nep-bec New Economics Papers
on Business Economics
Issue of 2005‒05‒23
twenty-one papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Is China's FDI Coming at the Expense of Other Countries? By Barry Eichengreen; Hui Tong
  2. Business Strategy, Human Capital, and Managerial Incentives By George J. Mailath; Volker Nocke; Andrew Postlewaite
  3. The role of households' collateralized debts in macroeconomic stabilization By Jeffrey R. Campbell; Zvi Hercowitz
  4. The recent shift in term structure behavior from a no-arbitrage macro-finance perspective By Glenn D. Rudebusch; Tao Wu
  5. A, B, C’s, (and D’s) for understanding VARs By Jesús Fernández-Villaverde; Juan Francisco Rubio-Ramírez; Thomas Sargent
  6. A general-equilibrium asset-pricing approach to the measurement of nominal and real bank output By Christina Wang; Susanto Basu; John G. Fernald
  7. International transmission of inflation among G-7 countries: a data-determined VAR analysis By Jian Yang; Hui Guo; Zijun Wang
  8. Contingent reserves management: an applied framework By Ricardo Caballero; Stavros Panageas
  9. Modeling bond yields in finance and macroeconomics By Francis X. Diebold; Monika Piazzesi; Glenn D. Rudebusch
  10. Debt maturity, risk, and asymmetric information By Allen N. Berger; Marco A. Espinosa-Vega; W. Scott Frame; Nathan H. Miller
  11. The impact of e-business technologies on supply chain operations: a macroeconomic perspective By Amit Basu; Thomas F. Siems
  12. Job-hopping in Silicon Valley: some evidence concerning the micro-foundations of a high technology cluster By Bruce Fallick; Charles A. Fleischman; James B. Rebitzer
  13. Not working: demographic changes, policy changes, and the distribution of weeks (not) worked By Lisa Barrow; Kristin F. Butcher
  14. Advertising and pricing at multiple-output firms: evidence from U.S. thrift institutions By Robert DeYoung; Evren Örs
  15. Where do manufacturing firms locate their headquarters? By J. Vernon Henderson; Yukako Ono
  16. A puzzle of card payment pricing : why are merchants still accepting card payments? By Fumiko Hayashi
  17. Worker turnover, industry localization, and producer size By Christopher H. Wheeler
  18. A unified analysis of executive pay: the case of the banking industry By Gregory E. Sierra; Eli Talmor; James S. Wallace
  19. Executive compensation at Fannie Mae and Freddie Mac By William R. Emmons; Gregory E. Sierra
  20. The Fear of Exclusion: Individual Effort when Group Formation is Endogenous By Brekke, Kjell Arne; Nyborg, Karine; Rege, Mari
  21. Venture Capital as Human Resource Management By Antonio Geldson de Carvalho; Charles W. Calomiris; Joao Amaro de Matos

  1. By: Barry Eichengreen; Hui Tong
    Abstract: We analyze how China's emergence as a destination for foreign direct investment is affecting the ability of other countries to attract FDI. We do so using an approach that accounts for the endogeneity of China's FDI. The impact turns out to vary by region. China's rapid growth and attractions as a destination for FDI also encourages FDI flows to other Asian countries, as if producers in these economies belong to a common supply chain. There is also evidence of FDI diversion from OECD recipients. We interpret this in terms of FDI motivated by the desire to produce close to the market where the final sale takes place. For whatever reason -- limits on their ability to raise finance for investment in multiple markets or limits on their ability to control operations in diverse locations -- firms more inclined to invest in China for this reason are corresponding less inclined to invest in the OECD. A detailed analysis of Japanese foreign direct investment outflows disaggregated by sector further supports these conclusions.
    JEL: F0
    Date: 2005–05
  2. By: George J. Mailath (Department of Economics, University of Pennsylvania); Volker Nocke (Department of Economics, University of Pennsylvania); Andrew Postlewaite (Department of Economics, University of Pennsylvania)
    Abstract: We posit that the value of a manager’s human capital depends on the firm’s business strategy. The resulting interaction between business strategy and managerial incentives affects the organization of business activities, both the internal organization of the firm and the determination of firm boundaries. We illustrate the impact of this interaction on firm boundaries in a dynamic agency model. There may be disadvantages in merging two firms even when such a merger allows the internalization of externalities between the two firms. Merging, by making unprofitable certain decisions, increases the cost of inducing managerial effort. This incentive cost is a natural consequence of the manager’s business-strategy -specific human capital.
    Keywords: Human capital, managerial incentives, firm boundaries, firm organization
    JEL: D23 L14
  3. By: Jeffrey R. Campbell; Zvi Hercowitz
    Abstract: Market innovations following the financial reforms of the early 1980's relaxed collateral constraints on households' borrowing. This paper examines the implications of this development for macroeconomic volatility. We combine collateral constraints on households with heterogeneity of thrift in a calibrated general equilibrium model, and we use this tool to characterize the business cycle implications of realistically lowering minimum down payments and rates of amortization for durable goods purchases. The model predicts that this relaxation of collateral constraints can explain a large fraction of the volatility decline in hours worked, output, household debt, and household durable goods purchases.
    Keywords: Households - Economic aspects ; Macroeconomics ; Labor supply
    Date: 2004
  4. By: Glenn D. Rudebusch; Tao Wu
    Abstract: This paper examines a recent shift in the dynamics of the term structure and interest rate risk. We first use standard yield-spread regressions to document such a shift in the U.S. in the mid-1980s. Over the pre- and post-shift subsamples, we then estimate dynamic, affine, no-arbitrage models, which exhibit a significant difference in behavior that can be largely attributed to changes over time in the pricing of risk associated with a “level” factor. Finally, we suggest a link between the shift in term structure behavior and changes in the risk and dynamics of the inflation target as perceived by investors.
    Keywords: Interest rates ; Monetary policy ; Econometric models
    Date: 2004
  5. By: Jesús Fernández-Villaverde; Juan Francisco Rubio-Ramírez; Thomas Sargent
    Abstract: The dynamics of a linear (or linearized) dynamic stochastic economic model can be expressed in terms of matrices (A, B, C, D) that define a state-space system. An associated state space system (A, K, C, S) determines a vector autoregression (VAR) for observables available to an econometrician. We review circumstances in which the impulse response of the VAR resembles the impulse response associated with the economic model. We give four examples that illustrate a simple condition for checking whether the mapping from VAR shocks to economic shocks is invertible. The condition applies when there are equal numbers of VAR and economic shocks.
    Date: 2005
  6. By: Christina Wang; Susanto Basu; John G. Fernald
    Abstract: This paper addresses the proper measurement of financial service output that is not priced explicitly. It shows how to impute nominal service output from financial intermediaries’ interest income and how to construct price indices for those financial services. We present an optimizing model with financial intermediaries that provide financial services to resolve asymmetric information between borrowers and lenders. We embed these intermediaries in a dynamic, stochastic, general-equilibrium model where assets are priced competitively according to their systematic risk, as in the standard consumption capital-asset-pricing model. In this environment, we show that it is critical to take risk into account in order to measure financial output accurately. We also show that even using a risk-adjusted reference rate does not solve all the problems associated with measuring nominal financial service output. Our model allows us to address important outstanding questions in output and productivity measurement for financial firms, such as: (1) What are the correct “reference rates” to use in calculating bank output? In particular, should they take account of risk? (2) If reference rates need to be risk-adjusted, does it mean that they must be ex ante rates of return? (3) What is the right price deflator for the output of financial firms? Is it just the general price index? (4) When—if ever—should we count capital gains of financial firms as part of financial service output?
    Keywords: Financial services industry ; Financial markets
    Date: 2004
  7. By: Jian Yang; Hui Guo; Zijun Wang
    Abstract: We investigate the international transmission of inflation among G-7 countries using a data-determined vector autoregression analysis, as advocated by Swanson and Granger (1997). Over the period 1973 to 2003, we find that U.S. innovations have a large effect on inflation in the other countries, although they are not always the dominant international factor. Similarly, shocks to some other countries also have a statistically and economically significant influence on U.S. inflation. Moreover, our evidence indicates that U.S. inflation has become less vulnerable to foreign shocks since the early 1990s, mainly because of the diminished influence from Germany and France
    Keywords: International finance ; Time-series analysis
    Date: 2004
  8. By: Ricardo Caballero; Stavros Panageas
    Abstract: One of the most serious problems that a central bank in an emerging market economy can face is the sudden reversal of capital inflows. Hoarding international reserves can be used to smooth the impact of such reversals, but these reserves are seldom sufficient and always expensive to hold. In this paper we argue that adding richer hedging instruments to the portfolios held by central banks can significantly improve the efficiency of the anti-sudden stop mechanism. We illustrate this point with a simple quantitative hedging model, where optimally used options and futures on the S&P100’s implied volatility index (VIX) increases the expected reserves available during sudden stops by as much as 40 percent.
    Keywords: Banks and banking, Central ; Emerging markets ; Bank reserves
    Date: 2004
  9. By: Francis X. Diebold; Monika Piazzesi; Glenn D. Rudebusch
    Abstract: From a macroeconomic perspective, the short-term interest rate is a policy instrument under the direct control of the central bank. From a finance perspective, long rates are risk-adjusted averages of expected future short rates. Thus, as illustrated by much recent research, a joint macro-finance modeling strategy will provide the most comprehensive understanding of the term structure of interest rates. We discuss various questions that arise in this research, and we also present a new examination of the relationship between two prominent dynamic, latent factor models in this literature: the Nelson-Siegel and affine no-arbitrage term structure models.
    Keywords: Bonds ; Macroeconomics ; Finance ; Econometric models
    Date: 2005
  10. By: Allen N. Berger; Marco A. Espinosa-Vega; W. Scott Frame; Nathan H. Miller
    Abstract: We test the implications of Flannery’s (1986) and Diamond’s (1991) models concerning the effects of risk and asymmetric information in determining debt maturity, and we examine the overall importance of informational asymmetries in debt maturity choices. We employ data from more than 6,000 commercial loans from 53 large U.S. banks. Our results for low-risk firms are consistent with the predictions of both theoretical models, but our findings for high-risk firms conflict with the predictions of Diamond’s model and with much of the empirical literature. Our findings also suggest a strong quantitative role for asymmetric information in explaining debt maturity.
    Date: 2004
  11. By: Amit Basu; Thomas F. Siems
    Abstract: New information technologies and e-business solutions have transformed supply chain operations from mass production to mass customization. This paper assesses the impact of these innovations on economic productivity, focusing on the macroeconomic benefits as supply chain operations have evolved from simple production and planning systems to today's real-time performance-management information systems using advanced e-business technologies. While many factors can influence macroeconomic variables, the impact of IT-enabled supply chains should not be overlooked. We find evidence that the impact of e-business technologies on supply chain operations have resulted in a reduced "bullwhip effect," lower inventory, reduced logistics costs, and streamlined procurement processes. These improvements, in turn, have likely helped to lower inflation, reduce economic volatility, strengthen productivity growth, and improve standards of living.
    Keywords: Information technology ; Macroeconomics ; Productivity
    Date: 2004
  12. By: Bruce Fallick; Charles A. Fleischman; James B. Rebitzer
    Abstract: In Silicon Valley's computer cluster, skilled employees are reported to move rapidly between competing firms. If true, this job-hopping facilitates the reallocation of resources towards firms with superior innovations, but it also creates human capital externalities that reduce incentives to invest in new knowledge. Outside of California, employers can use non-compete agreements to reduce mobility costs, but these agreements are unenforceable under California law. Until now, the claim of "hyper-mobility" of workers in Silicon has not been rigorously investigated. Using new data on labor mobility we find higher rates of job-hopping for college-educated men in Silicon Valley's computer industry than in computer clusters located out of the state. Mobility rates in other California computer clusters are similar to Silicon Valley's, suggesting some role for state laws restricting non-compete agreements. Outside of the computer industry, California's mobility rates are no higher than elsewhere.
    Keywords: Labor mobility - California ; Computer industry - California ; High technology industries - California
    Date: 2005
  13. By: Lisa Barrow; Kristin F. Butcher
    Abstract: From 1978 to 2000 the fraction of adult men in full-year non-employment increased from 17.1 to 21.6 percent. Previous research focused on the role of disability insurance policy and wage structure changes to explain this increase. Using Current Population Surveys from 1979 to 2003 we assess how much of the changes in full-year non-employment can be explained by demographic changes, possibly linked to health. With our empirical strategy we examine how 1978 to 2000 changes in demographic characteristics would have changed the distribution of weeks worked if policies and macroeconomic conditions remained as they were in 1978. For prime-aged men, we find changes in age, race, and ethnicity can “explain” 14 to 33 percent of the increase in full-year non-employment, without any change in policy or wage structure. For prime-aged women, changes in demographics also would have predicted increases in full-year nonemployment, when in fact we saw dramatic decreases.
    Keywords: Demography ; Labor policy ; Labor market
    Date: 2004
  14. By: Robert DeYoung; Evren Örs
    Abstract: We derive five hypotheses regarding market competition, price, and advertising from a theoretical model of a profit maximizing depository institution, and test these conjectures in a simultaneous system of deposit interest rates and advertising expenditures for a data panel of 1,867 thrift institutions that offer 13 different deposit products in 666 local markets in the U.S. between 1994 and 2000. We find some support for each of our hypotheses – branding, information, Dorfman-Steiner, structure-advertising, and structure-price – with the strength of the results often depending on the attributes of the deposit products or the characteristics of the thrifts.
    Keywords: Advertising ; Thrift institutions
    Date: 2004
  15. By: J. Vernon Henderson; Yukako Ono
    Abstract: Firms’ headquarters [HQ] support their production activity, by gathering information and outsourcing business services, as well as, managing, evaluating, and coordinating internal firm activities. In search of a better location for these functions, firms often separate the HQ function physically from their production facilities and construct stand-alone HQs. By locating its HQ in a large, service oriented metro area away from its production facilities, a firm may be better able to out-source service functions in that local metro market and also to gather information about market conditions for their products. However if the firm locates the HQ away from its production activity, that increases the coordination costs in managing plant activities. In this paper we empirically analyze the trade-off of these two considerations.
    Keywords: Corporations - Headquarters ; Industrial location ; Manufactures
    Date: 2004
  16. By: Fumiko Hayashi
    Abstract: This paper presents models that explain why merchants accept payment cards even when the fees they face exceed the transactional benefits they receive from a card transaction. Such merchant behaviors can be explained by competition among merchants and/or the effectiveness of the merchant’s card acceptance in shifting cardholders’ demand for goods upward. The prevalent assumption used in payment card literature—merchants accept cards only when their transactional benefits are higher than the fees they pay—holds only for a monopoly merchant who faces an inelastic consumer demand. A card network that wants all merchants in a given industry to accept cards sets a lower merchant fee initially and then gradually increases it to the highest possible level, which may be higher than the sum of the merchant’s transactional benefit and the merchant’s initial margin without cards. Such merchant fees potentially create inequality between cardholders and non-cardholders.
    Keywords: Credit cards
    Date: 2004
  17. By: Christopher H. Wheeler
    Abstract: Empirically, large employers have been shown to devote greater resources to filling vacancies than small employers. Following this evidence, this paper offers a theory of producer size based on labor market search, whereby a key factor in the determination of producer's total employment is the ease with which workers can be found to fill jobs that are, periodically, vacated. Since the geographic localization of industry has long been conjectured to facilitate the search process, the model provides an explanation for the observed positive association between average producer size and the magnitude of an industry's presence within local labor markets.
    Keywords: Regional economics ; Labor market
    Date: 2004
  18. By: Gregory E. Sierra; Eli Talmor; James S. Wallace
    Abstract: This study examines executive compensation determinants in the U.S. banking industry. Multiple theories of executive pay are discussed and tested using a relatively homogenous sample. We perform an in-depth look at the corporate governance and ownership structure of the companies selected. We explore the simultaneous relationship between compensation, firm performance, and board strength, exploiting variables unique to the banking industry. Our primary finding is that after controlling for both regulatory oversight and external market discipline, a strong board is associated with higher firm performance and lower levels of executive pay, consistent with such a board of directors providing a strong monitoring function.
    Keywords: Executives - Salaries
    Date: 2004
  19. By: William R. Emmons; Gregory E. Sierra
    Abstract: Corporate governance-and executive-compensation arrangements in particular-should be an important component of the agenda to reform the housing GSEs. The GSEs' safety-and-soundness regulator-who is essentially the debtholders' and taxpayers' representative-must be admitted to the GSEs' boardroom in a way that is atypical of an ordinary publicly held company. This intrusion into the board's oversight of executive-compensation plans is justified given the GSEs' public purposes and their large potential cost to taxpayers. Prudent public policy requires greater supervisory control over executive compensation at the GSEs, which would follow a precedent set in banking.
    Keywords: Government-sponsored enterprises ; Executives - Salaries
    Date: 2004
  20. By: Brekke, Kjell Arne (Ragnar Frisch Centre for Economic Research); Nyborg, Karine (Ragnar Frisch Centre for Economic Research); Rege, Mari (Department of Economics, Case Western Reserve University)
    Abstract: To secure their membership in a popular group, individuals may contribute more to the group’s local public good than they would if group formation were exogenous. Those in the most unpopular group do not have this incentive to contribute to their group. Substantial differences in individual efforts levels between groups may be the result. A principal may prefer either exogenous or endogenous group formation, depending on whether an increase in contributions to the local public good coincides with the principal’s interests. We analyze two examples: Social interaction in schools, and multiple-task teamwork.
    Keywords: Local public goods; opportunity costs; popularity; multiple-task principalagent analysis.
    JEL: C72 D11 D23 L24 Z13
    Date: 2005–04–21
  21. By: Antonio Geldson de Carvalho; Charles W. Calomiris; Joao Amaro de Matos
    Abstract: Venture capitalists add value to portfolio firms by obtaining and transferring information about senior managers across firms over time. Information transfer occurs on a significant scale and takes place both among a single venture capitalist%u2019s portfolio firms and between different venture capitalists%u2019 firms via a network of venture capitalists, which venture capitalists use to locate and relocate managers. Cross-sectional differences are associated with differences in the intensity with which venture capitalists network. The observable factors relevant in explaining the intensity with which venture capitalists network include: 1) the value of the information transmitted through the network, 2) the riskiness of the activities of portfolio firms, 3) the size of the venture capital fund, 4) the degree of difficulty in enticing executives to manage portfolio firms, and 5) the reputation of the venture capitalist for successfully recycling managers. These factors reflect costs and benefits to venture capitalists of participating in the network.
    JEL: G14 G24 J23
    Date: 2005–05

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