nep-bec New Economics Papers
on Business Economics
Issue of 2005‒11‒05
twenty papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Accounting for the secular “decline” of U.S. manufacturing By Milton Marquis; Bharat Trehan
  2. Estimates of home mortgage originations, repayments, and debt on one-to-four-family residences By Alan Greenspan; James Kennedy
  3. Too big to fail after all these years By Donald P. Morgan; Kevin J. Stiroh
  4. Assessing high house prices: bubbles, fundamentals, and misperceptions By Charles Himmelberg; Christopher Mayer; Todd Sinai
  5. Financial crises and total factor productivity By Felipe Meza; Erwan Quintin
  6. Will China Eat Our Lunch or Take Us to Dinner?—Simulating the Transition Paths of the U.S., E.U., Japan, and China By Hans Fehr; Sabine Jokisch,; Laurence J. Kotlikoff
  7. Explaining Union Organising During Corporate Mergers By Hyllman, Peter; Gunnarsson, Oskar
  8. Collateral, credit history, and the financial decelerator By Ronel Elul
  9. A New International Division of Labor in Europe: Offshoring and Outsourcing to Eastern Europe By Marin, Dalia
  10. From localized to corporate excellence: How do MNCs extract, combine and disseminate sticky knowledge from regional innovation systems? By Poul Houman Andersen; Poul Rind Christensen
  11. Too Large or Too Small? Returns to Scale in a Retail Network By Frantisek Brazdik; Viliam Druska
  12. Creating a policy environment for entrepreneurs By Thomas A. Garrett; Howard J. Wall
  13. Ownership Structure, Control and Firm Performance: The Effects of Vote Differentiated Shares By Bjuggren, Per-Olof; Eklund, Johan; Wiberg, Daniel
  14. Managing Quality under Heterogeneous Consumer Demand and Product Quality By Carriquiry, Miguel A.; Babcock, Bruce A.
  15. High Performance Workplaces and Family Friendly Practices: Promises Made and Promises Kept By John S. Heywood; W.S. Siebert; Xiangdong Wei
  16. Age Structure of the Workforce and Firm Performance By Christian Grund; Niels Westergård-Nielsen
  17. Knowledge Compensation in the German Automobile Industry By Uwe Cantner; Kristina Dreßler; Jens J. Krüger
  18. Job Hopping in Silicon Valley: Some Evidence Concerning the Micro-Foundations of a High Technology Cluster By Brice Fallick; Charles A. Fleischmann; James A. Rebitzer
  19. Capital Structure and Seniority in Entrepreneurial Firms By Filippo Ippolito
  20. Takeover Defenses, Firm-Specific Skills and Managerial Entrenchment By Filippo Ippolito

  1. By: Milton Marquis; Bharat Trehan
    Abstract: The share of employment in manufacturing as well as the relative price of manufactures has declined sharply over the postwar period, while the share of manufacturing output relative to GDP has remained roughly constant. Household preferences turn out to play a key role in reconciling this behavior with a closed-economy, two-sector model with differential rates of productivity growth. We show that the data imply that households are not willing to substitute between the two goods at all and also that this inference is independent of whatever the income elasticity of demand for services might be. Because we are unable to account for the entire decline in employment over this period, we expand the model to allow for manufactured exports. While this does not change our estimate of the elasticity of substitution, it does improve the model’s ability to explain the decline in relative employment in the 1990s. However, larger errors in the 1970s remain unexplained.
    Keywords: Manufactures ; Employment ; Productivity ; Economic conditions - United States
    Date: 2005
  2. By: Alan Greenspan; James Kennedy
    Abstract: Since 1997, when the Department of Housing and Urban Development discontinued its quarterly gross mortgage flow system, there has been no systematic attempt to disaggregate the net change in outstanding home mortgage debt into its constituent gross flows. Using a different approach, we have developed a system that reconciles the change in regular home mortgage debt with mortgage flows. The latter includes home purchase and refinance originations, and mortgage purchases, sales, and repayments for five types of mortgage originators and six categories of other mortgagees. In the process, we derive the sources of equity extraction from homes financed by mortgages.
    Date: 2005
  3. By: Donald P. Morgan; Kevin J. Stiroh
    Abstract: The naming of eleven banks as "too big to fail (TBTF)" in 1984 led bond raters to raise their ratings on new bond issues of TBTF banks about a notch relative to those of other, unnamed banks. The relationship between bond spreads and ratings for the TBTF banks tended to flatten after that event, suggesting that investors were even more optimistic than raters about the probability of support for those banks. The spread-rating relationship in the 1990s remained flatter for TBTF banks (or their descendants) even after the passage of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), suggesting that investors still see those banks as TBTF. Until investors are disabused of such beliefs, investor discipline of big banks will be less than complete.
    Keywords: Bank management ; Bank failures ; Corporate bond
    Date: 2005
  4. By: Charles Himmelberg; Christopher Mayer; Todd Sinai
    Abstract: We construct measures of the annual cost of single-family housing for 46 metropolitan areas in the United States over the last 25 years and compare them with local rents and incomes as a way of judging the level of housing prices. Conventional metrics like the growth rate of house prices, the price-to-rent ratio, and the price-to-income ratio can be misleading because they fail to account both for the time series pattern of real long-term interest rates and predictable differences in the long-run growth rates of house prices across local markets. These factors are especially important in recent years because house prices are theoretically more sensitive to interest rates when rates are already low, and more sensitive still in those cities where the long-run rate of house price growth is high. During the 1980s, our measures show that houses looked most overvalued in many of the same cities that subsequently experienced the largest house price declines. We find that from the trough of 1995 to 2004, the cost of owning rose somewhat relative to the cost of renting, but not, in most cities, to levels that made houses look overvalued.
    Keywords: Housing - Prices ; Interest rates ; Metropolitan areas - Statistics ; Rental housing ; Regional economics
    Date: 2005
  5. By: Felipe Meza; Erwan Quintin
    Abstract: Total factor productivity (TFP) falls markedly during financial crises, as we document with recent evidence from Mexico and Asia. These falls are unusual in magnitude and present a difficult challenge for the standard small open economy neoclassical model. We show in the case of Mexico’s 1994-95 crisis that the model predicts that inputs and output should have fallen much more than they did. Using models with endogenous factor utilization, we find that capital utilization and labor hoarding can account for a large fraction of the TFP fall during the crisis. However, these models also predict that output should fall significantly more than in the data. Given the behavior of TFP, the biggest challenge may not be explaining why output falls so much following financial crises, but rather why it falls so little.
    Keywords: Financial crises - Mexico
    Date: 2005
  6. By: Hans Fehr (University of Wuerzberg); Sabine Jokisch, (University of Wuerzberg); Laurence J. Kotlikoff (Boston University, National Bureau of Economic Research)
    Abstract: This paper develops a dynamic, life-cycle, general equilibrium model to study the interdependent demographic, fiscal, and economic transition paths of China, Japan, the U.S., and the EU. Each of these countries/regions is entering a period of rapid and significant aging that will require major fiscal adjustments. But the aging of these societies may be a cloud with a silver lining coming, in this case, in the form of capital deepening that will raise real wages. China eventually becomes the world’s saver and, thereby, the developed world’s savoir with respect to its long-run supply of capital and long-run general equilibrium prospects. And, rather than seeing the real wage per unit of human capital fall, the West and Japan see it rise by one fifth percent by 2030 and by three fifths by 2100. Even if the Chinese saving behavior gradually approaches that of Americans, developed world real wages per unit of human capital are roughly 17 percent higher in 2030 and 4 percent higher at the end of the century. Without China they’d be only 2 percent higher in 2030 and 4 percent lower at Century’s end. The short-run outflow of capital to China is met with a commensurate short-run reduction in developed world labor supply, leaving the short-run ratio of physical capital to human capital, on which wages positively depend, actually somewhat higher than would otherwise be the case. On the other hand, our findings about the developed world’s fiscal condition are quite troubling. Even under the most favorable macroeconomic scenario, tax rates will rise dramatically over time in the developed world to pay baby boomers their governmentpromised pension and health benefits. As Argentina has so recently shown, countries can grow quite well for years even with unsustainable fiscal policies. But if they wait too long to address those policies, the financial markets will do it for them, with often quite ruinous consequences.
    Date: 2005–09
  7. By: Hyllman, Peter (Center for People and Organization); Gunnarsson, Oskar
    Abstract: With the emergence of transnational corporations and the resulting internationalisation of union co-determination, unions are found to organise themselves ineffectively in order to deal with this development. This paper attempts to offer a preliminary explanation as to why unions organise themselves in any given way during corporate mergers. A major literature review as well as an in depth case study constitute the basis for the explanation provided in this paper. Our literature study identify five major ideals of union organising, shaping the ways in which unions organise themselves in order to maintain legitimacy. Our in depth case study reveal how these ideals come into play in practice and how actors in a union organising process (re)produce these ideals in resolving issues regarding organisational identity and governance. We integrate our findings in presenting a conceptual model of union organising within transnational corporations, highlighting the diverse interrelationship between ideals as well as between ideals and actors.
    Keywords: Union; transnational corporation; industrial relations; co-determination; corporate democracy
    Date: 2005–10–20
  8. By: Ronel Elul
    Abstract: The author develops a simple model in which nancial imperfections can serve to stabilize aggregate uctuations and not merely aggravate them as in much of the previous literature; the author terms this a nancial decelerator. In the model agents borrow to purchase housing and secure their loans with this long-lived asset. There are two nancial imperfections in this model. First, agents are unable to commit to repay their loans — that is, they can strategically default. This limits the amount that lenders are willing to offer. In addition, however, lenders are also imperfectly informed as to a borrower’s propensity to default; that is, there is adverse selection. The latter imperfection implies that default may actually occur in equilibrium, unlike in much of the previous literature. For relatively high house prices the commitment problem ensures that the equilibrium is typically characterized by a standard nancial accelerator; that is, the borrowing constraints which prevent default become tighter as falling prices reduce the wealth with which agents can collateralize future loans, thereby exacerbating aggregate uctuations. However, Elul shows that when prices are very low, agents will default, which serves as a stabilizing force; he terms this a nancial decelerator.
    Date: 2005
  9. By: Marin, Dalia
    Abstract: Europe is reorganizing its international value chain. I document these changes in Europe?s international organization of production with new survey data of Austrian and German firms investing in Eastern Europe. I show estimates of the share of intra-firm trade between Austria and Germany on the one hand and Eastern Europe on the other. Furthermore, I present empirical evidence of the drivers of the new division of labor in Europe. I find among other things that falling trade costs and falling corruption levels as well as improvements in the contracting environment in Eastern Europe are affecting the level of intra-firm imports from Eastern Europe. They are also favoring outsourcing over offshoring. Low organizational costs of hierarchies and large costs of hold-up (when there are no alternative investors in Old Europe or no alternative suppliers in Eastern Europe) are favoring offshoring over outsourcing. Tax holidays granted by host countries in Eastern Europe also mildly affect the organizational choice.
    JEL: O11 L14 F11 D51 D23
    Date: 2005–09
  10. By: Poul Houman Andersen; Poul Rind Christensen
    Abstract: MNCs and regional innovation systems differ widely in their knowledge generation and dissemination processes. We propose these differences provide systematic challenges for MNC units tapping into locally vested skills, combining their findings with existing knowledge and disseminating this internally. Our aim is to develop a framework for conceptualising the knowledge transfer process between MNCs and regional innovation systems. For that purpose we develop a conceptual model of the knowledge tapping process and a set of propositions.
    Keywords: MNCs; Knowledge management; Industrial districts
    JEL: D83 F23
    Date: 2005
  11. By: Frantisek Brazdik; Viliam Druska
    Abstract: Performance in retailing is usually evaluated by routine use of ratio analysis, but due to the univariate nature of this simple management tool there are many drawbacks to the obtained results. Therefore, the aim of this study is to demonstrate successful employment of parametric and non–parametric methods for evaluating technical performance in retailing. We also show how to utilize DEA results, when parametric methods do not satisfactorily perform due to their strict distributional assumptions. Results of this study are used to optimize the retail chain of a European mobile telecommunication network operator by providing estimates of and recommendations for improvements in the productive efficiency of the chain operations. Estimates of store–level technical and scale efficiency indicate that a majority of stores are operating in the decreasing returns to scale region of the production possibility set. The employed methodology allows us to identify input excesses and to address a means of reducing them.
    Keywords: Data envelopment analysis application, linear programming, ef-ficiency, retail units
    JEL: C14 C44 D24 L81
    Date: 2005–09
  12. By: Thomas A. Garrett; Howard J. Wall
    Abstract: This paper demonstrates that levels of entrepreneurship can be greatly affected by the general policy environment. Using a state-level panel, we estimate the effects of several policy variables on rates of entrepreneurship and find that bankruptcy exemptions, corporate tax rates, and the level of the minimum wage all affect a state's rate of entrepreneurship. For the median state, these policies reduced the level of entrepreneurship by 10.5 percent. Much of the geographic pattern of entrepreneurship can be explained by policy differences: The low-entrepreneurship states of the Great Lakes and the South tend to have relatively unfriendly policy environments, and the high-entrepreneurship states of the West tend to have relatively friendly policies. On the other hand, although New England states tend to have relatively unfriendly policy environments, they also tend to have high rates of entrepreneurship.
    Date: 2005
  13. By: Bjuggren, Per-Olof (Jönköping International Business School); Eklund, Johan (Jönköping International Business School); Wiberg, Daniel (Jönköping International Business School)
    Abstract: This paper contributes to the literature on ownership, control and performance by exploring these relationships for Swedish listed companies (1997-2002). We find that firms, on average, are making inferior investment decisions and that the use of dual-class shares have a negative effect on performance. According to our results concentration of ownership has a negative impact on investment performance and firm value when control instruments that separate votes from capital share are used. Marginal q is used as a measure of economic performance. It was presented in an article by Mueller and Reardon in 1993 and has recently been used in empirical studies of ownership and performance by among others Gugler and Yurtoglu (2003). Frequently Tobin’s q is used in studies of this type, but Tobin’s q has a number of disadvantages which can be circumvented by employing a marginal q. This study adds to earlier studies by investigating how the separation of vote and capital shares’ creates a wedge between the incentives and the ability to pursue value maximization. The relationships between the performance measure and different ownership characteristics like ownership concentration and foreign ownership are also investigated.
    Keywords: marginal q; ownership structure; firm performance; investments; dual-class shares
    JEL: C23 D21 G30 K22 L20
    Date: 2005–10–27
  14. By: Carriquiry, Miguel A.; Babcock, Bruce A.
    Abstract: Based on accepted advances in the marketing, economics, consumer behavior, and satisfaction literatures, we develop a micro-foundations model of a firm that needs to manage the quality of a product that is inherently heterogeneous in the presence of varying customer tastes or expectations for quality. Our model blends elements of the returns to quality, customer lifetime value, and service profit chain approaches to marketing. The model is then used to explain several empirical results pertaining to the marketing literature by explicitly articulating the trade-offs between customer satisfaction and costs (including opportunity costs) of quality. In this environment firms will find it optimal to allow some customers to go unsatisfied. We show that the relationship between the expected number of repeated purchases by an individual customer is endogenous to the choice of quality by the firm, indicating that the number of purchases cannot be chosen freely to estimate a customer’s lifetime value.
    Keywords: consumer satisfaction, heterogeneous customers, quality expectations, quality heterogeneity, quality management, repeated purchases
    Date: 2005–10–25
  15. By: John S. Heywood (University of Wisconsin); W.S. Siebert (University of Birmingham Business School and IZA Bonn); Xiangdong Wei (Lingnan University, Hong Kong)
    Abstract: High performance workplaces elicit greater involvement and productivity from employees but past theory and evidence remain divided on whether or not such workplaces are compatible with family friendly work practices. We present new evidence on the association using perceptions of a representative sample of workers and an innovative testing framework. The evidence reveals that high performance workplaces are no more likely to make commitments to provide family friendly workplaces than are other workplaces. It shows, however, that high performance workplaces are more likely to keep the family friendly commitments they make, thereby maintaining a "psychological contract" based on mutual obligation. As providing family friendly practices requires both making and keeping commitments, the evidence confirms that high performance workplaces are more likely to provide such practices.
    Keywords: high performance workplaces, family friendly practices, motivation, work incentives
    JEL: J31 J32 J81
    Date: 2005–10
  16. By: Christian Grund (University of Bonn, RWTH Aachen, CCP and IZA Bonn); Niels Westergård-Nielsen (CCP, Aarhus School of Business and IZA Bonn)
    Abstract: In this contribution, we examine the interrelation between corporate age structures and firm performance. In particular, we address the issues, whether firms with young rather than older employees are successful and whether firms with homogeneous or heterogeneous workforces are doing well. Several theoretical approaches are discussed with respect to these questions and divergent hypotheses are derived. Using Danish linked employeremployee data, we find that both mean age and dispersion of age in firms are inversely ushaped related to firm performance.
    Keywords: firm performance, corporate age structures, demographic change
    JEL: M54 J21 L25
    Date: 2005–10
  17. By: Uwe Cantner (University of Jena, Faculty of Economics); Kristina Dreßler (University of Jena, Faculty of Economics); Jens J. Krüger (University of Jena, Faculty of Economics)
    Abstract: Knowledge is one of the most important determinants in single-industry studies of firm survival over the life cycle. Different kinds of knowledge, namely post-entry experience, pre-entry experience, and knowledge acquired by innovative activity positively influence the survival chances of firms. This paper investigates how the kinds of knowledge are able to compensate for each other. Therefore, a statistical survival analysis is performed for the German automobile industry which applies a new approach that combines the Cox regression with instrumental variable estimation. The results show that innovative activity is able to compensate for lacking post-entry experience, supporting Schumpeterian creative destruction.
    Keywords: firm survival, patents, innovation, automobile industry, hazard rates
    JEL: L10 L62 O33 C41
    Date: 2005–09–26
  18. By: Brice Fallick; Charles A. Fleischmann; James A. Rebitzer
    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.
    JEL: R12 L63 O3 J63 J48
    Date: 2005–10
  19. By: Filippo Ippolito
    Abstract: We present a model of cash constrained entrepreneurs who need an investor to finance their project. Investors can either be uninformed, such as individual bondholders, or informed, such as venture capitalists and banks. There is an entrepreneurial moral hazard problem, which can be partially overcome through monitoring only by informed investors. However, monitoring is only effective if investors can commit ex ante to liquidate the project after observing a poor signal. We show that a capital structure that minimizes commitment and information costs requires informed investors to hold senior convertible debt, uninformed investors to hold junior debt and entrepreneurs to hold common stock.
    JEL: G21 G24 G32 G33
    Date: 2005
  20. By: Filippo Ippolito
    Abstract: We examine the shareholder wealth effects of takeover defenses by developing a model in which takeovers facilitate the implementation of technological innovations. In the rational expectations equilibrium of the model with explicit contracts, we show that takeover defenses are deployed to insure employees' firm-specific skills and that defenses dominate severance payments as an insurance mechanism because the latter distort the incentives of employees to exert effort. However, takeover defenses also result in managerial entrenchment. Managers of firms with weak boards choose takeover defenses which maximize their benefits of control, rather than shareholder wealth: golden parachutes serve to align managerial and shareholder preferences.
    JEL: G34 J24 J41
    Date: 2005

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