nep-bec New Economics Papers
on Business Economics
Issue of 2005‒10‒22
twenty-one papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Fear of Service Outsourcing: Is it Justified? By Mary Amiti; Shang-Jin Wei
  2. The Elusive Gains from International Financial Integration By Pierre-Olivier Gourinchas; Olivier Jeanne
  3. International Capital Flows, Returns and World Financial Integration By Martin D. D. Evans (Georgetown University) and Viktoria Hnatkovska (Georgetown University)
  4. Une étude économétrique de l’impact des dépenses publiques et des prélèvements fiscaux sur l’activité économique au Québec et au Canada By Louis Phaneuf; Étienne Wasmer
  5. Work Hours, Wages, and Vacation Leave By Joseph G. Altonji; Emiko Usui
  6. High-Order Consumption Moments and Asset Pricing By Andrei Semenov
  7. An Empirical Assessment of a Consumption CAPM with a Reference Level under Incomplete Consumption Insurance By Andrei Semenov
  8. Sticky prices, fair wages, and the co-movements of unemployment and labor productivity growth By Fabien Tripier
  9. Solving General Equilibrium Models with Incomplete Markets and Many Assets By Martin D. D. Evans; Viktoria Hnatkovska
  10. The Choice of the Agenda in Labor Negotiations: Efficiency and Behavioral Considerations By Manfred Königstein; Marie-Claire Villeval
  11. Employment Dynamics and Business Relocation: New Evidence from the National Establishment Time Series By David Neumark; Junfu Zhang; Brandon Wall
  12. The Knowledge Spillover Theory of Entrepreneurship By Zoltan J. Acs; David B. Audretsch; Pontus Braunerhjelm; Bo Carlsson
  13. Executive Compensation, Firm Performance, and Corporate Governance in China: Evidence from Firms Listed in the Shanghai and Shenzhen Stock Exchanges By Takao Kato; Cheryl Long
  14. Executive Compensation, Firm Performance, and Chaebols in Korea: Evidence from New Panel Data By Takao Kato; Woochan Kim; Ju Ho Lee
  15. Vocational Training and Gender: Wages and Occupational Mobility among Young Workers By Bernd Fitzenberger; Astrid Kunze
  16. Organizational Loyalties and Models of Firms: Governance Design and Standard of Duties By Fabrizio Cafaggi
  17. Why Are Similar Workers Paid Differently? The Role of Social Networks By François Fontaine
  18. Establishment Size and the Dispersion of Wages: Evidence from European Countries By Thierry Lallemand; François Rycx
  19. 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
  20. Dynamic Agency with Career Concerns: a Recursive Framework By Jeremy Bertomeu
  21. Nonparametric Risk Management with Generalized Hyperbolic Distributions By Ying Chen; Wolfgang Härdle; Seok-Oh Jeong

  1. By: Mary Amiti; Shang-Jin Wei
    Abstract: The recent media and political attention on service outsourcing from developed to developing countries gives the impression that outsourcing is exploding. As a result, workers in industrial countries are anxious about job losses. This paper aims to establish what are the hypes and what are the facts. The results show that although service outsourcing has been steadily increasing it is still very low, and that in the United States and many other industrial countries "insourcing" is greater than outsourcing. Using the United Kingdom as a case study, we find that job growth at a sectoral level is not negatively related to service outsourcing.
    Keywords: Employment , United States , United Kingdom ,
    Date: 2004–10–13
  2. By: Pierre-Olivier Gourinchas; Olivier Jeanne
    Abstract: Standard theoretical arguments tell us that countries with relatively little capital benefit from financial integration as foreign capital flows in and speeds up the process of income convergence. We show in a calibrated neoclassical model that conventionally measured welfare gains from this type of convergence appear relatively limited for developing countries. The welfare gain from switching from financial autarky to perfect capital mobility is roughly equivalent to a 1 percent permanent increase in domestic consumption for the typical non-OECD country. This is negligible relative to the welfare gain from a take-off in domestic productivity of the magnitude observed in some of these countries.
    Keywords: Capital flows , International financial system , International capital markets , Developing countries , Consumption , Productivity , Economic growth , Economic models ,
    Date: 2004–05–21
  3. By: Martin D. D. Evans (Georgetown University) and Viktoria Hnatkovska (Georgetown University) (Department of Economics, Georgetown University)
    Abstract: International capital flows have increased dramatically since the 1980s, with much of the increase being due to trade in equity and debt markets. Such developments are often attributed to the increased integration of world financial markets. We present a model that allows us to examine how greater integration in world financial markets affects the behavior of international capital flows and financial returns. Our model predicts that international capital flows are large (in absolute value) and very volatile during the early stages of financial integration when international asset trading is concentrated in bonds. As integration progresses and households gain access to world equity markets, the size and volatility of international bond flows fall dramatically but continue to exceed the size and volatility of international equity flows. This is the natural outcome of greater risk sharing facilitated by increased integration. We find that the equilibrium flows in bonds and stocks are larger than their empirical counterparts, and are largely driven by variations in equity risk premia. The paper also makes a methodological contribution to the literature on dynamic general equilibrium asset-pricing. We implement a new technique for solving a dynamic general equilibrium model with production, portfolio choice and incomplete markets. Classification-JEL Codes: D52; F36; G11.
    Keywords: Globalization; Portfolio Choice; Financial Integration; Incomplete Markets; Asset Prices.
  4. By: Louis Phaneuf; Étienne Wasmer
    Abstract: What is the impact of government policy on economic activity in Quebec and Canada? Do taxes have a distorsive effect? Does spending stimulate activity? Is the net outcome positive, neutral or negative from a macroeconomic perspective? We address these questions here. We attempt to clarify the relative merits of several empirical strategies and then propose a series of answers in the context of Quebec and Canada, for which we measure, in particular, the quantitative impact of taxes and public spending on GDP. For this purpose, we use a semi-structural vector-autoregressive approach (SVAR). For the first time, we apply this methodology to Quebec as a result of the recent availability of quarterly time-series data. Our main findings are as follows. 1) Fiscal shocks and spending shocks are relatively persistent the latter being more persistent; 2) output shocks are the most persistent of all shocks; 3) public spending generates more output in the short run, but the increase is modest; 4) distorsive effects of taxes reduce output; 5) when the effects 3) and 4) propagate over time, negative effects of taxes seem to dominate after a few years. Two additional results, the robustness of which needs to be checked, open interesting new perspective. We find that 6) spending multipliers are smaller at the federal level with respect to the provincial level and 7) distorsive effects of taxes seem to be larger. <P>Quel est l’impact des politiques des gouvernements sur l’activité économique au Québec et au Canada ? Les taxes ont-elles un effet négatif par les distorsions qu’elles induisent ? Les dépenses stimulent-elles l’activité ? Le bilan est-il neutre, positif ou négatif d’un point de vue macroéconomique ? Nous proposons ici d’adresser ces questions, de clarifier les mérites respectifs des diverses approches empiriques et de proposer une série de réponses dans le contexte du Québec et du Canada. Nous mesurons en particulier l’impact quantitatif des dépenses publiques et des prélèvements fiscaux sur l’activité économique dans ces deux zones géographiques. Pour cela, nous utilisons une approche économétrique de type vecteurs-autorégressifs qui peut être qualifiée de « semi-structurelle » (SVAR). Pour la première fois, nous appliquons ce type d’approche à l’économie québécoise en raison de la disponibilité récente de données trimestrielles se rapportant à certains agrégats nécessaires à la réalisation d’une telle étude. Nos principaux résultats sont les suivants : 1) les chocs fiscaux et les chocs de dépenses sont relativement persistants, surtout en ce qui concerne les dépenses; 2) de tous les chocs étudiés, les chocs d’activité sont les plus persistants; 3) les dépenses publiques influent sur l’activité économique à court terme, mais modestement; 4) les effets distorsifs des taxes réduisent l’activité économique; 5) lorsque les effets cumulés des mécanismes 3) et 4) se propagent dans le temps, les effets négatifs des taxes semblent l’emporter après quelques années. Quant aux deux autres résultats dont la robustesse reste à vérifier mais qui ouvrent des perspectives intéressantes : 6) les multiplicateurs de dépense au niveau fédéral sembleraient inférieurs par rapport à ceux au niveau provincial, et 7) les effets distorsifs des taxes y seraient plus forts.
    Keywords: distortionary taxes, economic activity, government spending, SVAR, activité économique, dépenses budgétaires, prélèvements fiscaux, effets distorsifs des taxes, SVAR
    Date: 2005–10–01
  5. By: Joseph G. Altonji; Emiko Usui
    Abstract: Using the Panel Study of Income Dynamics and the Health and Retirement Study, we provide a set of facts about vacation leave and its relationship to hours worked, hours constraints, wage rates, worker characteristics, spouse's vacation leave, labor market experience, job tenure, occupation, industry, and labor market conditions. We show that on average vacation time taken rises 1 to 1 with paid vacation but varies around it, that annual hours worked fall by about 1 full time week with every week of paid vacation, that the gap between time taken and time paid for is higher for women, union members, and government workers, that hourly wage rates have a strong positive relationship with paid vacation weeks both in the cross section and across jobs, and that nonwage compensation is positively related to vacation weeks. We provide evidence that vacation leave is determined by broad employer policy rather than by negotiation between the worker and firm. In particular, it is strongly related to job seniority but depends very little on labor market experience, and for job changers it is only weakly related to the amount of vacation on the previous job.
    JEL: J2
    Date: 2005–10
  6. By: Andrei Semenov (Department of Economics, York University)
    Abstract: This paper develops an approximate equilibrium factor model for asset returns. In this model, the pricing factors are the cross-moments of return with the cross-sectional moments of individual consumption and the signs of the risk factor coefficients are driven by preference assumptions. Using household-level quarterly consumption data from the U.S. Consumer Expenditure Survey, we find that this model explains the observed equity premium with an economically realistic value of risk aversion when the stochastic discount factor is expressed in terms of the cross-sectional skewness and kurtosis, in addition to the mean and variance, of individual consumption.
    Keywords: asset pricing, equity premium, Euler equation, heterogeneous consumers, incomplete consumption insurance.
    JEL: G12
    Date: 2003–12
  7. By: Andrei Semenov (Department of Economics, York University)
    Abstract: We study asset pricing implications of the preference specification in which an agent derives utility from both the ratio of his consumption to some reference level and this level itself under incomplete consumption insurance and limited asset market participation. Assuming that the reference level responds gradually to changes in aggregate consumption per capita, we show that when asymmetry in individual consumption is taken into account, the obtained estimate of the elasticity of intertemporal substitution is in the conventional range and significantly different from the inverse of the relative risk aversion (RRA) coefficient as the definition of assetholders is tightened. Both the power utility model and the ratio preference specification are rejected statistically.
    Keywords: incomplete consumption insurance, intertemporal substitution, limited asset market participation, risk aversion
    JEL: G12
    Date: 2003–12
  8. By: Fabien Tripier (EconomiX - University of Paris X Nanterre)
    Abstract: This paper studies the co-movements of unemployment and labor productivity growth for the U.S. economy. Measures of co-movements in the frequency domain indicate that co-movements between variables differ strongly according to the frequency. First, long-term and business cycle co-movements are larger than short-term co-movements. Second, co- movements are negative in the short and long run, but positive over the business cycle. A New Keynesian model that combines nominal rigidity on the goods market (sticky prices) and real rigidity on the labor market (fair wages) is shown to be quantitatively consistent with the observed co-movements both in the long term and over the business cycle. However, the model fails to explain the short-term co-movements.
    Keywords: growth, unemployment, sticky prices, fair wages, spectral analysis
    JEL: C32 E31 E32 J41
    Date: 2005–10–18
  9. By: Martin D. D. Evans; Viktoria Hnatkovska
    Abstract: This paper presents a new numerical method for solving general equilibrium models with many assets. The method can be applied to models where there are heterogeneous agents, time-varying investment opportunity sets, and incomplete markets. It also can be used to study models where the equilibrium dynamics are non-stationary. We illustrate how the method is used by solving a one-- and two-sector versions of a two--country general equilibrium model with production. We check the accuracy of our method by comparing the numerical solution to the one-sector model against its known analytic properties. We then apply the method to the two-sector model where no analytic solution is available.
    JEL: C68 D52 G11
    Date: 2005–10
  10. By: Manfred Königstein (University of Erfurt and IZA Bonn); Marie-Claire Villeval (GATE (CNRS, University Lumière Lyon 2, Ecole Normale Supérieure LSH) and IZA Bonn)
    Abstract: The labor economics literature has shown that the "efficient bargaining" model, in which wage and employment are negotiated simultaneously, is less frequently used on unionized markets than the less efficient "right-to-manage" model, in which wage is determined via bargaining and employment determined subsequently and unilaterally by the firm. This paper reports an experiment in which the choice of the bargaining agenda is endogenous within a noncooperative game. We find that participants show a preference for decision authority and choose single-issue bargaining in most cases even though efficiency is lower than in multiissue bargaining. Furthermore, multi-issue bargaining induces unions to offer smaller payoff shares and leads to a higher conflict rate than in a single-issue bargaining.
    Keywords: bargaining agenda, efficient contracts, right-to-manage, decision authority, experiments
    JEL: C72 C78 C91 J51 J53
    Date: 2005–09
  11. By: David Neumark (Public Policy Institute of California, NBER and IZA Bonn); Junfu Zhang (Public Policy Institute of California); Brandon Wall (Public Policy Institute of California)
    Abstract: We analyze and assess new evidence on employment dynamics from a new data source – the National Establishment Time Series (NETS). The NETS offers advantages over existing data sources for studying employment dynamics, including tracking business establishment relocations that can contribute to job creation or destruction on a regional level. Our primary purpose in this paper is to assess the reliability of the NETS data along a number of dimensions, and we conclude that it is a reliable data source although not without limitations. We also illustrate the usefulness of the NETS data by reporting, for California, a full decomposition of employment change into its six constituent processes, including job creation and destruction stemming from business relocation, which has figured prominently in policy debates but on which there has been no systematic evidence.
    Keywords: job creation, job destruction, employment dynamics, business relocation
    JEL: J2 C8 L0
    Date: 2005–09
  12. By: Zoltan J. Acs; David B. Audretsch; Pontus Braunerhjelm; Bo Carlsson
    Abstract: Contemporary theories of entrepreneurship generally focus on the decision-making context of the individual. The recognition of opportunities and the decision to commercialize them is the focal concern. While the prevalent view in the entrepreneurship literature is that opportunities are exogenous, the most prevalent theory of innovation in the economics literature suggests that opportunities are endogenous. This paper bridges the gap between the entrepreneurship and economic literature on opportunity by developing a knowledge spillover theory of entrepreneurship. The basic argument is that knowledge created endogenously via R&D results in knowledge spillovers. Such spillovers give rise to opportunities to be identified and exploited by entrepreneurs. Our results show that there is a strong relationship between knowledge spillovers and new venture creation.
    Keywords: Opportunity, knowledge, entrepreneurship, management science
    JEL: O3 R1 J24 M13
    Date: 2005–10
  13. By: Takao Kato (Colgate University, Columbia University and IZA Bonn); Cheryl Long (Colgate University, Stanford University and University of Electronic Science and Technology of China)
    Abstract: This paper provides evidence on how executive compensation relates to firm performance in listed firms in China. Using comprehensive financial and accounting data on China’s listed firms from 1998 to 2002, augmented by unique data on executive compensation and ownership structure, we find for the first time statistically significant sensitivities and elasticities of annual cash compensation (salary and bonus) for top executives with respect to shareholder value in China. In addition, sales growth is shown to be significantly linked to executive compensation and that Chinese executives are penalized for making negative profit although they are neither penalized for declining profit nor rewarded for rising profit insofar as it is positive. Perhaps more importantly, we find that ownership structure of China’s listed firms has important effects on pay-performance link in these firms. Specifically state ownership of China’s listed firms is weakening pay-performance link for top managers and thus possibly making China’s listed firms less effective in solving the agency problem. As such, ownership restructuring may be needed for China to successfully transform its SOEs to efficient modernized corporations and reform its overall economy.
    Keywords: executive compensation, firm performance, corporate governance, ownership structure, China, and transition economies
    JEL: M52 M12 J33 P31 P34 O16 G30 O53 G15
    Date: 2005–09
  14. By: Takao Kato (Colgate University, Columbia University and IZA Bonn); Woochan Kim (KDI School of Public Policy and Management); Ju Ho Lee (KDI School of Public Policy and Management)
    Abstract: This paper provides the first rigorous econometric estimates on the pay-performance relations for executives of Korean firms with and without Chaebol affiliation. To do so, we have assembled for the first time panel data (that provide information not only on executive compensation and firm performance but also on Chaebol affiliation) for 246 firms that were included in KOSPI200 for at least two consecutive years from 1998 to 2001. Contrary to a popular belief that Korean corporate governance and the structure of Korean executive compensation is considerably different from elsewhere in the West, we find that cash compensation of Korean executives is statistically significantly related to stock market performance and that the magnitude of the sensitivity of pay to stock market performance is comparable to the U.S. and Japan. Perhaps even more importantly, further analysis reveals for the first time that such overall significant executive pay-performance link is driven by non- Chaebol firms and that no such link exists for Chaebol firms. The evidence is consistent with the recent literature on the nature of Chaebols in Korea and the current corporate governance reform efforts in Korea that are aimed mostly at Chaebol firms.
    Keywords: executive compensation, firm performance, corporate governance, Korea, Chaebols
    JEL: M52 M12 G30 G15 J33 O53
    Date: 2005–09
  15. By: Bernd Fitzenberger (Goethe University Frankfurt, ZEW, IFS and IZA Bonn); Astrid Kunze (Norwegian School of Economics and Business Administration and IZA Bonn)
    Abstract: This paper investigates the relationship between the gender wage gap, the choice of training occupation, and occupational mobility. We use longitudinal data for young workers with apprenticeship training in West Germany. Workers make occupational career choices early during their careers and women and men pursue very different occupational careers. We reconsider whether through occupational segregation women are locked in low wage careers (Kunze, 2005) or whether they can move up to higher wage paths through mobility. We furthermore investigate whether patterns have changed across cohorts during the period 1975 and 2001 and whether effects vary across the distribution. The main results are: First, while there exists a persistent gender wage gap over experience, the gap has decreased over time. Second, in the lower part of the wage distribution, the gap is highest and it increases with experience. Third, occupational mobility is lower for women than for men and the wage gains due to occupational mobility are higher for men than for women, especially in the lower part of the wage distribution. We conclude that occupational mobility has reduced the gender wage gap, but lock-in effects are still stronger for women compared to men.
    Keywords: gender wage gap, actual experience, occupational mobility, apprenticeship
    JEL: C21 J16 J24 J31 J62 J7
    Date: 2005–09
  16. By: Fabrizio Cafaggi
    Abstract: This paper makes the two following claims: 1) The legal dimension of loyalty within organizations goes beyond duties. The governance design aimed at ensuring loyalty may strongly affect standards that characterize each layer of the organization. The interaction between standards of duty and the governance dimension of loyalty should, therefore, be more tailored to specific legal forms and their functional correlation with ownership and financing. 2) There is a greater divergence than has so far been acknowledged between the function of loyalty in vertically integrated firms and in networks of small firms. This difference, created by the relationship between the duty and the governance dimensions, should have repercussions on the definitions of legal standards. In particular, it should reflect the different relationships between hierarchy, monitoring, and loyalty and the choice between prohibitory, authorization-based, and compensatory rules. The analysis concentrates on the key variables that may affect the choice between vertical and horizontal monitoring to ensure compliance with loyal behavior in two polar models: hierarchical firms and networks of small firms. It reveals the importance of considering the governance design when defining duties of loyalty and related standards to evaluate party-related transactions in both cases but, at the same time, the necessity of using different interpretive categories
    Date: 2005–05–01
  17. By: François Fontaine (GREMARS, Université Lille 3 and IZA Bonn)
    Abstract: We provide a matching model where identical workers are embedded in ex-ante identical social networks. Job arrival rate is endogenous and wages are bargained. We study the evolution of networks over time and characterize the equilibrium distribution of unemployment rates across networks. We emphasize that wage dispersion arises endogenously as the consequence of the dynamics of networks, firms’ strategies and wage bargaining. Moreover, contrary to a generally accepted idea, social networks do not necessary induce stickiness in unemployment dynamics. Our endogenous matching technology shows that the effects of networks on the dynamics mostly hinge on search externalities. Our endogenous framework allows us to quantify these effects.
    Keywords: social networks, matching, wage dispersion
    JEL: E24 J64 J68
    Date: 2005–09
  18. By: Thierry Lallemand (Université Libre de Bruxelles, DULBEA and Centre de Comptabilité, Planning et Contrôle); François Rycx (Université Libre de Bruxelles, DULBEA and IZA Bonn)
    Abstract: We investigate how the wage distribution differs among small and large establishments in four European countries. Findings show that within-establishment wage dispersion rises with size because large employers have a more diverse workforce. They also suggest that screening and monitoring costs imply a lower sensitivity of wages to ability in larger establishments. Smaller establishments are found to rely more on incentive-based pay mechanisms, particularly in countries with a low trade union coverage rate. Further results indicate that between-establishment wage dispersion decreases with employer size because smaller establishments are technologically more diversified and hence exhibit greater diversity in average workforce skills.
    Keywords: wage structure, establishment size, decomposition of wages, Europe
    JEL: J21 J31
    Date: 2005–09
  19. By: Bruce Fallick (Federal Reserve Board of Governors); Charles A. Fleischman (Federal Reserve Board of Governors); James B. Rebitzer (Case Western Reserve University, Levy Institute, NBER and IZA Bonn)
    Abstract: In Silicon Valley's computer cluster, skilled employees are reported to move rapidly between competing firms. 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. Using a formal model of innovation we identify conditions where the innovation benefits of job-hopping exceed the costs from reduced incentives to invest in human capital. These conditions likely hold for computers, but not in most other settings. Features of state law also favor high rates of inter-firm mobility in California. Outside of California, employers can use non-compete agreements to inhibit mobility, but these agreements are unenforceable in California. 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. Consistent with our model of innovation, we also find that outside of the computer industry, California’s mobility rates are no higher than elsewhere.
    Keywords: job mobility, industrial clusters, Silicon Valley, innovation, knowledge spillovers, non-compete agreements
    JEL: R12 L63 O3 J63 J48
    Date: 2005–10
  20. By: Jeremy Bertomeu (Carnegie Mellon University)
    Abstract: This paper investigates the design of a long-term compensation contract between a principal and an agent in the presence of career concerns and moral hazard. Specifically, the output history must be interpreted simultaneously as a signal on the productivity of the partnership and on the action choices of the agent. I consider a stationary formulation of the problem where in addition to the continuation utility, the beliefs of the principal \textit{and} the agent are used as state variables. A deviation from equilibrium action choices will trigger an incorrect update of the prior of the principal. The continuation utility will correspond to the maximum feasible utility for a given belief of the agent and given that the principal implements a contract based on a possibly wrong prior. The model unifies the existing literature on agency theory and learning.
    Keywords: Dynamic Agency, Learning, Mechanism Design
    JEL: C7 D1 D31 D80 D82
    Date: 2005–10–18
  21. By: Ying Chen; Wolfgang Härdle; Seok-Oh Jeong
    Abstract: In this paper we propose the GHADA risk management model that is based on the generalized hyperbolic (GH) distribution and on a nonparametric adaptive methodology. Compared to the normal distribution, the GH distribution possesses semi-heavy tails and represents the financial risk factors more appropriately. The nonparametric adaptive methodology has the desirable property of estimating homogeneous volatility in a short time interval. For DEM/USD exchange rate data and a German bank portfolio data the proposed GHADA model provides more accurate value at risk calculation than the traditional model based on the normal distribution. All calculations and simulations are done with XploRe.
    Keywords: adaptive volatility estimation, generalized hyperbolic distribution, value at risk, risk management
    JEL: C
    Date: 2004–10

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