nep-bec New Economics Papers
on Business Economics
Issue of 2006‒03‒18
nineteen papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Why did U.S. market hours boom in the 1990s? By Ellen R. McGrattan; Edward C. Prescott
  2. Turbulent firms, turbulent wages? By Diego Comin; Erica L. Groshen; Bess Rubin
  3. Investing in Foreign Currency is like Betting on your Intertemporal Marginal Rate of Substitution. By Hanno Lustig; Adrien Verdelhan
  4. Geographic spillover of unionism By Thomas J. Holmes
  5. Investigating the intertemporal risk-return relation in international stock markets with the component GARCH model By Hui Guo; Christopher J. Neely
  6. Performance Pay and Multi-dimensional Sorting: Productivity, Preferences and Gender By Thomas Dohmen; Armin Falk
  7. Equity market volatility and expected risk premium By Long Chen; Hui Guo; Lu Zhang
  8. Performance Pay and Risk Aversion By Christian Grund; Dirk Sliwka
  9. Burden sharing in a banking crisis in Europe By Dirk Schoenmaker; Charles Goodhart
  10. Could capital gains smooth a current account rebalancing? By Michele Cavallo; Cedric Tille
  11. Performance Pay and the Erosion of Worker Cooperation: Field Experimental Evidence By Stephen Burks; Jeffrey Carpenter; Lorenz Goette
  12. Skill Transferability, Regret and Mobility By Lex Borghans; Bart H.H. Golsteyn
  13. Decision Support System for Design and Evaluation of Pipeline Projects By Barua S K; Madhavan T
  14. Renascent Entrepreneurship - Entrepreneurial Preferences Subsequent to Firm Exit By Erik Stam; David Audretsch; Joris Meijaard
  15. Computation of order and volume fill rates for a base stock inventory control system with heterogeneous demand to investigate which customer class gets the best service By Larsen, Christian
  16. On the Validity of Risk Measures over Time: Value-at-Risk, Conditional Tail Expectations and the Bodie-Merton-Perold Put By Jonathan Treussard;
  17. Macroeconomic volatility and the equity premium By Keith Sill
  18. The role of regional institutional entrepreneurs in the emergence of clusters in nanotechnologies By Mangematin, V.; Rip, A.; Delemarle, A.; Robinson, D.K.R.
  19. Evolution of Corporate Governance in Global Industries: The Case of Multinationals in Alcoholic Beverages By Teresa da Silva Lopes

  1. By: Ellen R. McGrattan; Edward C. Prescott
    Abstract: During the 1990s, market hours in the United States rose dramatically. The rise in hours occurred as gross domestic product (GDP) per hour was declining relative to its historical trend, an occurrence that makes this boom unique, at least for the postwar U.S. economy. We find that expensed plus sweat investment was large during this period and critical for understanding the movements in hours and productivity. Expensed investments are expenditures that increase future profits but, by national accounting rules, are treated as operating expenses rather than capital expenditures. Sweat investments are uncompensated hours in a business made with the expectation of realizing capital gains when the business goes public or is sold. Incorporating expensed and sweat equity into an otherwise standard business cycle model, we find that there was rapid technological progress during the 1990s, causing a boom in market hours and actual productivity.
    Date: 2006
  2. By: Diego Comin; Erica L. Groshen; Bess Rubin
    Abstract: Has greater turbulence among firms fueled rising wage instability in the United States? Earlier research by Gottschalk and Moffitt shows that rising earnings instability was responsible for one-third to one-half of the rise in wage inequality during the 1980s. These growing transitory fluctuations remain largely unexplained. To help fill this gap, this paper further documents the recent rise in transitory fluctuations in compensation and investigates its linkage to the concurrent rise in volatility of firm performance documented in research by Comin and Mulani and others. ; After examining models that explain the relationship between firm and wage volatility, we investigate this linkage in three complementary panel data sets, each with its own virtues and limitations: the Panel Study of Income Dynamics (detailed information on workers, but no information on employers), COMPUSTAT (detailed firm information, but only average wage and employment levels about workers), and the Federal Reserve Bank of Cleveland's Community Salary Survey (wages and employment for specific occupations for identified firms). We find support for the hypothesis in all three data sets. We can rule out straightforward compositional churning as an explanation for the link to firm performance in high-frequency (over spans of five years) wage volatility, although not in more persistent fluctuations (between successive five-year averages). We conclude that the rise in firm turbulence explains about 60 percent of the recent rise in high-frequency (five-year) wage volatility.
    Keywords: Wages ; Corporate profits
    Date: 2006
  3. By: Hanno Lustig; Adrien Verdelhan (Department of Economics, Boston University)
    Abstract: Investors earn positive excess returns on high interest rate foreign discount bonds, because these currencies appreciate on average. Lustig and Verdelhan (2005) show that investing in high interest rate foreign discount bonds exposes them to more aggregate consumption risk, while low interest rate foreign bonds provide a hedge. This paper provides a simple model that replicates these facts. Investing in foreign currency is like betting on the di®erence between your own intertemporal; marginal rate of substitution (IMRS) and your neighbor's IMRS. These bets are very risky if your neighbor's IMRS is not correlated with yours, but they provide a hedge when his IMRS is highly correlated and more volatile. If the foreign neighbors that face low interest rates also have more volatile and correlated IMRS, that accounts for the spread in excess returns in the data.
    Keywords: Exchange Rates, Currency Risk.
    Date: 2005–10
  4. By: Thomas J. Holmes
    Abstract: Unionism in the United States is contagious; it spills out of coal mines and steel mills into other establishments in the neighborhood, like hospitals and supermarkets. The geographic spillover of unionism is documented here using a newly constructed establishment level data on unionism that is rich in geographic detail. A strong connection is found between unionism of health care establishments today and proximity to unionized coal mines and steel mills from the 1950s.
    Date: 2006
  5. By: Hui Guo; Christopher J. Neely
    Abstract: We revisit the risk-return relation using the component GARCH model and international daily MSCI stock market data. In contrast with the previous evidence obtained from weekly and monthly data, daily data show that the relation is positive in almost all markets and often statistically significant. Likelihood ratio tests reject the standard GARCH model in favor of the component GARCH model, which strengthens the evidence for a positive risk-return tradeoff. Consistent with U.S. evidence, the long-run component of volatility is a more important determinant of the conditional equity premium than the short-run component for most international markets.
    Keywords: Stock exchanges ; Securities
    Date: 2006
  6. By: Thomas Dohmen (IZA Bonn); Armin Falk (IZA Bonn and University of Bonn)
    Abstract: This paper studies the impact of incentives on worker self-selection in a controlled laboratory experiment. In a first step we elicit subjects’ productivity levels. Subjects then face the choice between a fixed or a variable payment scheme. Depending on the treatment, the variable payment is either a piece rate, a tournament or a revenue-sharing scheme. We elicit additional individual characteristics such as subjects’ risk attitudes, measures of selfassessment and overconfidence, social preferences, gender and personality. We also elicit self-reported measures of work effort, stress and exhaustion. Our main findings are as follows. First, output is much higher in the variable pay schemes (piece rate, tournament, and revenue sharing) compared to the fixed payment scheme. Second, this difference is largely driven by productivity sorting. On average, the more productive a worker is, the more likely he self-selects into the variable pay scheme. Third, relative self-assessment and overconfidence affect worker self-selection, in particular into tournaments. Fourth, risk averse workers prefer fixed payments and are less likely to sort into variable pay schemes. Fifth, people endowed with social preferences are less likely to sort into tournaments. Sixth, variable pay schemes attract men more than women, a difference that is partly explained by gender-specific risk attitudes. Seventh, self-selection is also affected by personality differences. Finally, reported effort is significantly higher in all variable pay conditions than in the fixed wage condition. In sum, our findings underline the importance of multi-dimensional sorting, i.e., the tendency for different incentive schemes to systematically attract people with different abilities, preferences, self-assessments, gender and personalities.
    Keywords: personnel economics, sorting, incentives, productivity, ability, piece rates, tournament, revenue sharing, risk preferences, overconfidence, gender, experiment
    JEL: M52 M55 J00 J3 J33 J31 J16 J22 J24 C91 D81
    Date: 2006–03
  7. By: Long Chen; Hui Guo; Lu Zhang
    Abstract: This paper revisits the time-series relation between the conditional risk premium and variance of the equity market portfolio. The main innovation is that we construct a measure of the ex ante equity market risk premium using corporate bond yield spread data. This measure is forward-looking and does not rely critically on either realized equity returns or instrumental variables. We find strong support for a positive risk-return tradeoff, and this result is not sensitive to a number of robustness checks, including alternative proxies of the conditional stock variance and controls for hedging demands.
    Keywords: Stock exchanges ; Securities
    Date: 2006
  8. By: Christian Grund; Dirk Sliwka (University of Cologne and IZA Bonn)
    Abstract: A main prediction of agency theory is the well known risk-incentive trade-off. Incentive contracts should be found in environments with little uncertainty and for agents with low degrees of risk aversion. There is an ongoing debate in the literature about the first trade-off. Due to lack of data, there has so far been hardly any empirical evidence about the second. Making use of a unique representative data set, we find clear evidence that risk aversion has a highly significant and substantial negative impact on the probability that an employee’s pay is performance contingent.
    Keywords: risk, incentives, agency theory, risk aversion, performance appraisal, pay for performance, GSOEP
    JEL: J33 M52 D80
    Date: 2006–03
  9. By: Dirk Schoenmaker; Charles Goodhart
    Abstract: No abstract availableDownload Paper
    Date: 2006–03
  10. By: Michele Cavallo; Cedric Tille
    Abstract: A narrowing of the U.S. current account deficit through exchange rate movements is likely to entail a substantial depreciation of the dollar, as stressed in research by Obstfeld and Rogoff. We assess how the adjustment is affected by the high degree of financial integration in the world economy. A growing body of research emphasizes the increasing leverage in international financial positions, with industrialized economies holding substantial and growing financial claims on each other. Exchange rate movements then lead to valuation effects as the currency composition of a country's assets and liabilities are not matched. In particular, a dollar depreciation generates valuation gains for the United States by boosting the dollar value of much of its foreign-currency-denominated assets. We consider an adjustment scenario in which the U.S. net external debt is held constant. The key finding is that as the current account moves into balance, the pace of adjustment is smooth. Intuitively, the valuation gains from the depreciation of the dollar allow the United States to finance ongoing, albeit shrinking, current account deficits. We find that the smooth pattern of adjustment is robust to alternative scenarios, although the ultimate movements in exchange rates will vary under different conditions.
    Keywords: International finance ; Foreign exchange ; Dollar, American
    Date: 2006
  11. By: Stephen Burks (University of Minnesota, Morris and IZA Bonn); Jeffrey Carpenter (Middlebury College and IZA Bonn); Lorenz Goette (University of Zurich, CEPR and IZA Bonn)
    Abstract: We report the results of a field experiment with bicycle messengers in Switzerland and the United States. Messenger work is individualized enough that firms can choose to condition pay on it, but significant externalities in messenger behavior nonetheless give their on-the-job interactions the character of a social dilemma. Firms therefore suffer efficiency losses when messengers fail to cooperate. Second-mover behavior in our sequential Prisoner's Dilemma allows us to characterize the cooperativeness of our participants. We find that messengers, like our student controls, have heterogeneous social preferences, but are much more cooperative than students. Among messengers, we find that employees at firms that pay for performance are significantly less cooperative than those who are paid hourly or are members of cooperatives. To examine whether the difference is the result of treatment or selection we exploit the fact that firm type is location-specific in Switzerland and that entering messengers must work in performance pay firms in the U.S. We find that the erosion of cooperation under performance pay is predominantly due to treatment, and that the treatment effect is relatively rapid, more akin to the differential cueing of a behavioral norm than the gradual acquisition of a new preference.
    Keywords: field experiment, social preference, altruism, conditional cooperation, egoism, social dilemma
    JEL: C72 C78 C93 D23 J33 J54 Z13
    Date: 2006–03
  12. By: Lex Borghans (ROA, Maastricht University and IZA Bonn); Bart H.H. Golsteyn (ROA, Maastricht University)
    Abstract: After graduation many students start working in sectors not related to their field of study or participate in training targeted at work in other sectors. In this paper, we look at mobility immediately after graduation from the perspective that educational choices have been made when these pupils had little experience of the actual working life in these professions. We develop a model where students accumulate partially transferable human capital but also learn about their professional preferences at the university and during the first years in the labor market. As a consequence of this newly acquired insight, these young workers might realize that working in another occupational field would better fit their preferences, although they are better equipped to work in their own field. The empirical analysis reveals that if wages are 1% lower due to lower skill transferability, the probability that a graduate who regrets his choice actually switches decreases by 2.2 percentage points, while those who switch on average take 0.3 months additional education.
    Keywords: regret, mobility, skill transfer, training
    JEL: J24 J44 J62
    Date: 2006–03
  13. By: Barua S K; Madhavan T
    Abstract: Petronet India Limited (PIL) was created to give impetus to investments in pipeline projects for transportation of petroleum products in the country. Since these projects have a long life and require large investments, correct assessment of location, capacity and financial viability are of critical importance. This paper is based on the study undertaken for PIL to evaluate a few of their pipeline projects. The study resulted in creation of a comprehensive software package that is capable of operational and financial evaluation of pipeline projects based on countrywide view on production and distribution of petroleum products. The core of the package is an LP based optimization model. The package is capable of performing sensitivity analysis to investigate the impact of uncertainty on the proposed project due to from changes in the values of key factors including distribution network and capacities, refining capacities and pattern of demand. •A model is developed for identification of viable pipeline projects, taking into account the demand and capacity additions to production and distribution network for petroleum products in the future. •The model can be used for financial evaluation of such projects based on appropriate assumptions to forecast the investments required as well as the net cash flows from the project. •The solution procedure is implemented for the models developed in the form of a software package that would allow the decision maker to experiment with assumption and generate solutions with ease and with little manual intervention. •The software package developed above is further embellished so that it also provides additional information to the decision maker in the form of reports that contain details of movement of products and the mode combinations used for the movements.
    Date: 2006–03–07
  14. By: Erik Stam; David Audretsch; Joris Meijaard
    Abstract: Why should individuals that have exited their firm consider re-entering into entrepreneurship, i.e. become renascent entrepreneurs? According to the logic of economic models of firm dynamics there is no reason to re-enter into entrepreneurship following termination of a previous firm. In contrast, research on nascent entrepreneurship has shown the positive effect of entrepreneurial experience on planning a new firm start. Based on the empirical evidence from a database consisting of ex-entrepreneurs, this study shows that renascent entrepreneurship is a pervasive phenomenon in current society. Especially entrepreneurial human and social capital induce renascent entrepreneurship. In addition, the nature of the firm exit also affects the probability of renascent entrepreneurship.
    Keywords: entrepreneurial preferences, entrepreneurial skills, firm exit, renascent entrepreneurship, economics of entrepreneurship
    Date: 2006–03
  15. By: Larsen, Christian (Department of Business Studies)
    Abstract: We consider a base stock inventory control system serving two customer classes whose demands are generated by two independent compound renewal processes. We show how to derive order and volume fill rates of each class. Based on assumptions about first order stochastic dominance we prove when one customer class will get the best service. That theoretical result is validated through a series of numerical experiments which also reveal that it is quite robust.
    Keywords: Base stock policy; service measures; two customer classes; compound renewal processes
    Date: 2006–03–06
  16. By: Jonathan Treussard (Department of Economics, Boston University);
    Abstract: Over the past decade, risk measurement has received a much needed amount of attention from the .nancial community. Risk measures based on .xed quantiles un- der the actual probability distribution, especially Value-at-Risk and its re.nement the Conditional Tail Expectation, were instrumental in capturing the attention of .nancial decision-makers. However, these were developed in a way that is inconsistent with eco- nomic theory. Consequently, these instruments possess characteristics that make them invalid risk measures for the purposes they intend to serve, be it informing life-cycle investors or guaranteeing the .rm.s capital adequacy through regulation. In particular, in addition to failing to guarantee the intregity of .nancial .rms when used for capital adequacy, these measures can eventually decrease with the investment horizon. Risk-neutral .xed-quantile measures are valid for framing life-cycle decisions because of their economic content. When endowed with a dynamic replication technology, Q- measure .xed-quantile risk measures become least-cost insurance contracts that may be used for capital adequacy considerations. However, no single quantile of the risk-neutral distribution can be used for the procurement of risk capital at all horizons. A risk-neutral varying-quantile instrument is needed. This unique instrument is a put option proposed by Merton-Perold (1993) and Bodie (1995). The Bodie-Merton-Perold Put is universally valid for both risk disclosure to investors and for the regulatory provision of risk capital at all horizons. It is a natural candidate for an industry standard in risk measurement.
    Date: 2005–08
  17. By: Keith Sill
    Abstract: Recent empirical work documents a decline in the U.S. equity premium and a decline in the standard deviation of real output growth. We investigate the link between aggregate risk and the asset returns in a dynamic production based asset-pricing model. When calibrated to match asset return moments, the model implies that the post-1984 reduction in TFP shock volatility of 60 percent gives rise to a 40 percent decline in the equity premium. Lower macroeconomic risk post-1984 can account for a substantial fraction of the decline in the equity premium.
    Keywords: Equity ; Macroeconomics
    Date: 2006
  18. By: Mangematin, V.; Rip, A.; Delemarle, A.; Robinson, D.K.R.
    Abstract: In the case of new technologies like nanotechnology, institutional entrepreneurs appear who have to act at different levels (organizational, regional, national) at the same time. We reconstruct, in some detail, the history of two cases, in Grenoble and in Twente/Netherlands. An intriguing finding is that institutional entrepreneurs build their environment before changing their institution. They first mobilize European support to convince local and national levels before actual cluster building occurs. Only later will there be reactions against any de-institutionalisation caused at the base location. The Dutch case shows another notable finding: when mobilizing support the entrepreneur will have to agree to further conditions, and then ends up in a different situation (a broad national consortium) than originally envisaged (the final cluster involved a collaboration of Twente with two other centres). In general, an institutional entrepreneur attempts to create momentum, and when this is achieved, he has to follow rather than lead it.
    JEL: M13
    Date: 2005
  19. By: Teresa da Silva Lopes (Saïd Business School, University of Oxford)
    Abstract: This paper considers aspects of the evolution of ownership and control in global industries from 1960. The existing literature usually uses the largest firms in industrialized countries, to provide generalizations about national systems of corporate governance. In practice, this characterization is far from being comprehensive. For example, global industries which are not dominant in countries’ economies – such as alcoholic beverages – are overlooked. Including such overlooked cases, this study suggests that there is a broader range of combinations of ownership and control of firms than is usually considered. Regardless of national systems of corporate governance, family ownership may remain very important in some industries. Industry-specific factors, such as brands and marketing knowledge in alcoholic beverages, help explain why the predominant ownership and control structures of global firms are distinct from those that characterize their countries of origin.
    Date: 2006–03–16

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