range. The model generates a negative relationship between firm size and market-to-book ratio, thus explaining the "size-discount puzzle" found in the data. Globalization induces a merger wave that leads to an improvement in average productivity. This improvement is not due to selection effects but rather due to product-level productivity effects. The model predicts that globalization leads to a flattening of the size distribution of firms. |
| Keywords: | firm heterogeneity; firm size distribution; merger wave; multiproduct firms; productivity; size discount; trade liberalization |
| JEL: | F12 F15 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6948&r=bec |
| By: | Julián Messina; Chiara Strozzi; Jarkko Turunen |
| Abstract: | We study differences in the adjustment of aggregate real wages in the manufacturing sector over the business cycle across OECD countries, combining results from different data and dynamic methods. Summary measures of cyclicality show genuine cross-country heterogeneity even after controlling for the impact of data and methods. We find that more open economies and countries with stronger unions tend to have less pro-cyclical (or more counter-cyclical) wages. We also find a positive correlation between the cyclicality of real wages and employment, suggesting that policy complementarities may influence the adjustment of both quantities and prices in the labour market. |
| Keywords: | Real Wages, Business Cycle, Dynamic Correlation, Labour Market Institutions |
| JEL: | E32 J30 C10 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:mod:recent:028&r=bec |
| By: | Jacobson, Tor; Kindell, Rikard; Lindé, Jesper; Roszbach, Kasper F. |
| Abstract: | This paper studies the relation between macroeconomic fluctuations and corporate defaults while conditioning on industry affiliation and an extensive set of firm-specific factors. Using a multiperiod logit approach on a panel data set for all incorporated Swedish businesses over 1990-2002, we find strong evidence for a substantial and stable impact of aggregate fluctuations. Macroeffects differ across industries in an economically intuitive way. Out-of-sample evaluations show our approach is superior to both models that exclude macro information and best fitting naive forecasting models. While firm-specific factors are useful in ranking firms' relative riskiness, macroeconomic factors capture fluctuations in the absolute risk level. |
| Keywords: | Business cycles; Default; Default-risk model; Logit model; Macroeconomic variables; Micro-data |
| JEL: | C35 C41 C52 E44 G21 G33 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7083&r=bec |
| By: | Jeremy T. Fox (University of Chicago and NBER) |
| Abstract: | I estimate the relative magnitudes of worker switching costs and whether the employer switching of experienced engineers responds to outside wage offers. Institutional features imply that voluntary turnover dominates switching in the market for Swedish engineers from 1970–1990. I use data on the allocation of engineers across a large fraction of Swedish private sector firms to estimate the relative importance of employer wage policies and switching costs in a dynamic programming, discrete choice model of voluntary employer choice. The differentiated firms are modeled in employer characteristic space and each firm has its own age wage profile. I find that a majority of engineers have moderately high switching costs and that a minority of experienced workers are responsive to outside wage offers. Younger workers are more sensitive to outside wage offers than older workers. |
| Keywords: | monopsony papers |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:pri:indrel:1113&r=bec |
| By: | David Bartolini (Universit… Politecnica delle Marche, Department of Economics, MoFiR); Alberto Zazzaro (Universit… Politecnica delle Marche, Department of Economics, MoFiR) |
| Abstract: | A well-established result of the theory of antitrust policy is that it might be optimal to tolerate some degree of collusion among firms if the authority in charge is constrained by limited resources and imperfect information. However, few doubts are cast on the common opinion by which stricter enforcement of antitrust laws definitely makes market structure more competitive and prices lower. In this paper we challenge this presumption of effectiveness and show that the introduction of a positive (expected) antitrust fine may drive firms from partial cartels to a monopolistic cartel. Moreover, introducing uncertainty on market demand, we show that the socially optimal competition policy can call for a finite or even zero antitrust penalty even if there are no enforcement costs. We first show our results in a Cournot industry with five symmetric firms and a specilc rule of cartel formation. Then we extend the analysis to the case of N symmetric firms and a generic rule of coalition formation. Finally, we consider;the case of asymmetric firms and show that our results still hold for an industry;populated by one Stackelberg leader and two followers. |
| Keywords: | Antitrust policy, Coalition formation, Collusive cartels |
| JEL: | C70 L40 L41 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wmofir:19&r=bec |
| By: | Pástor, Luboš; Veronesi, Pietro |
| Abstract: | We survey the recent literature on learning in financial markets. Our main theme is that many financial market phenomena that appear puzzling at first sight are easier to understand once we recognize that parameters in financial models are uncertain and subject to learning. We discuss phenomena related to the volatility and predictability of asset returns, stock price bubbles, portfolio choice, mutual fund flows, trading volume, and firm profitability, among others. |
| Keywords: | Bayesian; bubble; predictability; uncertainty; volatility |
| JEL: | G0 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7127&r=bec |
| By: | Corsetti, Giancarlo; Dedola, Luca; Leduc, Sylvain |
| Abstract: | This paper investigates the international dimension of productivity and demand shocks to US manufacturing. Identifying shocks with sign restrictions based on standard theory predictions we find that productivity gains in manufacturing - our measure of tradables - have substantial aggregate effects, boosting US consumption and investment, relative to the rest of the world, thus raising real imports; net exports and US net foreign assets correspondingly decrease. We also ascertain substantial repercussions through the international financial adjustment mechanism, via a rise in US shares prices and nontrivial portfolio shifts in gross US foreign assets and liabilities. At the same time these shocks appreciate the US real exchange rate and improve its terms of trade. Shocks to the demand for US manufacturing also lead to real dollar appreciation; however, they appear to have less pronounced aggregate effects, with limited impact on trade and capital accounts. Our findings provide novel evidence on key channels of the international transmission of business cycle impulses, including financial channels, linking aggregate demand, the current account, international relative prices. Namely, asymmetric wealth effects amplify rather than attenuate the consequences of US shocks to tradables on domestic aggregate spending, driving endogenous aggregate demand fluctuations across countries. |
| Keywords: | consumption risk sharing; International transmission mechanism; sign restrictions; structural VAR; US dollar real exchange rate |
| JEL: | F31 F41 F42 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7003&r=bec |
| By: | Conconi, Paola; Legros, Patrick; Newman, Andrew |
| Abstract: | We embed a simple incomplete-contracts model of organization design in a standard two-country perfectly-competitive trade model to examine how the liberalization of product and factor markets affects the ownership structure of firms. In our model, managers decide whether or not to integrate their firms, trading off the pecuniary benefits of coordinating production decisions with the private benefits of operating in their preferred ways. The price of output is a crucial determinant of this choice, since it affects the size of the pecuniary benefits. In particular, non-integration is chosen at "low" and "high" prices, while integration occurs at moderate prices. Organizational choices also depend on the terms of trade in supplier markets, which affect the division of surplus between managers. We obtain three main results. First, even when firms do not relocate across countries, the price changes triggered by liberalization of product markets can lead to significant organizational restructuring within countries. Second, the removal of barriers to factor mobility can lead to inefficient reorganization and adversely affect consumers. Third, "deep integration" - the liberalization of both product and factor markets - leads to the convergence of organizational design across countries. |
| Keywords: | Contracts; Firms; Globalization |
| JEL: | D23 F13 F23 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7028&r=bec |
| By: | Bekkers, Eddy; Francois, Joseph |
| Abstract: | We develop a model with endogeneity in key features of industrial structure linked to heterogeneous cost structures under Cournot competition. We use the model to explore issues related to cross-country differences in industry structure and the impact of globalization on markups and pricing, concentration, and productivity. The model nests two workhorse trade models, the Brander & Krugman reciprocal dumping model and the Ricardian technology-based trade model, as special cases. We examine both free entry and limited entry (free exit) cases. The model generates clear testable predictions on the probability of zero trade flows and the pattern of export prices, and on cross-country and industry variations in industrial structure controlling for openness. Market prices decline as a result of trade liberalization, the least productive firms get squeezed out of the market, exporting firms gain market share, and more firms become trade oriented. In addition, depending on the strength of underlying cost heterogeneity, falling prices are consistent with both increasing and falling industry concentration following episodes of integration. Welfare rises with trade liberalization, unless trade costs decline from a prohibitive level in the short run free exit case. Variation across industries and markets in markups, concentration, and pricing structures is otherwise a function of market size and the variation in cost heterogeneity across industries. |
| Keywords: | Composition effects of trade liberalization; Cournot competition; Industry structure and firm heterogeneity |
| JEL: | F12 L11 L13 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6956&r=bec |
| By: | Corsetti, Giancarlo; Konstantinou, Panagiotis T |
| Abstract: | The joint dynamics of US net output, consumption, and (valuation-adjusted) foreign assets and liabilities, characterized empirically following Lettau and Ludvigson [2004], is shown to be strikingly consistent with current account theory. While US consumption is virtually insulated from transitory shocks, these contribute considerably to the variation in net output and, even more so, in gross foreign positions, arguably smoothing temporary variations in returns. A single permanent shock – naturally interpreted as a productivity shock – raises consumption swiftly while causing net output to adjust only gradually. This leads to persistent, procyclical external deficits but, interestingly, moves gross assets and liabilities in the same direction. |
| Keywords: | Consumption Smoothing; Current Account; International Adjustment Mechanism; Intertemporal Approach to the Current Account; Net Foreign Wealth; Permanent-Transitory Decomposition |
| JEL: | C32 E21 F32 F41 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7134&r=bec |
| By: | Bovenberg, A Lans; Teulings, Coen N |
| Abstract: | We argue in favour of the shareholder model of the firm for three main reasons, First, serving multiple stakeholders leads to ill-defined property rights. What sounds like a fair compromise between stakeholders can easily evolve in a permanent struggle between the stakeholders about the ultimate goal of the company. In many cases, the vague Rhineland principles no longer offer much protection to workers. Second, giving workers a claim on the surplus of the firm raises the cost of capital for investments in jobs, which harms the position of job seekers, including new entrants to the labour market. Third, and most importantly, making shareholders the ultimate owner of the firm provides the best possible diversification of firm- specific risks. Whereas globalisation has increased firm-specific risk by intensifying competition, globalisation of capital markets has also greatly increased the scope for diversification of firm-specific risk. Diversification of this risk on the capital market is an efficient form of social insurance. Reducing the claims of workers on the surplus of the firm can be seen as the next step in the emancipation of workers. Workers derive their security not from the firm that employs them but from the value of their own human capital. In such a world, global trade in corporate control, global competition and creative destruction associated with these developments are more legitimate. Coordination in wage bargaining and collective norms on what is proper compensation play an important role in reducing the claim of workers on the firm’s surplus, thereby protecting workers against firm-specific risks. Indeed, in Denmark, workers bear less firm- specific risk than workers in the United States do. Collective action thus has an important role to play. Politicians, however, also face the temptation to please voters and incumbent workers with short-run gains at the expense of exposing workers to firm-specific risks and reducing job creation. This is why corporate governance legislation that gives moral legitimacy to the claim of insiders on the surplus of the firm is damaging. The transition from the Rhineland model (in which management serves the interests of all stakeholders) towards the shareholder model is fraught with difficulties. While society reaps long-run gains in efficiency, in the short run a generation of insiders has to give up their rights without benefiting from increased job creation and higher starting wages. Whereas the claims of older workers on the surplus of a firm may thus have some legitimacy, younger cohorts should be denied such moral claims. These problems require extreme political skill to solve. In particular, they may require some grandfathering provisions or temporary explicit transfers from younger to older generations. |
| Keywords: | corporate governance; employment protection; optimal risk sharing; wagesetting |
| JEL: | E24 G32 G34 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6936&r=bec |
| By: | Robert S. Pindyck |
| Abstract: | In merger analysis and other antitrust settings, risk is often cited as a potential barrier to entry. But there is little consensus as to the kinds of risk that matter - systematic versus non-systematic and industry-wide versus firm-specific - and the mechanisms through which they affect entry. I show how and to what extent different kinds of risk magnify the deterrent effect of exogenous sunk costs of entry, and thereby affect industry dynamics, concentration, and equilibrium market prices. To do this, I develop a measure of the "full," i.e., risk-adjusted, sunk cost of entry. I show that for reasonable parameter values, the full sunk cost is far larger than the direct measure of sunk cost typically used to analyze markets. |
| JEL: | D43 L10 L40 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14755&r=bec |
| By: | Arce, Oscar; López-Salido, J David |
| Abstract: | In this paper we use the notion of a housing bubble as an equilibrium in which some investors hold houses only for resale purposes and not for the expectation of a dividend, either in the form of rents or utility. We provide a life-cycle model where households face collateral constraints that tie their credit capacity to the value of their houses and examine the conditions under which housing bubbles can emerge. In such equilibria, the total housing stock is held by owners that extract utility from their homes, landlords that obtain rents, and investors. We show that an economy with tighter collateral constraints is more prone to bubbles which, in turn, tend to have a larger size but are less fragile in face of fund-draining shocks. Our environment also allows for pure bubbles on useless assets. We find that multiple equilibria in which the economy moves endogenously from a pure bubble to a housing bubble regime and vice versa are possible. This suggests that high asset price volatility may be a natural consequence of asset shortages (or excess funding) that depress interest rates sufficiently so as to sustain an initial bubble. We also examine some welfare implications of the two types of bubbles and discuss some mechanisms to rule out equilibria with housing bubbles. |
| Keywords: | buy-to-let investment; collateral constraints; housing bubbles; switching |
| JEL: | G21 R21 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6932&r=bec |
| By: | Post, G.T.; Vliet, P. van; Lansdorp, S.D. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | Downside risk, when properly defined and estimated, helps to explain the cross-section of US stock returns. Sorting stocks by a proper estimate of downside market beta leads to a substantially larger cross-sectional spread in average returns than sorting on regular market beta. This result arises despite the fact that downside beta is based on fewer return observations and therefore is more difficult to estimate and predict. The explanatory power of downside risk remains after controlling for other stock characteristics, including firm-level size, value and momentum. |
| Keywords: | asset pricing;downside risk;semi-variance;lower partial moments |
| Date: | 2009–02–18 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:1765014843&r=bec |
| By: | Giroud, Xavier; Mueller, Holger M |
| Abstract: | This paper examines the hypothesis that firms in competitive industries should benefit relatively less from good governance, while firms in non-competitive industries--where lack of competitive pressure fails to enforce discipline on managers--should benefit relatively more. Whether we look at the effects of governance on long-horizon stock returns, firm value, or operating performance, we consistently find the same pattern: The effect is monotonic in the degree of competition, it is small and insignificant in competitive industries, and it is large and significant in non-competitive industries. By implication, the effect of governance (in non-competitive industries) reported in this paper is stronger than what has been previously reported in Gompers, Ishii, and Metrick (2003, "GIM") and subsequent work, who document the average effect across all industries. For instance, GIM’s hedge portfolio - provided it only includes firms in non-competitive industries -earns a monthly alpha of 1.47%, which is twice as large as the alpha reported in GIM. The alpha remains large and significant even if the sample period is extended until 2006. We also revisit the argument that investors in the 1990s anticipated the effect of governance, implying that the alpha earned by GIM’s hedge portfolio is likely due to an omitted risk factor. We find that while investors were indeed not surprised on average, they underestimated the effect of governance in non-competitive industries, the very industries in which governance has a significant effect in the first place. |
| Keywords: | Corporate Governance; G-index; Product Market Competition |
| JEL: | D4 G3 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6974&r=bec |
| By: | Giannone, Domenico; Lenza, Michele; Reichlin, Lucrezia |
| Abstract: | This paper shows that the EMU has not affected historical characteristics of member countries’ business cycles and their cross-correlations. Member countries which had similar levels of GDP per-capita in the seventies have also experienced similar business cycles since then and no significant change associated with the EMU can be detected. For the other countries, volatility has been historically higher and this has not changed in the last ten years. We also find that the aggregate euro area per-capita GDP growth since 1999 has been lower than what could have been predicted on the basis of historical experience and US observed developments. The gap between US and euro area GDP per capita level has been 30% on average since 1970 and there is no sign of catching up or of further widening. |
| Keywords: | euro area; European integration; European monetary union; international business cycles |
| JEL: | C5 E32 F2 F43 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7124&r=bec |
| By: | Lóránth, Gyöngyi; Morrison, Alan |
| Abstract: | This paper analyzes the consequences of bank diversification into fee-based businesses. Universal banks raise welfare by expanding the range of services available to entrepreneurs. However, because they may choose to rescue failed entrepreneurs in order to sell them fee-based financial services, universal banks provide weaker incentives. Adopting a holding company structure and devolving liquidation decisions to the lending division partially resolves this problem. We demonstrate a relationship between the welfare effects of diversification and competition for fee-based business, and we analyze the tying of lending and fee-based business. Our analysis yields several testable implications. |
| Keywords: | Bank diversification; soft budget constraint; tying; universal banks |
| JEL: | G20 G21 G34 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7051&r=bec |
| By: | Åkerman, Anders (Research Institute of Industrial Economics (IFN)); Forslid, Rikard (Stockholm University) |
| Abstract: | This paper introduces a market size dependent firm entry cost into the Melitz (2003) model. This is a relatively small generalisation, which preserves the analytical solvability of the model. Nevertheless, our model yields several new results that are in line with data. First, the average productivity of firms located in a market increases in the size of the market. Second, the productivity of exporters is U-shaped with reference to export market size. Third, the productivity premium (the difference in average productivity) between exporters and non-exporters decreases in the home country size. Fourth, we derive a set of new results related to trade volume. It is shown that when the fixed entry cost of exporting declines, for instance as the result of economic integration, export shares converge. This prognosis is supported by the empirical section of the paper. Fifth, we use a multicountry version of our model to derive a gravity equation. Our specification yields a gravity equation à la Anderson and van Wincoop (2003), but where GDP per capita enters as an additional explanatory variable. |
| Keywords: | Heterogenous Firms; Market Size; Beachhead Costs |
| JEL: | D21 F12 F15 |
| Date: | 2009–02–23 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:0790&r=bec |
| By: | Lommerud, Kjell Erik; Meland, Frode; Straume, Odd Rune |
| Abstract: | We analyze unionized firms’ incentives to outsource intermediate goods production to foreign (low-cost) subcontractors. Such outsourcing leads to increased wages for the remaining in-house production. We find that stronger unions, which imply higher domestic wages, reduce incentives for international outsourcing. Though somewhat surprising, this result provides a theoretical conciliation of the empirically observed trends of deunionization and increased international outsourcing in many countries. We further show that globalization - interpreted as either market integration or increased product market competition - will increase incentives for international outsourcing. |
| Keywords: | Deunionization; Globalization; International outsourcing |
| JEL: | F16 J51 L24 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6998&r=bec |
| By: | Vives, Xavier |
| Abstract: | A Bayesian supply function equilibrium is characterized in a market where firms have private information about their uncertain costs. It is found that with supply function competition, and in contrast to Bayesian Cournot competition, competitiveness is affected by the parameters of the information structure: supply functions are steeper with more noise in the private signals or more correlation among the costs parameters. In fact, for large values of noise or correlation supply functions are downward sloping, margins are larger than the Cournot ones, and as we approach the common value case they tend to the collusive level. Furthermore, competition in supply functions aggregates the dispersed information of firms (the equilibrium is privately revealing) while Cournot competition does not. The implication is that with the former the only source of deadweight loss is market power while with the latter we have to add private information. As the market grows large the equilibrium becomes competitive and we obtain an approximation to how many competitors are needed to have a certain degree of competitiveness. |
| Keywords: | adverse selection; collusion; competitiveness; imperfect competition; rational expectations; welfare |
| JEL: | D44 D82 L13 L94 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6960&r=bec |
| By: | David S. Lee (Princeton University and NBER); Alexandre Mas (UC Berkeley and NBER) |
| Abstract: | We estimate the effect of new unionization on firms’ equity value over the 1961-1999 period using a newly assembled sample of National Labor Relations Board (NLRB) representation elections matched to stock market data. Event-study estimates show an average union effect on the equity value of the firm eq uivalent to a cost of at least $40,500 per unionized worker. At the same time, point estimates from a regression-discontinuity design – comparing the stock market impact of close union election wins to close losses – are considerably smaller and close to zero. We find a negative relationship between the cumulative abnormal returns and the vote share in support of the union, allowing us to reconcile these seemingly contradictory findings. Using the magnitudes from the analysis, we calibrate a structural “median voter” model of endogenous union determination in order to conduct counterfactual policy simulations of policies that would marginally increase the ease of unionization. |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:pri:indrel:1117&r=bec |
| By: | Lóránth, Gyöngyi; Morrison, Alan |
| Abstract: | We examine the interdependency between loan officer compensation contracts and commercial bank internal reporting systems (IRSs). The optimal incentive contract for bank loan officers may require the bank headquarters to commit not to act on certain types of information. The headquarters can achieve this by running a basic reporting system that restricts information flow within the bank. We show that origination fees for loan officers emerge naturally as part of the optimal contract in our set-up. We examine the likely effect of the new Basel Accord upon IRS choice, loan officer compensation, and bank investment strategies. We argue that the new Accord reduces the value of commitment, and hence that it may reduce the number of marginal projects financed by banks. |
| Keywords: | capital regulation; compensation; internal reporting system |
| JEL: | G20 G21 G30 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7179&r=bec |
| By: | Acharya, Viral V; DeMarzo, Peter; Kremer, Ilan |
| Abstract: | We consider the release of information by a firm when the manager has discretion regarding the timing of its release. While it is well known that firms appear to delay the release of bad news, we examine how external information about the state of the economy (or the industry) affects this decision. We develop a dynamic model of strategic disclosure in which a firm may privately receive information at a time that is random (and independent of the state of the economy). Because investors are uncertain regarding whether and when the firm has received information, the firm will not necessarily disclose the information immediately. We show that bad news about the economy can trigger the immediate release of information by firms. Conversely, good news about the economy can slow the release of information by firms. As a result, the release of negative information tends to be clustered. Surprisingly, this result holds only when firms can preempt the arrival of external information by disclosing their own information first. These results have implications for conditional variance and skewness of stock and market returns. |
| Keywords: | disclosure; disclosure dynamics; disclosure timing; earnings announcement; skewness; stochastic volatility; strategic disclosure |
| JEL: | D82 G14 G3 M4 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6985&r=bec |
| By: | Natalya Y. Shelkova (University of Connecticut) |
| Abstract: | Low-wage markets are traditionally viewed as competitive, and the possibility of strategic behavior by employers is dismissed. However, such behavior is not impossible. This paper investigates the possibility of tacit collusion by low-wage employers while setting wages. A game-theoretic explanation along the lines of the Folk theorm is offered, suggesting that a non-binding minimum wage may serve as a focal point of tacit collusion, proposing a symmetric solution to an infinitely played game of wage-setting. Several empirical techniques were employed in testing the hypothesis, including hurdle models of collusion. CPS monthly data is used for the years 1990-2005, covering the last four federal minimum wage increases. The likelihood of collusion at minimum wage is evaluated, as well as its dynamics during this period. The results generally support the collusion hypothesis and suggest that employers respond strategically to changes in minimum wage legislation while using the statutory minimum wage as a coordination tool in tacit collusion. |
| Keywords: | minimum wage, low-wage markets, collusion, tacit collusion, focal points, monopsony papers |
| JEL: | J31 J38 J42 L10 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:pri:indrel:1112&r=bec |
| By: | Benk, Szilárd; Gillman, Max; Kejak, Michal |
| Abstract: | The post-1983 moderation coincided with an ahistorical divergence in the money aggregate growth and velocity volatilities away from the downward trending GDP and inflation volatilities. Using an en dogenous growth monetary DSGE model, with micro-based banking production, enables a contrasting characterization of the two great volatility cycles over the historical period of 1919-2004, and enables this puzzle to be addressed more easily. The volatility divergence is explained by the upswing in the credit volatility that kept money supply variability from translating into inflation and GDP volatility. |
| Keywords: | Growth; Inflation; Money and credit shocks; Volatility |
| JEL: | E13 E32 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7150&r=bec |
| By: | Van Beers, Cees; Dekker, Ronald |
| Abstract: | This aim of this paper is twofold. First it examines the determinants of acquisitions and divestitures of Dutch firms in the period 1996-2004. Second, it investigates the impact of acquisitions and divestitures on the firm’s innovative output performance. An econometric model is specified and estimated with Community Innovation Survey data for the Netherlands in the period 1996-2004. The main findings of this study are as follows. First, innovating firms are significantly more involved in acquisition activities than non-innovating firms, which suggests that acquisitions are a strategy to gain access to new technologies or knowledge. Second, lack of knowledge as a barrier to innovate increases the chance of acquiring assets of other firms although not significantly. Lack of finance as a barrier to innovate increases significantly the chance of divesting assets. Third, acquisitions motivated by knowledge barriers in the innovation process affect the probability of positive innovative sales positively while acquisitions motivated by other reasons than innovation barriers affect this probability negatively. No effect of knowledge barriers induced acquisitions on the level of the innovative sales could be found. |
| Keywords: | Innovation; performance; mergers; acquisitions; divestitures; strategy. |
| JEL: | L10 D40 |
| Date: | 2009–02–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13464&r=bec |
| By: | Audretsch, David B; Dohse, Dirk; Niebuhr, Annekatrin |
| Abstract: | In this paper we investigate the determinants of entrepreneurial activity in a cross section of German regions for the period 1998-2005. Departing from the knowledge spillover theory of entrepreneurship, the focus of our analysis is on the role of the regional environment and, in particular, knowledge and cultural diversity. Our main hypothesis is that both, knowledge and diversity, have a positive impact on new firm formation. As the determinants of regional firm birth rates might differ considerably with respect to the necessary technology and knowledge input of new businesses, we consider start-ups at different technology levels. The regression results indicate that regions with a high level of knowledge provide more opportunities for entrepreneurship than other regions. Moreover, while sectoral diversity tends to dampen new firm foundation, cultural diversity has a positive and highly significant impact on technology oriented start-ups. This suggests that the diversity of people is more conducive to entrepreneurship than the diversity of firms. We conclude that regions characterized by a high level of knowledge and cultural diversity form an ideal breeding ground for technology oriented start-ups. |
| Keywords: | diversity; entrepreneurship; knowledge spillover |
| JEL: | M13 O18 R11 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6945&r=bec |
| By: | De Paoli, Bianca (Bank of England); Zabczyk, Pawel (Bank of England) |
| Abstract: | Empirical evidence suggests that risk premia are higher at business cycle troughs than they are at peaks. Existing asset pricing theories ascribe moves in risk premia to changes in volatility or risk aversion. Nevertheless, in a simple general equilibrium model, risk premia can be procyclical even though the volatility of consumption is constant and despite a countercyclically varying risk aversion coefficient. We show that agents' expectations about future prospects also influence premium dynamics. In order to generate countercyclically varying premia, as found in the data, one requires a combination of hump-shaped consumption dynamics or highly persistent shocks and habits. Our results, thus, suggest that factors which help match activity data may also help along the asset pricing dimension. |
| Date: | 2009–02–16 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0361&r=bec |
| By: | Kaniska Dam; Marc Escrihuela-Villar; Santiago Sanchez-Pages |
| Abstract: | We analyse risk-taking behaviour of banks in the context of spatial competition. Banks mobilise unsecured deposits by offering deposit rates, which they invest either in a prudent or a gambling asset. Limited liability along with high return of a successful gamble induce moral hazard at the bank level. We show that when the market power is low, banks invest in the gambling asset. On the other hand, for sufficiently high levels of market power, all banks choose the prudent asset to invest in. We further show that a merger of two neighboring banks increases the likelihood of prudent behaviour. Finally, introduction of a deposit insurance scheme exacerbates banks’ moral hazard problem. |
| JEL: | D43 G28 G34 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:edn:esedps:187&r=bec |