nep-bec New Economics Papers
on Business Economics
Issue of 2006‒03‒25
twenty papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Uncertainty Determinants of Corporate Liquidity By Christopher F. Baum, Mustafa Caglayanm, Andreas Stephan and Oleksandr Talavera
  2. Risk Sharing through Financial Markets with Endogenous Enforcement of Trades By Thorsten Koeppl
  3. Incentives to innovate in oligopolies By Paul, BELLEFLAMME; Cecilia, VERGARI
  4. Guess what: It's the Settlements! By Thorsten Koeppl; Cyril Monnet
  5. Pay Me Later: Inside Debt and Its Role in Managerial Compensation By Sundaram, Rangarajan K.; Yermack, David
  6. What Banks Do and Markets Don't: Cross-subsidization By Thorsten Koeppl; James MacGee
  7. Start-up Success of Freelancers: New Microeconometric Evidence from the German Socio-Economic Panel By Joachim Merz; Peter Paic
  8. Output and Inflation in Models of the Business Cycle with Nominal Rigidities: Some Counterfactual Evidence By Páez-Farrell, Juan
  9. New Workplace Practices and the Gender Wage Gap: Can the New Economy be the Great Equalizer? By Nabanita Datta Gupta; Tor Eriksson
  10. Continuous State Dynamic Programming via Nonexpansive Approximation By John Stachurski
  11. Theory and Empirical Evidence of Business Support Networks By Kaie Kerem; Vello Vensel
  12. Theoretical and Methodological Foundations for Personality Research in the Context of Business-to-Business Relationships: the Case of Financial Services By Katrin Kull
  13. Executive Loyalty and Employer Attributes By MONIKA HAMORI
  14. Credit Cycles and Macro Fundamentals By Siem Jan Koopman; Roman Kraeussl; Andre Lucas; Andre Monteiro
  15. Entrepreneurial Entry, Exit and Re-Entry: The Extent and Nature of Opportunity Identification By Deniz Ucbasaran; Mike Wright; Paul Westhead
  16. Women in Managerial Positions in Europe : Focus on Germany By Elke Holst
  17. Starting anew: Entrepreneurial intentions and realizations subsequent to business closure By Veronique Schutjens; Erik Stam
  18. Golden Handshakes: Separation Pay for Retired and Dismissed CEOs By Yermack, David
  19. Strategic Management in Estonian SMEs By Juhan Teder; Urve Venesaar
  20. Mexican Entrepreneurship: A Comparison of Self-Employment in Mexico and the United States By Robert W. Fairlie; Christopher Woodruff

  1. By: Christopher F. Baum, Mustafa Caglayanm, Andreas Stephan and Oleksandr Talavera
    Abstract: This paper investigates the link between the optimal level of non- financial firms’ liquid assets and uncertainty. We develop a partial equilibrium model of precautionary demand for liquid assets showing that firms change their liquidity ratio in response to changes in either macroeconomic or idiosyncratic uncertainty. We test this proposition using a panel of non-financial US firms drawn from the COMPUSTAT quarterly database covering the period 1993–2002. The results indicate that firms increase their liquidity ratios when macroeconomic uncertainty or idiosyncratic uncertainty increases.
    JEL: C23 D8 D92 G32
  2. By: Thorsten Koeppl (Department of Economics, Queen's University)
    Abstract: When people share risk in financial markets, intermediaries provide costly enforcement for most trades and, hence, are an integral part of financial markets' organization. We assess the degree of risk sharing that can be achieved through financial markets when enforcement is based on the threat of exclusion from future trading as well as on costly enforcement intermediaries. Starting from constrained efficient allocations and taking into account the public good character of enforcement we study a Lindahl-equilibrium where people invest in asset portfolios and simultaneously choose to relax their borrowing limits by paying fees to an intermediary who finances the costs of enforcement. We show that financial markets always allow for optimal risk sharing as long as markets are complete, default is prevented in equilibrium and intermediaries provide costly enforcement competitively. In equilibrium, costly enforcement translates into both agent-specific borrowing limits and price schedules that include a separate default premium. Enforcement costs - or, equivalently, default premia - increase borrowing costs, while interest rates per se depend on the change in enforcement over time.
    Keywords: Limited Commitment, Enforcement Intermediaries, Lindahl-equilibrium, Endogenous Borrowing Constraints
    JEL: C73 D60 G10 H41 K42
    Date: 2004–12
  3. By: Paul, BELLEFLAMME; Cecilia, VERGARI (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE))
    Abstract: In the spirit of Arrow (1962), we examine, in an oligopoly model with horizontally differentiated products, how much a firm is willing to pay for a process innovation that it would be the only one to use. We show that different measures of competition (number of firms, degree of product differentiation, Cournot vs Bertrand) affect incentives to innovate in non-monotoic, different, and potentially ways.
    Keywords: innovation; profit incentive; oligopoly; product differentiation
    JEL: L13 O31
    Date: 2006–02–22
  4. By: Thorsten Koeppl (Department of Economics, Queen's University); Cyril Monnet (DG Research, European Central Bank)
    Abstract: Exchanges and other trading platforms are often vertically integrated to carry out trading and settlement as one operation. We show that these vertical silos can prevent the full realization of efficincy gains from horizontal consolidation of trading and settlement platforms. Independent of the gains from such consolidation, when costs of settlement are private information, a merger of vertical silos cannot be designed to always ensure efficient trading and settlement after the merger. Furthermore, we show that efficiency can nevertheless be guaranteed either by delegating the operation of settlement platforms to agents or by forcing competition across vertical silos through cross-listings.
    Keywords: Clearing and Settlement, Cross-listing, Vertical and Horizontal Integration, Mechanism Design
    JEL: C73 G20 G34 L22
    Date: 2005–08
  5. By: Sundaram, Rangarajan K. (New York University); Yermack, David (New York University)
    Abstract: Inside debt, such as pensions and deferred compensation, constitutes a widely-used form of executive compensation, yet the valuation and incentive effects of these instruments have been almost entirely overlooked by prior work. Our paper initiates this line of research by studying CEO pension arrangements in a sample of 237 large capitalization firms. Among our findings are that CEO compensation in most large cap firms exhibits a balance between debt- and equity-based incentives, with the balance shifting systematically away from equity and toward debt as CEOs growolder; that annual increases in pension entitlements represent about 10% of overall compensation for the CEOs in our sample, and about 15% for CEOs aged 61 to 65; that CEOs with high debt-based incentives manage their firms conservatively to reduce default risk; and that pension plan compensation strongly influences patterns of CEO turnover and CEO cash compensation.
    Keywords: CEO pensions; inside debt; deferred compensation
    JEL: G34 J33
    Date: 2006–02–15
  6. By: Thorsten Koeppl (Department of Economics, Queen's University); James MacGee (Department of Economics, University of Western Ontario)
    Abstract: We show that interbank markets are a poor substitute for ``broad'' banks that operate across regions or sectors. In the presence of regional or sectoral asset and liquidity shocks, interbank markets can distribute liquidity efficiently, but fail to respond efficiently to asset shocks. Broad banks can condition on the joint distribution of both shocks and, hence, achieve an efficient internal allocation of capital. This allocation involves the cross-subsidization of loans across regions or sectors. Compared to regional banks that are linked through well-functioning interbank markets, broad banks lead to higher levels of aggregate investment, higher output, and less fluctuations within regions. However, broad banks generate endogenously aggregate uncertainty.
    Keywords: Banking Restrictions, Interbank Markets, Universal Banking, Endogenous Uncertainty
    JEL: G21 G28 D80 E44
    Date: 2005–02
  7. By: Joachim Merz (University of Lueneburg and IZA Bonn); Peter Paic (University of Lueneburg)
    Abstract: If certain start-up characteristics will indicate a business success, knowing such characteristics could generate more successful start-ups and more efficient start-up counseling. Our study will contribute to this by quantifying individual success determinants of freelance start-ups. The data base for the microeconometric analyses of the survival of the first three years is a revised German Socio-Economic Panel (SOEP) for 1992 until 2002, which allows to incorporate institutional, personal and family/household socio-economic variables. We describe and discuss the datawork to achieve compatible information over time within a revised GSOEP and present microeconometric rare events logit, logit and probit results.
    Keywords: start-up success, freelancers, liberal professions, self-employed, German Socio-Economic Panel, rare events logit, logit, probit
    JEL: J23 J21 D10
    Date: 2006–03
  8. By: Páez-Farrell, Juan (Cardiff Business School)
    Abstract: This paper examines the relationship between cyclical output and inflation in models commonly used for monetary policy analysis. This includes models that incorporate the New Keynesian, Fuhrer-Moore and backward-looking Phillips curves. The main finding is that these models imply a strong negative relationship between inflation and output, a result that is at odds with the data. The fact that New Keynesian models yield counterfactual implications is not new; the novelty of the paper lies in the fact that the finding extends to the other variants, such as the backward-looking Phillips Curve, which has been put forward as displaying superior dynamics.
    Keywords: nominal rigidities; monetary policy; Phillips Curve; Output; Inflation; Correlation
    JEL: E20 E31 E32 E52 E61
    Date: 2006–03
  9. By: Nabanita Datta Gupta (Danish National Institute of Social Research, Aarhus School of Business and IZA Bonn); Tor Eriksson (Aarhus School of Business)
    Abstract: We estimate the effect of introducing new workplace practices on the gender gap in wages in the manufacturing sector. We use a unique 1999 survey on work and compensation practices of Danish private sector firms merged to a large matched employer-employee database. Selfmanaged teams, project organisation and job rotation schemes are the most widely implemented work practices. Our estimates from a difference-in-differences model of wages and work practices show that the wage gains from adopting new workplace practices accrue mainly to males so that the gender gap in pay increases at the level of the firm, in particular among hourly-paid workers. Considering practices individually, however, a few exceptions are seen: the gender wage gap among salaried workers is significantly reduced in firms which offer project organisation, while the gap in pay among workers paid by the hour is significantly reduced with the use of quality control circles. All in all, however, the new economy is not the great equalizer.
    Keywords: new workplace practices, employer-employee data, wage differentials, gender
    JEL: J16 J31 M54
    Date: 2006–03
  10. By: John Stachurski
    Abstract: This paper studies fitted value iteration for continuous state dynamic programming using nonexpansive function approximators. A number of nonexpansive approximation schemes are discussed. The main contribution is to provide error bounds for approximate optimal policies generated by the value iteration algorithm.
    Keywords: Dynamic Programming; Approximation
    JEL: C63 C61
    Date: 2006
  11. By: Kaie Kerem (School of Economics and Business Administration, Tallinn University of Technology); Vello Vensel (School of Economics and Business Administration, Tallinn University of Technology)
    Abstract: Business firms operate in a certain environment in which they interact with one another, with individuals, governmental organisations, financial institutions and various other interest groups. Operation of respective economic and social networks (both voluntary and private market determined) may have an important effect on the overall business environment. This paper presents and analyses some results of the special sample survey of Estonian firms undertaken in 1994-2003. Our main attention in this paper is focused on business supporting services provided by various institutions and on the operation of disputes’ resolution mechanism, using the concept of social networks. It is argued that the state enforcement mechanism is working weakly in the still unstable legal environment and firms have to use different self-enforcement mechanisms (through social networks) to resolve disputes. Social networks are also used for obtaining additional financing for investment. The success of the operation of social networks depends on the government economic policy.
    Keywords: economic and social networks, social capital, business supporting services, enforcement mechanism, value creation.
    JEL: Z13 P30 K42
    Date: 2005
  12. By: Katrin Kull (School of Economics and Business Administration, Tallinn University of Technology)
    Abstract: The current study defines the platform for approaching the subject of marketing financial services to businesses. The relationship between a financial institution and its business customer has been analyzed in the framework of relationship marketing. The author proposes that there are multiple models within the satisfaction process, which are moderated by product, person and situational factors. While reviewing the history and current trends of marketing financial services to businesses, the author claims that it would be most useful to be aware of metatheoretical positions and cross-examine the already existent data in order to develop the concepts instead of coming up with new approaches. Theories of personality research have been gone through to study the foundations of the self, role and identity, whereby the author comes to the conclusion that the theories lead us to a set of broad dimensions that characterize individual differences and that can be measured in a reliable way, but the „why“ of personality is something else. After conducting an interviews-based research, there would be good grounds for further discussion of the subject.
    Keywords: marketing, financial services, relationship, business-to-business relationship, relationship marketing, marketing financial services to businesses, personality research
    JEL: M19 M39
    Date: 2005
  13. By: MONIKA HAMORI (Instituto de Empresa)
    Abstract: An employee´s attachment to their employer is one of the central topics across the social sciences. We examine an important aspect of attachment, job search, in the context of executive jobs using a unique data set from a prominent executive search firm that identifies whether executives have declined or pursued offers of employment at other companies. This measure offers an improvement over previous studies on attachment, which rely on actual turnover and, as such, are confounded by opportunities in the labor market.
    Keywords: Job search, Voluntary turnover, Executives
    Date: 2006–03
  14. By: Siem Jan Koopman (Vrije Universiteit Amsterdam); Roman Kraeussl (Vrije Universiteit Amsterdam); Andre Lucas (Vrije Universiteit Amsterdam); Andre Monteiro (Vrije Universiteit Amsterdam)
    Abstract: We study the relation between the credit cycle and macro-economic fundamentals in an intensity-based framework. Using rating transition and default data of U.S. corporates from Standard and Poor’s over the period 1980—2005 we directly estimate the credit cycle from the micro rating data. We relate this cycle to the business cycle, bank lending conditions, and financial market variables. In line with earlier studies, these variables appear to explain part of the credit cycle. As our main contribution, we test for the correct dynamic specification of these models. In all cases, the hypothesis of correct dynamic specification is strongly rejected. Moreover, if we account for the dynamic mis-specification, many of the variables thought to explain the credit cycle, turn out to be insignificant. The main exceptions are GDP growth, and to some extent stock returns and stock return volatilities. Their economic significance appears low, however. This raises the puzzle of which macro-economic fundamentals explain default and rating dynamics.
    Keywords: Credit cycles; Business cycles; Bank lending conditions; Unobserved component models; Intensity models
    JEL: G11 G21
    Date: 2006–03–08
  15. By: Deniz Ucbasaran; Mike Wright; Paul Westhead
    Abstract: This study utilizes a human capital framework to explore whether business ownership experience is associated with the number of business opportunities identified, the number of identified opportunities that are pursued, and the nature of those opportunities. Information from a large representative sample of owners of 631 private independent firms is utilized. Controlling for various dimensions of entrepreneurs' general and specific human capital, we find that experienced (habitual) entrepreneurs identify more business opportunities, pursue more of these opportunities and are associated with more innovative opportunities. We can infer that business ownership experience acts as an important guide for entrepreneurs in processing information in a manner than allows them not only identify more opportunities but potentially more innovative ones too.
    Date: 2006–03
  16. By: Elke Holst
  17. By: Veronique Schutjens; Erik Stam
    Abstract: We know that most businesses fail. But what is not known is to what extent failed ex-entrepreneurs set up in business again. The objective of this article is to explore potential and realized serial entrepreneurship. Based on three disciplines - psychology, labour economics, and the sociology of careers - we formulated propositions to explain (potential) serial entrepreneurship. We tested these propositions empirically with a longitudinal database of 79 businesses that had closed within 5 years after start-up. A large majority of the ex-entrepreneurs maintained entrepreneurial intentions subsequent to business closure, while almost one in four business closures were followed by a new business (serial entrepreneurship). Our results show that the determinants of restart intention (potential serial entrepreneurship) and actual restart realization (realized serial entrepreneurship) are different. Ex-entrepreneurs who are young, who worked full-time in their prior business, and who recall their business management experience positively are likely to harbour restart intentions. Only 'being located in an urban region' transpired to have a significant effect on the start of a new business. Although entrepreneurial intentions are a necessary condition for the start of a new business, this study shows that the explanation of entrepreneurial intentions is distinct from the explanation of new business formation subsequent to business closure.
    Keywords: serial entrepreneurship; business closure; entrepreneurial intentions; new business formation, The Netherlands
    Date: 2006–03
  18. By: Yermack, David (New York University)
    Abstract: This paper studies separation payments made when CEOs leave their firms. In a sample of 179 exiting Fortune 500 CEOs, more than half receive severance pay and the mean separation package is worth $5.4 million. The large majority of severance pay is awarded on a discretionary basis by the board of directors and not according to terms of an employment agreement. For the subset of exiting CEOs who are dismissed, separation pay generally conforms to theories related to bonding and damage control. Shareholders react negatively when separation agreements are disclosed, but only in cases of voluntary CEO turnover.
    Keywords: CEO turnover; severance pay
    JEL: G34
    Date: 2006–02–15
  19. By: Juhan Teder (School of Economics and Business Administration, Tallinn University of Technology); Urve Venesaar (School of Economics and Business Administration, Tallinn University of Technology)
    Abstract: The research is based on the empirical survey conducted among the members of Estonian Association of SMEs. The study involved goal setting, development and implementation of strategies, competitive advantages striven for, orientation toward growth, and factors hindering enterprises’ development. As a result, characteristics of strategic management in enterprises with different levels of growth orientation (expanding, stable and declining enterprises) as well as those depending on other enterprise’s characteristics (e.g., coincidence of managers and owners; age and size of enterprises, etc) were proposed. The analysis showed the existence of clear relationship between the coincidence of owners and managers and existence of formalised plans, whereby company growth leads to the increasing difference of coincidence of owners and managers and therefore increases the role of strategic plans in the enterprises. Measures taken for strategy formation (e.g. managers’ role, cooperation) are supporting factors for positive implementation performance of the intended strategy in expanding firms. The analysis of the factors hindering company growth indicates an increasing need for managers’ training in the area of strategic management. National entrepreneurship policy should, in addition to supporting start-up enterprises, pay more attention to supporting the implementation of company growth potential by help of relevant measures.
    Keywords: SME, strategic management; strategy implementation, coincidence of managers and owners, growth orientation, growth barriers, entrepreneurship policy.
    JEL: L25 M21 O21 O38
    Date: 2005
  20. By: Robert W. Fairlie (University of California, Santa Cruz and IZA Bonn); Christopher Woodruff (University of California, San Diego)
    Abstract: Nearly a quarter of Mexico's workforce is self employed. In the United States, however, rates of self employment among Mexican Americans are only 6 percent, about half the rate among non-Latino whites. Using data from the Mexican and U.S. population census, we show that neither industrial composition nor differences in the age and education of Mexican born populations residing in Mexico and the U.S. accounts for the differences in the self employment rates in the two countries. Within the United States, however, estimates indicate that low levels of education and the youth of Mexican immigrants residing in the United States account for roughly half of the Mexican immigrant/U.S. total difference in selfemployment rates for men and the entire difference for women. We also find some suggestive evidence that for both men and women, Mexican immigrant self-employment rates may be higher for those who reside in the United States legally and are fluent in English, and for men, those who live in ethnic enclaves.
    Keywords: entrepreneurship, self-employment, Mexico, Mexican-Americans
    JEL: J15 J23
    Date: 2006–03

This nep-bec issue is ©2006 by Christian Calmes. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.