nep-bec New Economics Papers
on Business Economics
Issue of 2005‒03‒06
sixteen papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Can We Trust Private Firms as Suppliers of Vaccine for the Avian Influenza? By Forslid, Rikard
  3. Does Wage Rank Affect Employees’ Wellbeing? By Brown, Gordon D. A.; Gardner, Jonathan; Oswald, Andrew; Qian, Jing
  4. Outsourcing and Technological Change By Ann Bartel; Saul Lach; Nachum Sicherman
  5. Re-examining the Consumption-Wealth Relationship: The Role of Model Uncertainty By Gary Koop; Simon M. Potter; Rodney W. Strachan
  6. Returning to the Returns to Computer Use By Sabrina Wulff Pabilonia; Cindy Zoghi
  7. Credit Risk Versus Capital Requirements Under Basel II: Are SME Loans and Retail Credit Really Di Erent? By JESPER TOR JACOBSON; KASPER ROSZBACH LINDÉ
  8. It's What You Say Not What You Pay By Jordi Brandts; David J. Cooper
  9. Advertising in Specialized Markets: Example from the US Pharmaceutical Industry By Amrita Bhattacharyya
  10. Estimation of inequality indices from survey data, allowing for design effects By Stephen Jenkins
  12. Demand for Coffee: The Role of Prices, Preferences and Market Power By Durevall, Dick
  13. Group selection and social preferences By Weibull, Jörgen; Salomonsson, Marcus
  14. Selection, Investment, and Women's Relative Wages Since 1975 By Casey B. Mulligan; Yona Rubinstein
  15. Occupation-Specific Human Capital and Local Labor Markets By Jeffrey A. Groen
  16. A virtuous interaction betweenpressure groups, firms and institutions: a subsidiarity principle in a horizontal differentiation model By BECCHETTI LEONARDO; PAGANETTO LUIGI; NAZARIA SOLFERINO

  1. By: Forslid, Rikard (Dept. of Economics, Stockholm University)
    Abstract: Using a simple monopoly model, this note analyses the incentives of a vaccine producer. Because a vaccine tends to eradicate the disease for wich it is intended, it also tends to destroy its own market. This means that monopolistic producers may be tempted, in a socially non-optimal way, to delay the introduction of vaccines against new infections until the disease has spread.
    Keywords: Vaccines
    JEL: D42 D62 H10 I18 L10
    Date: 2005–02–22
  2. By: Li-Gang Liu
    Abstract: This paper argues that the triangular trade established among China, the US, and the rest of the East Asia suggests that a unilateral renminbi revaluation will not help reduce the large US-China trade deficit. The paper shows further that China's economic overheating over the last two years had little to do with its "undervalued" currency. In fact, incentives to expand balance sheets, interest rate margin and liberalization, and continued interferences on bank lending by local governments contributed to rapid credit expansion and overinvestment. In light of the unsustainable US current account deficit, China and the rest of the East Asia is likely to experience continued and large capital inflows, which will make further sterilization less effective. China's exit from the current exchange rate regime could thus be coordinated with the currencies of the East Asia region as they together would have to make major adjustments.
    Date: 2005–03
  3. By: Brown, Gordon D. A. (University of Warwick); Gardner, Jonathan (Watson Wyatt LLP); Oswald, Andrew (University of Warwick and IZA Bonn); Qian, Jing (University of Warwick)
    Abstract: What makes workers happy? Here we argue that pure ‘rank’ matters. It is currently believed that wellbeing is determined partly by an individual’s absolute wage (say, 30,000 dollars a year) and partly by the individual’s relative wage (say, 30,000 dollars compared to an average in the company or neighborhood of 25,000 dollars). Our evidence shows that this is inadequate. The paper demonstrates that range-frequency theory – a model developed independently within psychology and unknown to most economists – predicts that wellbeing is gained partly from the individual’s ranked position of a wage within a comparison set (say, whether the individual is number 4 or 14 in the wage hierarchy of the company). We report an experimental study and an analysis of a survey of 16,000 employees’ wage satisfaction ratings. We find evidence of rank-dependence in workers’ pay satisfaction.
    Keywords: job satisfaction, wages, rank, wellbeing
    JEL: J28 J30
    Date: 2005–03
  4. By: Ann Bartel; Saul Lach; Nachum Sicherman
    Abstract: In this paper we argue that an important source of the recent increase in outsourcing is the computer and information technology revolution, characterized by increased rates of technological change. Our model shows that an increase in the pace of technological change increases outsourcing because it allows firms to use services based on leading edge technologies without incurring the sunk costs of adopting these new technologies. In addition, firms using more IT-intensive technologies face lower outsourcing costs of IT-based services generating a positive correlation between the IT level of the user and its outsourcing share of IT-based services. This implication is verified in the data.
    JEL: M55 O33
    Date: 2005–02
  5. By: Gary Koop; Simon M. Potter; Rodney W. Strachan
    Abstract: This paper discusses the consumption-wealth relationship. Following the recent influential work of Lettau and Ludvigson [e.g. Lettau and Ludvigson (2001), (2004)], we use data on consumption, assets and labor income and a vector error correction framework. Key findings of their work are that consumption does respond to permanent changes in wealth in the expected manner, but that most changes in wealth are transitory and have no effect on consumption. We investigate the robustness of these results to model uncertainty and argue for the use of Bayesian model averaging. We find that there is model uncertainty with regards to the number of cointegrating vectors, the form of deterministic components, lag length and whether the cointegrating residuals affect consumption and income directly. Whether this uncertainty has important empirical implications depends on the researcher's attitude towards the economic theory used by Lettau and Ludvigson. If we work with their model, our findings are very similar to theirs. However, if we work with a broader set of models and let the data speak, we obtain somewhat different results. In the latter case, we find that the exact magnitude of the role of permanent shocks is hard to estimate precisely. Thus, although some support exists for the view that their role is small, we cannot rule out the possibility that they have a substantive role to play.
    Keywords: wealth effect; vector error correction model; Bayesian model averaging; cointegration; variance decomposition.
    Date: 2005–02
  6. By: Sabrina Wulff Pabilonia (U.S. Bureau of Labor Statistics); Cindy Zoghi (U.S. Bureau of Labor Statistics)
    Abstract: This paper re-examines the returns to computer use using a new matched workplace-employee data from Canada. We control for potential selection using instrumental variables. Results suggest that it is not merely the employee having a computer on his desk, but rather having complementary computer skills, that causes wages to increase.
    Keywords: computers, computer skills, human capital, technology
    JEL: J31 O30
    Date: 2005–02
    Abstract: The new Basel II regulation contains a number of new regulatory features. Most importantly, internal ratings will be given a central role in the evaluation of bank loans' riskiness. Another novelty is that retail credit and SME loans will receive a special treatment in recognition of the fact that the riskiness of such exposure derives to a greater extent from idiosyncratic risk and much less from common factor risk. Much of the work done on the differences between the risk properties of retail, SME and corporate credit has been based on parameterized model of credit risk. In this paper we present new quantitative evidence on the implied credit loss distributions for two Swedish banks using a non-parametric Monte Carlo re-sampling method following Carey [1998]. Our results are based on a panel data set containing both loan and internal rating data from the banks' complete business loan portfolios over the period 1997-2000. We compute the credit loss distributions that each rating system implies and compare the required economic capital implied by these loss distributions with the regulatory capital under Basel II. By exploiting the fact that a subset of all businesses in the sample is rated by both banks, we can generate loss distributions for SME, retail and corporate credit portfolios with a constant risk profile. Our findings suggest that a special treatment for retail credit and SME loans may not be justified. We also investigate if any alternative definition of SME's and retail credit would warrant different risk weight functions for these types of exposure. Our results indicate that it may be di¢cult to find a simple risk weight function that can account for the differences in portfolio risk properties between banks and asset types.
    Date: 2004–02
  8. By: Jordi Brandts; David J. Cooper
    Abstract: We study manager-employee interactions in experiments set in a corporate environment where payoffs depend on employees coordinating at high effort levels; the underlying game being played repeatedly by employees is a weak-link game. In the absence of managerial intervention subjects invariably slip into coordination failure. To overcome a history of coordination failure, managers have two instruments at their disposal, increasing employees' financial incentives to coordinate and communication with employees. We find that communication is a more effective tool than incentive changes for leading organizations out of performance traps. Examining the content of managers' communication, the most effective messages specifically request a high effort, point out the mutual benefits of high effort, and imply that employees are being paid well.
    Keywords: Change, Incentives, Coordination, Communication, Experiments, Organizations
    JEL: C92 D23 J31 L23 M52
    Date: 2005–02–18
  9. By: Amrita Bhattacharyya (Boston College)
    Abstract: Pharmaceutical companies spend billions of dollars on advertising prescription drugs to doctors and also to consumers directly. People wonder why is direct-to-consumer-advertising (DTCA) concentrated among only a few classes of drugs, what explains the within-class variation of DTCA, how are DTCA and physician advertising related. We analyze the advertising equilibriums in prescription drugs market and find that it is possible to have a sub-game perfect non-symmetric Nash-equilibrium when, (i)the number of patients who are aware of a treatment is very low, and (ii) there are very few people who insist on having a particular drug. Otherwise, for very familiar diseases a non-advertising equilibrium is most likely. We also find that, all competing brands in a class are likely to advertise to consumers if the number of insisting patients is very high. Finally, advertising to consumers does not substitute for advertising directed to physicians.
    Keywords: advertising, DTCA, prescription, expert, Nash equilibrium
    JEL: L0 M3 I0
    Date: 2005–02–28
  10. By: Stephen Jenkins (University of Essex)
    Abstract: Martin Biewen and I have derived the sampling variances of Generalized Entropy and Atkinson indices for the case they are estimated from survey data with a complex design. This talk illustrates how the indices may calculated in Stata, using our commands -svyatk- and -svygei-. The empirical illustrations compare income inequality in Britain and Germany.
    Date: 2005–03–03
  11. By: Roberts Waddle
    Abstract: Our companion article developed a clear conceptual framework of profit sharing between two rival firms and studied the effects of this strategy on each firm's profit under the assumption that each firm decides unilaterally to give away voluntarily a part of its profit to its rival. This article relaxes totally this assumption and allows firms to invest rather a fraction of their profits in a joint venture. As in the previous article, it shows how and when forming a joint venture may be a successful strategy. Furthermore and more importantly, it brings to light that joint venture may be used to conceal the profit-sharing (maybe forbidden) strategy.
    Date: 2005–02
  12. By: Durevall, Dick (Department of Economics, School of Economics and Commercial Law, Göteborg University)
    Abstract: The purpose of this paper is to evaluate the role of prices in determining demand for roasted coffee in Sweden. This is of interest because many believe that consumer prices are high relative to green coffee-bean prices, and that lower consumer prices would increase demand for coffee beans. Coffee demand is estimated on data for the period 1968-2002. In the long run, changing preferences appear to determine demand for roasted coffee, and a reduction in consumer prices would only have a temporary impact on consumption. Hence a permanent decrease in consumer prices would only increase exports of coffee beans to Sweden for a couple of years. <p>
    Keywords: Coffee exports; Coffee Prices; Market Power; Multinationals; Preferences; Sweden
    JEL: F14 F23 L13 L66 L81
    Date: 2005–02–28
  13. By: Weibull, Jörgen (Dept. of Economics, Stockholm School of Economics); Salomonsson, Marcus (Dept. of Economics, Stockholm School of Economics)
    Abstract: Suppose that a large number of individuals are randomly matched into groups where each group plays a finite symmetric game. Individuals breed true according to their individual material payoffs, but the expected number of surviving offspring may depend on the material payoff vector to the whole group. We show that the mean-field equation for the induced population dynamic is equivalent to the replicator dynamic for a game with payoffs derived from those in the original game. We apply this selection dynamic to a number of examples, including prisoners' dilemma games, coordination games, hawk-dove games, public-goods provision games with and without punishment options, mini-ultimatum games, and common-pool games. For each of these, we provide conditions under which our selection dynamic leads to other outcomes than those obtained under the usual replicator dynamic. By way of a revealed-preference argument, we show how our selection dynamic can explain certain stable behaviors that are consistent with individuals having social preferences.
    Keywords: Group selection; social preferences; altruism; fairness.
    JEL: C72 C73 D64
    Date: 2005–02–28
  14. By: Casey B. Mulligan; Yona Rubinstein
    Abstract: In theory, growing wage inequality within gender should cause women to invest more in their market productivity and should differentially pull able women into the workforce, thereby closing the measured gender gap even though women's wages might have grown less than men's had their behavior been held constant. Using the CPS repeated cross-sections between 1975 and 2001, we use control function (Heckit) methods to correct married women's conditional mean wages for selectivity and investment biases. Our estimates suggest that selection of women into the labor market has changed sign, from negative to positive, or at least that positive selectivity bias has come to overwhelm investment bias. The estimates also explain why measured women's relative wage growth coincided with growth of wage inequality within-gender, and attribute the measured gender wage gap closure to changing selectivity and investment biases, rather than relative increases in women's earning potential. Using PSID waves 1975-93 to control for the changing female workforce with person-fixed effects, we also find little growth in women's mean log wages. Finally, we make a first attempt to gauge the relative importance of selection versus investment biases, by examining the family and cognitive backgrounds of members of the female workforce. PSID, NLS, and NLSY data sets show how the cross-section correlation between female employment and family/cognitive background has changed from "negative" to "positive" over the last thirty years, in amounts that might be large enough to attribute most of women's relative wage growth to changing selectivity bias.
    JEL: J24 J31 J16 C34
    Date: 2005–02
  15. By: Jeffrey A. Groen (U.S. Bureau of Labor Statistics)
    Abstract: Most skills acquired through on-the-job training may be specific to an occupation and therefore transferable to some but not all firms. This paper explores the relationship between the size of the local market for an occupation-specific skill and job-training outcomes. The Stevens (1994) model of training predicts that as market size increases, job turnover increases and training becomes more general. I test these predictions using data on blue-collar workers and variation in market size across U.S. metropolitan areas. The empirical results support the theoretical predictions and the impacts are most relevant at low levels of market size.
    Keywords: on-the-job training, occupation, human capital, local labor markets, market size
    JEL: J24 J63 J61
    Date: 2005–02
    Abstract: In this paper we analyse the relationship between producers' ethical responsibility and consumers' welfare in a duopoly with horizontal (ethical) differentiation. We show that the entry of an ethically concerned (socially and environmentally responsible) producer generates a Pareto improvement for all (both ethically and non ethically) concerned consumers in the North in a Hotelling game in which the incumbent and the ethical entrant compete over prices and ethical features of their products. We also show that the price reaction of the incumbent when his location is fixed has additional positive welfare effects and that - when we remove the fixed location hypothesis -incumbent's ethical imitation adds to this even though it is compensated by reduced price competition. We also analyse the relative efficiency of tax financed direct aid to the South vis à vis a policy of duty exemption for i) the socially and environmentally responsible producer, ii) both producers. We therefore show under different games how changes in costs of ethical distance, ethical location of the incumbent and amount of the duty affect the relative welfare-dominance of these three different policies.
    Date: 2003–09

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