nep-bec New Economics Papers
on Business Economics
Issue of 2005‒04‒03
23 papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. An Information Approach to International Currencies By Richard K. Lyons; Michael J. Moore
  2. Closing International Real Business Cycle Models with Restricted Financial Markets By Martin Boileau; Michel Normandin
  3. Returns to Computer Use and Organizational Practices of the Firm By Benoit Dostie; Mathieu Trépanier
  4. Competition and Efficiency in Congested Markets By Daron Acemoglu; Asuman Ozdaglar
  5. Model Averaging and Value-at-Risk based Evaluation of Large Multi Asset Volatility Models for Risk Management By M. Hashem Pesaran; Paolo Zaffaroni
  6. Scope for Credit Risk Diversification By Samuel Hanson; M. Hashem Pesaran; Til Schuermann
  7. U.S. Real Exchange Rate Fluctuations and Relative Price Fluctuations By Caroline M. Betts; Timothy J. Kehoe
  8. Discovering the Sources of TFP Growth: Occupational Choice and Financial Deepening By Hyeok Jeong; Robert M. Townsend
  9. People People: Social Capital and the Labor-Market Outcomes of Underrepresented Groups By Borghans,Lex; Weel,Bas,ter; Weinberg,Bruce
  10. Union Strategy and Optimal Income Taxation By Sebastian G. Kessing; Kai A. Konrad
  11. Quelles relations entre science de l'organisation et management ? Penser la contribution de H.A. Simon By FIOL, Michel; SOLE, Andreu
  12. La déformation continue des managers By FIOL, Michel; de GEUSER, Fabien
  13. Returns to Skills and Personnel Management: U.S. DoD Scientists and Engineers By Michael Gibbs
  14. Skills, Workforce Characteristics and Firm-Level Productivity: Evidence from the Matched ABI/Employer Skills Survey By Fernando Galindo-Rueda; Jonathan Haskel
  15. Affirmative Action in Hierarchies By Suzanne Scotchmer
  16. The Void at the Heart of Rules: Routines in the Context of Rule-Following. By Bénédicte Reynaud
  17. Optimal Partnership Contracts: Foundation and Duality By Harrison Cheng
  18. Pay for Short-Term Performance: Executive Compensation in Speculative By Patrick Bolton; Jose Scheinkman; Wei Xiong
  19. Market valuation and employee stock options By Zhang, Ge
  20. Dynamic modeling of web purchase behavior and e-mailing impact by Petri net By BALAGUE, Christine; LEE, Janghyuk
  21. "International Consumption Patterns among High-income Countries: Evidence from the OECD Data" By Istvan Konya; Hiroshi Ohashi
  22. Technical Efficiency and Stock Market Reaction to Horizontal Mergers By Yanna Wu; Subhash C. Ray
  23. Stress Testing: A Review of key Concepts By Martin Čihák

  1. By: Richard K. Lyons; Michael J. Moore
    Abstract: This paper addresses currency competition from an information perspective. Transactions in traditional models do not convey information, so transaction costs %u2013 the driver of competition outcomes %u2013 are driven by market size. In our model transactions do convey information (consistent with recent empirical findings). Several important departures arise. First, adding the information dimension resolves the traditional indeterminacy of currency trade patterns (by mitigating the concentrating force of market-size economies). Second, whether transactions are executed directly or through a vehicle actually affects prices (because these trading methods do not in general reveal the same information). Third, our model provides a new rationale for why some currency pairs never trade directly (information is not sufficiently symmetric to support trading). Fourth, our model formalizes the arbitrage process and shows that arbitrage transaction quantities and price levels are jointly determined. Empirically, the paper provides a first integrated analysis of transactions in a triangle of markets: ¥/$, $/ %u20AC, and ¥/ %u20AC. Data for the full triangle permits comparison of direct, indirect and arbitrage transactions, for each pair. The information model predicts that transactions should affect prices across markets (e.g., flow in the ¥/$ market should convey information relevant to $/ %u20AC and ¥/ %u20AC prices), which is borne out.
    JEL: F3 F4 G1
    Date: 2005–03
  2. By: Martin Boileau; Michel Normandin
    Abstract: Several authors argue that international real business cycle (IRBC) models with incomplete financial markets offer a good explanation of the ranking of cross-country correlations. Unfortunately, this conclusion is suspect, because it is commonly based on an analysis of the near steady state dynamics using a linearized system of equations. The baseline IRBC model with incomplete financial markets does not possess a unique deterministic steady state and, as a result, its linear system of difference equations is not stationary. We show that the explanation of the ranking of cross-country correlations is robust to modifications that ensure a unique steady state and a stationary system of linear difference equations. We find, however, that the modifications affect the quantitative predictions regarding key macroeconomic variables.
    Keywords: Incomplete markets, stationarity, cross-country correlations, wealth effects
    JEL: F32 G15
    Date: 2005
  3. By: Benoit Dostie (HEC Montréal, CREF, CIRPÉE , CIRANO and IZA Bonn); Mathieu Trépanier (Kellogg School of Management, Northwestern University)
    Abstract: In this paper, we test the hypothesis that computer use will lead to productivity gains only if the firm uses an appropriate set of organizational practices. Detailed data on organizational practices and workers’ compensation are obtained through a Canadian longitudinal linked employer-employee database called the Workplace and Employee Survey (WES). Linked data allow us to take into account both worker and firm unobserved heterogeneity through the estimation of a linear mixed model of wage determination. Our results suggest a small but positive computer-wage premium whose size is related to a set of organizational practices.
    Keywords: wage determination, human capital, computers, mixed models, linked employer-employee data, organizational practices of the firm
    JEL: D21 J30 J31 O33
    Date: 2005–03
  4. By: Daron Acemoglu; Asuman Ozdaglar
    Abstract: We study the efficiency of oligopoly equilibria in congested markets. The motivating examples are the allocation of network flows in a communication network or of traffic in a transportation network. We show that increasing competition among oligopolists can reduce efficiency, measured as the difference between users' willingness to pay and delay costs. We characterize a tight bound of 5/6 on efficiency in pure strategy equilibria. This bound is tight even when the number of routes and oligopolists is arbitrarily large. We also study the efficiency properties of mixed strategy equilibria.
    JEL: D43 C62
    Date: 2005–03
  5. By: M. Hashem Pesaran; Paolo Zaffaroni
    Abstract: This paper considers the problem of model uncertainty in the case of multi-asset volatility models and discusses the use of model averaging techniques as a way of dealing with the risk of inadvertently using false models in portfolio management. In particular, it is shown that under certain conditions portfolio returns based on an average model will be more fat-tailed than if based on an individual underlying model with the same average volatility. Evaluation of volatility models is also considered and a simple Value-at-Risk (VaR) diagnostic test is proposed for individual as well as 'average' models and its exact and asymptotic properties are established. The model averaging idea and the VaR diagnostic tests are illustrated by an application to portfolios of daily returns based on twenty two of Standard & Poor's 500 industry group indices over the period January 2, 1995 to October 13, 2003, inclusive.
    Keywords: Model Averaging, Value-at-Risk, Decision Based Evaluations
    JEL: C32 C52 C53 G11
    Date: 2004–10
  6. By: Samuel Hanson; M. Hashem Pesaran; Til Schuermann
    Abstract: This paper considers a simple model of credit risk and derives the limit distribution of losses under different assumptions regarding the structure of systematic risk and the nature of exposure or firm heterogeneity. We derive fat-tailed correlated loss distributions arising from Gaussian (i.e. non-fat-tailed) risk factors and explore the potential for (and limit of) risk diversification. Where possible the results are generalized to non-Gaussian distributions. The theoretical results indicate that if the firm parameters are heterogeneous but come from a common distribution, for suffciently large portfolios there is no scope for further risk reduction through active portfolio management. However, if the firm parameters come from different distributions, say for different sectors or countries, then further risk reduction is possible, even asymptotically, by changing the portfolio weights. In either case, neglecting parameter heterogeneity can lead to underestimation of expected losses. But, once expected losses are controlled for, neglecting parameter heterogeneity can lead to overestimation of risk, whether measured by unexpected loss or value-at-risk. We examine the impact of sectoral and geographic diversification on credit losses empirically using returns for firms in the U.S. and Japan across seven sectors and find that ignoring this heterogeneity results in far riskier credit portfolios. Risk, is reduced significantly when parameter heterogeneity is properly taken into account.
    Keywords: Risk management, correlated defaults, credit loss distributions, heterogeneity, diversification
    JEL: C33 G13 G21
    Date: 2005–02
  7. By: Caroline M. Betts; Timothy J. Kehoe
    Abstract: This paper studies the relation between the United States’ bilateral real exchange rate and the associated bilateral relative price of nontraded goods for five of its most important trade relationships. Traditional theory attributes fluctuations in real exchange rates to changes in the relative price of nontraded goods. We find that this relation depends crucially on the choice of price series used to measure relative prices and on the choice of trade partner. The relation is stronger when we measure relative prices using producer prices rather than consumer prices. The relation is stronger the more important is the trade relationship between the United States and a trade partner. Even in cases where there is a strong relation between the real exchange rate and the relative price of nontraded goods, however, a large fraction of real exchange rate fluctuations is due to deviations from the law of one price for traded goods.
    Keywords: Risk management, correlated defaults, credit loss distributions, heterogeneity, diversification
    JEL: C33 G13 G21
    Date: 2005–03
  8. By: Hyeok Jeong; Robert M. Townsend
    Abstract: Total factor productivity (TFP) growth is measured as a residual and its sources typically remain unknown inside the residual. This paper aims to identify the underlying sources of this residual growth, being explicit about both micro underpinnings and transitional growth. The key forces are occupational choice and limited access to credit. We develop a method of growth accounting that decomposes not only the overall growth but also TFP growth into four components: occupational shifts, financial deepening, capital heterogeneity, and sectoral Solow residuals. Thus we explicitly evaluate the quantitative importance of micro impediments to trade such as credit constraint on aggregate growth dynamics, in particular the TFP dynamics. Applying this method to Thailand, which experienced rapid growth with enormous structural changes for the two decades between 1976 and 1996, we find that 73 percent of TFP growth can be explained on average by occupational shifts and financial deepening, without presuming exogenous technical progress. Expansion of credit is a major part of this explained TFP growth. The remainder TFP growth is related to the sectoral Solow residuals, which are determined by the endogenous interaction between the price dynamics of wage, interest rate, and profits and the evolution of wealth distribution. The nature of this interaction between price dynamics and wealth distribution depends on access to credit, and the di¤erences in measured TFP growth across subgroups di¤erentiated by any specific characteristics may reflect the varying degrees of limited access to credit rather than subgroup-specific technical changes. The above key forces of TFP also provide a micro foundation of the relationship between growth and inequality. The inequality among the non-intermediated a¤ects the growth of the intermediated. The growth of the intermediated trickles down to the non-intermediated and reduces inequality among them.
    Keywords: Total Factor Productivity, Occupation Choice, Financial Deepening
    JEL: O47 O16 J24 D24
    Date: 2005–03
  9. By: Borghans,Lex; Weel,Bas,ter; Weinberg,Bruce (ROA rm)
    Abstract: Despite indications that interpersonal interactions are important for understanding individual labor-market outcomes and have become more important over the last decades, there is little analysis by economists. This paper shows that interpersonal interactions are important determinants of labor-market outcomes, including occupations and wages. We show that technological and organizational changes have increased the importance of interpersonal interactions in the workplace. We particularly focus on how the increased importance of interpersonal interactions has affected the labor-market outcomes of underrepresented groups. We show that the acceleration in the rate of increase in the importance of interpersonal interactions between the late 1970s and early 1990s can help explain why women’s wages increased more rapidly, while the wages of blacks grew more slowly over these years relative to earlier years.
    Keywords: education, training and the labour market;
    Date: 2005
  10. By: Sebastian G. Kessing (Free University of Berlin); Kai A. Konrad (WZB, Free University of Berlin and IZA Bonn)
    Abstract: Restrictions on work hours are more important in countries with a large welfare state. We show that this empirical observation is consistent with the strategic effects of such restrictions in a welfare state in the context of optimal direct taxation in the tradition of Mirrlees (1971). Our results also apply to non-welfarist states which have income redistribution, but not in purely extortionary states.
    Keywords: optimal income taxation, labor unions, work hours
    JEL: H21 H23
    Date: 2005–03
  11. By: FIOL, Michel; SOLE, Andreu
    Abstract: The importance of H.A. Simon's contribution to understand the relations between organization science and management.
    Keywords: organizational science; managerial theory
    JEL: L20 M10
    Date: 2004–07–01
  12. By: FIOL, Michel; de GEUSER, Fabien (HEC Lausanne)
    Abstract: This paper analyzes the way of thinking of the managers when they have to take a decision on a complex situation.
    Keywords: managers; thinking; reasoning
    JEL: B31 M10
    Date: 2004–12–01
  13. By: Michael Gibbs (University of Chicago GSB and IZA Bonn)
    Abstract: Personnel records are used to examine compensation, recruitment, and retention of a group of very highly skilled workers: civilian scientists and engineers in U.S. Department of Defense laboratories. In contrast to the private sector, returns to skills were largely flat for this group from 1982-1996. Despite this, quality and performance of recruits relative to earlier cohorts, and of those retained relative to those who left, remained stable. One explanation is the importance of defense-industry-specific human capital. These results hold for three different pay plans, including the federal government’s primary plan and two intended to introduce greater flexibility in personnel management.
    Keywords: returns to skills, personnel, workforce quality
    JEL: J24 J31 J44 J45
    Date: 2005–03
  14. By: Fernando Galindo-Rueda (CEP, London School of Economics, CeRiBA and IZA Bonn); Jonathan Haskel (Queen Mary, University of London, AIM, CeRiBA, CEPR and IZA Bonn)
    Abstract: We construct firm-level data set with matched productivity and qualification data by linking the Annual Business Inquiry and Employer Skills Survey for England. We first examine the effect of workplace skills and other characteristics such as part-time status and gender on both productivity and wages in English firms. We also investigate how productivity-implied returns to worker characteristics compare with wage-implied returns, therefore providing information on how rents are distributed between employers and employees. We find that firms with a higher share of college-educated, full-time and male workers also tend to be more productive, with considerable variations across sectors. The only robust difference in implied returns follows from part-timers, who tend to work for firms that pay too low wages for the observed productivity differences. Second, we study the effect of local skills on productivity controlling for skills at the firm. We find a positive and robust association, which is consistent with positive human capital externalities.
    Keywords: productivity, wages, skills, workforce characteristics, spillovers
    JEL: J2 J3 J7
    Date: 2005–03
  15. By: Suzanne Scotchmer
    Abstract: If promotion in a hierarchy is based on a random signal of ability, rates of promotion will be affected by risk-taking. Further, the numbers and abilities of risk-takers and non-risk-takers will be different at each stage of the hierarchy, and the ratio will be changing. I show that, under mild conditions, more risk-takers than non-risk-takers will survive at early stages, but they will have lower ability. At later stages, this will be reversed: Fewer risk-takers than non-risk-takers survive, but they will have higher ability. I give several interpretations for how these theorems relate to affirmative action, in light of considerable evidence that males are more risk-taking than females.
    JEL: J7
    Date: 2005–03
  16. By: Bénédicte Reynaud
    Abstract: This paper is an attempt to understand how rules operate in organisations. I focus on the links between organisational routines and rules that are defined as incomplete when they come to their application. I analyse the role of routines in managing the incompleteness of rules. I present a case study where management introduced a productivity bonus in the middle of 1992. This allows to study in what extent the new rule modifies the prevailing routines of work organisation. Based on team observations, interviews, and statistics that I carried out over a period of nine years (1992-2000), I show that in an initial period, the productivity bonus has partially biased the tasks selec-tion process. In a second period - "the normal period"- our observations indicate that following the rules consists in translating the abstract rules into concrete reference points, and adding in what the rules have not specified. The first activity becomes a routine when the interpretation is stabi-lised. Routines provide a pragmatic, local, and temporary solution to the incompleteness of rules. Since routines emerge only in the course of action, they come with no guarantee of success. That constitutes their dynamic.
    Date: 2005
  17. By: Harrison Cheng
    Abstract: We use the duality in linear programming to solve the problem of optimal contracts with moral hazards. We show the importance of allowing the partners to throw away outputs under some contingencies. A two-step procedure is used to find the optimal contracts. The first step minimizes the loss from undistributed outputs, and in the second step, a second best solution is found. A characterization of the optimal contracts in 2-by-2-by-2 partnership games is o?ered. Such contracts implement an optimal strategy profile which either has no incentive cost to implement or is near a pure strategy profile.
    Keywords: optimal sharing contracts, partnership games, moral hazards, duality, linear programming
    JEL: D23 D8
    Date: 2004–08
  18. By: Patrick Bolton; Jose Scheinkman; Wei Xiong
    Date: 2005–03–18
  19. By: Zhang, Ge
    Abstract: This paper investigates a market-valuation-based hypothesis for employee stock options (ESOs). It examines how market valuation has affected the decision to grant ESOs, the amount of options granted, and the distribution of options among executives and rankand- file employees. I find strong empirical evidence that firms with high market valuation and high probability of future overvaluation are more likely to adopt ESOs and grant more options to their employees. Furthermore, when top executives perceive that the current market valuation is high, they grant a smaller portion of options to themselves relative to rank-and-file employees. All these results are consistent with the market-valuation rationale for ESOs, which argues that firms use ESOs as a method to sell overvalued equity.
    Keywords: Market valuation, Stock options
    Date: 2004–01–27
  20. By: BALAGUE, Christine; LEE, Janghyuk
    Abstract: In this article, the authors introduce Petri nets to model the dynamics of web site visits and purchase behaviors in the case of wish list systems. They describe web site activities and their transition with probability distributions and model the sequential impact of influential factors through links that better explain web purchase behavior dynamics. The basic model, which analyzes site connections and purchases to explain visit and purchase behavior, performs better than a classical negative binomial regression model. To demonstrate its flexibility, the authors extend the wish list Petri net model to measure the impact of e-mailing intervals on visit frequency and purchase.
    Keywords: internet; wish list; e-mail; Petri net; dynamic model
    JEL: D12 M31
    Date: 2004–12–01
  21. By: Istvan Konya (Department of Economics, Magyar Nemzeti Bank); Hiroshi Ohashi (Faculty of Economics, University of Tokyo)
    Abstract: The paper analyzes product-level consumption patterns among countries in the OECD in the period from 1985 to 1999. Estimation results find robust evidence of strong convergence in cross-country consumption patterns. The paper also finds a relationship between openness and the cross-country consumption pattern.
    Date: 2005–03
  22. By: Yanna Wu (PricewaterhouseCooper LLP); Subhash C. Ray (University of Connecticut)
    Abstract: This study examines the relationship between stock market reaction to horizontal merger announcements and technical efficiency levels of the participating firms. The analysis is based on data pertaining to eighty mergers between firms in the U.S. manufacturing industry during the 1990s. We employ Data Envelopment Analysis (DEA) to measure technical efficiency, which capture the firms. competence to produce the maximum output given certain productive resources. Abnormal returns related to the merger announcements provide the investor.s re-evaluation on the future performance of the participating firms. In order to avoid the problem of nonnormality, heteroskedasticity in the regression analysis, bootstrap method is employed for estimations and inferences. We found that there is a significant relationship between technical efficiency and market response. The market apparently welcomes the merger as an arrangement to improve resource utilizations.
    JEL: G14 C61 C15
    Date: 2005–03
  23. By: Martin Čihák
    Abstract: The note is a review of the literature on the quantitative methods used to assess the vulnerabilities of financial systems to risks. In particular, the author focuses on the role of system-wide stress testing. He summarizes the recent developments in the literature, highlighting topics relevant for the Czech case. He presents the key concepts relating to systemwide stress tests, overviews the stress tests performed by central banks and international financial institutions, and discusses conceptual issues relating to modeling of individual risk factors.
    Keywords: Financial soundness, macroprudential analysis, stress tests.
    JEL: G21 G28 E44

This nep-bec issue is ©2005 by Christian Calmes. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.