nep-bec New Economics Papers
on Business Economics
Issue of 2005‒07‒11
eighteen papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. China's exchange rate policy: the case against abandoning the dollar PEG By Laurenceson,James; Qin,Fengming
  2. The Entrepreneurial Theory of the Firm and the Theory of the Entrepreneurial Firm By Richard N. Langlois
  3. Small business credit scoring and credit availability By Allen N. Berger; W. Scott Frame
  4. Real Wage Cyclicality of Job Stayers, Within-Company Job Movers, and Between-Company Job Movers By Paul J. Devereux; Robert A. Hart
  5. Risk Perceptions and Attitudes By Miroslav Misina
  6. Consumption along the life cycle: how different is housing? By Fang Yang
  7. Gestation lags and the relationship between investment and Q in regressions By Jonathan N. Millar
  8. Learning Your Earning: Are Labor Income Shocks Really Very Persistent? By Fatih Guvenen
  9. Statistical Regularities in the Evolution of Industries. A Guide through some Evidence and Challenges for the Theory By Giovanni Dosi
  10. A synthetic protective put strategy for phased investment in projects without an outright deferral. By Sukanto Bhattacharya
  11. Too Motivated? By Van den Steen, Eric
  12. Effectiveness of Innovation Leadership Styles: A Manager's Influence on Ecological Innovation in Construction Projects By Bossink, Bart A.G.
  13. DETERMINANTS OF OUTSOURCING PRODUCTION: A Dynamic Panel Data Approach for Manufacturing Industries By Carmen Díaz Mora
  14. Earnings on the information technology roller coaster: insight from matched employer-employee data By Julie L. Hotchkiss; M. Melinda Pitts; John C. Robertson
  15. Who Are the Workers Who Never Joined a Union? Empirical Evidence from Germany By Claus Schnabel; Joachim Wagner
  16. Multilateral vertical contracting with an alternative supplier : discrimination and nondiscrimination By Caprice, S.
  17. Internal Markets for Supply Chain Capacity Allocation By McAdams, David; Malone, Thomas W.
  18. Management Transfer and Job Consciousness in Indo-Japanese Joint Ventures--Has "Japanese Style Management" Been Successfully Accepted in India?-- By Yukihiko Kiyokawa; Hiroyuki Oba; P. C. Verm

  1. By: Laurenceson,James; Qin,Fengming (Tilburg University, Center for Economic Research)
    Abstract: This paper critically evaluates the policy literature surrounding China's exchange rate regime. It first discusses several popularly raised contentions in relation to the dollar peg employed by China, which in fact are poorly grounded in evidence. These include notions that the RMB is clearly undervalued and that its value is a prominent cause of the U.S trade deficit. The paper then describes a consensus position that has emerged which argues that China should abandon the peg in favour of a flexible exchange rate regime. We see numerous weaknesses in this position but a few stand out. Moving to a flexible regime is far from the most proximate policy response to the problems that the consensus literature itself identifies in China's economy. Institutional realities that make moving to a flexible regime difficult also appear to have been seriously overlooked. The paper concludes by noting that in the longer term moving to a managed float may be in China's best interests - but for now the focus needs to be firmly in the area of domestic financial reform.
    JEL: E58 F31
    Date: 2005
  2. By: Richard N. Langlois (University of Connecticut)
    Abstract: The entrepreneurial theory of the firm argues that entrepreneurship, properly understood, is a crucial but neglected element in explaining the nature and boundaries of the firm. By contrast, the theory of the entrepreneurial firm presumably seeks not to understand the nature and boundaries of “the firm†in general but rather to understand a particular type of firm: one that is entrepreneurial. This paper is an attempt to reconcile the two. After briefly delving for the concept of entrepreneurship in the work of Schumpeter, Kirzner, and (especially) Knight, the paper makes the case for the entrepreneurial theory of the firm. In such a theory, the firm exists as the solution to a coordination problem in a world of change and uncertainty, including Knightian or structural uncertainty. Taking a historical or developmental perspective, the paper then examines the changing nature of the entrepreneurial coordination problem over the life-cycle. In this formulation, “the entrepreneurial firm†is a nascent firm or proto-firm facing a problem of coordinating systemic change in economic capabilities. Lacking (by definition) adequate guidance from existing systems of rules of conduct embedded in markets or organizations, the entrepreneurial firm typically relies on a form of organization Max Weber called charismatic authority. In the end, although there is no such thing as a non-entrepreneurial firm, firms that must solve coordination problems in a world of novelty and systemic change ("entrepreneurial firmsâ€) are perhaps the purest case of the entrepreneurial theory of the firm.
    Keywords: entrepreneurship, transaction costs, coordination, Coase, Knight, Schumpeter, Weber.
    JEL: B25 L22 M13
    Date: 2005–06
  3. By: Allen N. Berger; W. Scott Frame
    Abstract: U.S. commercial banks are increasingly using credit scoring models to underwrite small business credits. This paper discusses this technology, evaluates the research findings on the effects of this technology on small business credit availability, and links these findings to a number of research and public policy issues.
    Date: 2005
  4. By: Paul J. Devereux (University of California, Los Angeles and IZA Bonn); Robert A. Hart (University of Stirling and IZA Bonn)
    Abstract: Using the British New Earnings Survey Panel Data (NESPD) for the period 1975 to 2001 we estimate the wage cyclicality of job stayers (those remaining within single jobs in a given company), within company job movers, and between company job movers. We also examine how the proportion of internal and external job moves varies over the business cycle. We find that the wages of internal movers are slightly more procyclical and wages of external movers considerably more procyclical than those of stayers. Notwithstanding, a decomposition shows that in Britain, wage cyclicality arises almost entirely from the procyclicality of wages for job stayers, with across- and within-firm mobility playing a lesser role. Thus, there is little evidence for rigid wage models that imply that employers use changes in job titles as a means of adjusting wages to the business cycle. We also show that the distinctions between private and public sectors and between workers covered and uncovered by collective agreements have important impacts on the wage estimates of both stayers and movers.
    Keywords: wage cyclicality, job stayers, internal job movers, external job movers
    JEL: E32 J31
    Date: 2005–07
  5. By: Miroslav Misina (Bank of Canada)
    Abstract: Changes in risk perception have been used in various contexts to explain shorter-term developments in financial markets, as part of a mechanism that amplifies fluctuations in financial markets, as well as in accounts of “irrational exuberance.” This approach holds that changes in risk perception affect actions undertaken in risky situations, and create a discrepancy between the risk attitude implied by those actions and the a priori description of risk attitude as summarized by the Arrow-Pratt coefficients of risk aversion. The author characterizes this discrepancy by introducing the notion of risk perception within the expected utility theory, and proposes the concept of implied risk aversion as a summary measure of risk attitudes implied by agents’ actions. Properties of implied risk aversion are related to an individual’s future outlook. Key ideas are illustrated using an asset-pricing model.
    Keywords: risk attitudes, risk perception, expectations, asset prices
    JEL: D81 D84 G12
    Date: 2005–07–08
  6. By: Fang Yang
    Abstract: Micro data over the life cycle shows two different patterns of consumption of housing and non-housing goods: the consumption profile of non-housing goods is hump-shaped while the consumption profile for housing first increases monotonically and then flattens out. This paper develops a rich, quantitative, dynamic general equilibrium model of life cycle behavior, which generates consumption profiles consistent with the observed data. Borrowing constraints are essential in explaining the accumulation of housing assets early in life, while transaction costs are crucial in generating the slow downsizing of the housing later in life. The bequest motives play a role in determining total life time wealth, but not the housing profile.
    Date: 2005
  7. By: Jonathan N. Millar
    Abstract: Regressions of investment on Tobin's Q are misspecified in the presence of capital gestation lags because they don't distinguish between the value of existing capital and the value of capital at a future date. Current investment should be determined by the anticipated shadow value of capital at the gestation horizon. Under homogeneity conditions analogous to Hayashi[1982], this value is equal to the forecast of an adjusted version of Q. This misspecification helps to explain many pathologies in the literature: attenuated estimates of the coefficient on Q, low R2, and serially-correlated errors. Regressions using aggregate data suggest that (1) endogeneity problems associated with the standard regression of investment on Q can can be eliminated by reversing the regression, (2) forecastable changes in Q provide additional information about investment not captured in current Q, and (3) specifications that explicitly account for gestation lags yield capital adjustment costs of a more reasonable magnitude.
    Keywords: Capital investments ; Tobin's q
    Date: 2005
  8. By: Fatih Guvenen (University of Rochester)
    Abstract: The current literature offers two views on the nature of the income process. According to the first view, which we call the “restricted income profiles” (RIP) model (MaCurdy, 1982), individuals are subject to large and very persistent shocks, while facing similar life-cycle income profiles (conditional on a few characteristics). According to the alternative view, which we call the “heterogeneous income profiles” (HIP) model (Lillard and Weiss, 1979), individuals are subject to income shocks with modest persistence, while facing individual-specific income profiles. While labor income data does not seem to distinguish between the two hypotheses in a definitive way, the RIP model is overwhelmingly used to specify the income process in economic models, because it delivers implications consistent with certain features of consumption data. In this paper we study the consumption-savings behavior under the HIP model, which so far has not been investigated. In a life-cycle model, we assume that individuals enter the labor market with a prior belief about their individual-specific profile and learn over time in a Bayesian fashion. We find that learning is slow, and thus initial uncertainty affects decisions throughout the life-cycle allowing us to estimate the prior uncertainty from consumption behavior later in life. This procedure implies that 40 percent of variation in income growth rates is forecastable by individuals at time zero. The resulting model is consistent with several features of consumption data including (i) the substantial rise in within-cohort consumption inequality (Deaton and Paxson 1994), (ii) the non-concave shape of the age-inequality profile (which the RIP model is not consistent with), and (iii) the fact that consumption profiles are steeper for higher educated individuals (Carroll and Summers 1991). These results bring new evidence from consumption data on the nature of labor income risk.
    Keywords: Labor income risk, Incomplete markets, Inequality, Consumption-savings decision, Kalman filter.
    JEL: D52 D91 E21
    Date: 2005–07–07
  9. By: Giovanni Dosi
    Abstract: Fundamental drivers of the evolution of contemporary economies are the activities of search, discovery and economic exploitation of new products, new production processes, new organizational arrangements within and amongst business firms. What are their marks in terms of statistical properties that such processes display? Three basic questions in particular are addressed in this work. First, are there distinct characteristics of the microentities (in primis, business firms) and their distributions which systematically persist over time? Second, how do such characteristics within the population of competing firms affect their relative evolutionary success over time? And in particular what are the ultimate outcomes in terms of growth and profitability performances? Third, amongst the foregoing statistical properties and relations between them, which ones are invariant across industries, and, conversely, which ones depend on the technological and market characteristics of particular sectors? In order to address these questions we proceed in a sort of “inductive” manner. I start by examining some basic features of the distributions of firms sizes, growth rates and profitability. Next, I consider some evidence on the underlying inter-firm heterogeneity - particularly with regard to technological innovativeness and productivity - and their relationships with corporate performances. Finally, the work recalls the basic elements of an evolutionary interpretation of the evidence. Together with important points of corroboration of such a view - including those regarding a profound heterogeneity of firms at all levels of observation -, one also facing standing challenges - in primis, concerning the purported role of markets as effective selection devices -.
    Keywords: Industrial evolution, Size distributions, Growth rates, Heterogeneity, Fat tails, Market selection
  10. By: Sukanto Bhattacharya
    Abstract: In this paper we propose and computationally demonstrate a synthetic protective put strategy for real options. Specifically, we deal with the problem of deferral option when an outright deferral is not permissible due to competitive pressures. We demonstrate that in such a situation an appropriate strategy would be to invest in the new project in phases rather than doing it all at once. By setting the owner’s equity in the project equal to the price of a call option on the value of the project, we set up the replicating portfolio for a protective put on the project. Our method is a logical extension of the financial protective put in the real options scenario and is rather simple and practicable for businesses to adopt and apply.
    Keywords: synthetic protective put, replicating portfolio, deferral option
    JEL: G
    Date: 2005–07–04
  11. By: Van den Steen, Eric
    Abstract: I show that an agent's motivation to do well (objectively) may be unambiguously bad in a world with differing priors, i.e., when people openly disagree on the optimal course of action. The reason is that an agent who is strongly motivated is more likely to follow his own view of what should be done. As a result, the agent is more willing to disobey his principal's orders when the two of them disagree on the right course of action. This effect has a number of implications. First of all, agents who are subject to authority will have low-powered incentive pay. Second, intrinsically motivated agents will be more likely to disobey and less likely to be subject to authority. Firms with intrinsically motivated agents will need to rely on other methods than authority for coordination. Moreover, an increase in intrinsic motivation may decrease all players' expected utility, so that it may be optimal for a firm to look for employees with low intrinsic motivation. Finally, subjective performance pay may be optimal, even when the true outcome of the project is perfectly measurable and contractible. Through this analysis, the paper identifies an important difference between differing priors and private benefits (or private information): with differing priors, pay-for-performance can create agency problems rather than solving them.
    Keywords: agent motivation,
    Date: 2005–07–08
  12. By: Bossink, Bart A.G. (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics)
    Abstract: This article presents four basic innovation leadership styles: charismatic, instrumental, strategic and interactive innovation leadership. The leadership styles and their characteristics relate to process and product innovations in construction projects. A theoretical framework - which synthesizes these relations enables explorative research into the effects of leadership on organizational innovativeness. Four case studies, observing the same manager in four comparable projects, explore the effects of each leadership style on a construction project's innovativeness in ecological terms. On an analytical level the case study explorations indicate that a manager's consistent performance of a leadership style stimulates the project's ecological innovativeness when the manager also injects the project with ecological information, knowledge and competence. It also indicates that a manager's consistent performance of a leadership style, without an injection of information, knowledge and competence in the project, doesn't stimulate the project's ecological innovativeness.
    Keywords: construction; innovation; leadership; management; projects
    Date: 2004
  13. By: Carmen Díaz Mora
    Abstract: The present paper investigates the determinants of outsourcing production using a panel of 93 Spanish manufacturing industries for the period 1993-2002. Outsourcing is measured as production tasks which are contracting out to independent suppliers, a more direct and suitable indicator. After controlling for unobserved heterogeneity and simultaneity, our results show a high persistence of the outsourcing intensity. Moreover, outsourcing of production is positively related to unit labour costs, skills requirements and national ownership.
  14. By: Julie L. Hotchkiss; M. Melinda Pitts; John C. Robertson
    Abstract: This paper uses matched employer-employee data for the state of Georgia to examine workers’ earnings experience through the information technology (IT) sector’s employment boom of the mid-1990s and its bust in the early 2000s. The results show that even after controlling for individual characteristics before the sector’s boom, transitioning out of the IT sector to a non-IT industry generally resulted in a large wage penalty. However, IT service workers who transitioned to a non-IT industry still fared better than those who took a non-IT employment path. For IT manufacturing workers, there is no benefit to having worked in tech, likely because of the nontransferability of manufacturing experience to other industries.
    Date: 2005
  15. By: Claus Schnabel (University of Erlangen-Nuremberg); Joachim Wagner (University of Lueneburg and IZA Bonn)
    Abstract: Using representative data from the German social survey ALLBUS 2002 and the European Social Survey 2002/03, this paper provides the first empirical analysis of trade union nevermembership in Germany. We show that between 54 and 59 percent of all employees in Germany have never been members of a trade union. Individuals’ probability of nevermembership is significantly affected by their personal characteristics (in particular age, education and status at work), their political orientation and (to a lesser degree) their family background, and by broad location. In addition, occupational and workplace characteristics play a significant role. Most important in this regard is the presence of a union at the workplace.
    Keywords: union membership, never-membership, Germany
    JEL: J51
    Date: 2005–07
  16. By: Caprice, S.
    Abstract: This paper examines third-degree price discrimination by an intermediate supplier selling to downstream firms that have access to an alternative less efficient supplier. We allow nonlinear pricing. It is shown that banning price discrimination may raise welfare in some cases by increasing total output. The fall in the final price is a result of the dominant supplier trying to offset the reduction in profits caused by the threat of bypass by the downstream firms. ...French Abstract : Ce papier examine la discrimination en prix sur un marché intermédiaire oû un vendeur en concurrence avec un fournisseur alternatif s'adresse à plusieurs distributeurs. L'analyse est conduite en tarifs non-linéaires. Il est montré qu'interdire la discrimination peut augmenter le surplus social par un accroissement de la quantité vendue. La baisse du prix final est le résultat des contrats proposés par le fournisseur dominant qui tente de compenser un partage moins favorable du surplus de l'industrie par une concurrence accrue.
    JEL: K21 L13 L42
    Date: 2005
  17. By: McAdams, David; Malone, Thomas W.
    Abstract: This paper explores the possibility of solving supply chain capacity allocation problems using internal markets among employees of the same company. Unlike earlier forms of transfer pricing, IT now makes it easier for such markets to involve many employees, finegrained transactions, and frequently varying prices. The paper develops a formal model of such markets, proves their optimality in a baseline condition, and then analyzes various potential market problems and solutions. Interestingly, these proposed solutions are not possible in a conventional market because they rely on the firm's ability to pay market participants based on factors other than just the profitability of their market transactions. For example, internal monopolies can be ameliorated by paying internal monopolists on the basis of corporate, not individual, profits. Incentives for collusion among peers can be reduced by paying participants based on their profits relative to peers. Profit-reducing competition among different sales channels can be reduced by imposing an internal sales tax. And problems caused by fixed costs can be avoided by combining conditional internal markets with a pivot mechanism.
    Keywords: supply chain capacity, internal markets,
    Date: 2005–07–08
  18. By: Yukihiko Kiyokawa; Hiroyuki Oba; P. C. Verm
    Abstract: This paper aims to analyze the effect of "Japanese style management" on job-consciousness at Indo-Japanese joint ventures. Our analysis for this purpose is focused on uncovering the differences in job-consciousness between the joint ventures and indigenous firms. The transfer of management, which is essentially a transfer of a portion of culture, necessarily colors the job-consciousness in the recipient firms. To prove this hypothesis, we conducted a structured interview survey in 1998 at three Indo-Japanese joint ventures and two Indian firms. Then we confirmed, through canonical discriminant analysis applied to our survey data, that (1) the introduction of various Japanese management practices promoted 'a sense of unity' and 'job satisfaction,' and (2) such management was welcome particularly by workers in the joint ventures, since those practices partly realized egalitarianism in the firm.
    Date: 2005–07

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