nep-bec New Economics Papers
on Business Economics
Issue of 2006‒04‒01
nineteen papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Incentives and Self Control By Ted O’Donoghue; Matthew Rabin
  2. The Irrelevance of Market Incompleteness for the Price of Aggregate Risk (joint with Dirk Krueger, University of Frankfurt) By Hanno Lustig
  3. Principles of Cost-Benefit Analysis By Robin Boadway
  4. Pay for Short-Term Performance: Executive Compensation in Speculative Markets By Patrick Bolton; Jose Scheinkman; Wei Xiong
  5. Performance Pay and Risk Aversion By Christian Grund; Dirk Sliwka
  6. Reputation and career concerns By Leonardo Martinez
  7. The return to capital and the business cycle By Paul Gomme; B. Ravikumar; Peter Rupert
  8. Demand shocks and economic fluctuations By Yi Wen
  9. Imperfect competition and sunspots By Pengfei Wang; Yi Wen
  10. Design of web questionnaires: an informationprocessing perspective for the effect of response categories By Toepoel,Vera; Vis,Corrie; Das,Marcel; Soest,Arthur van
  11. Imperfect competition and indeterminacy of aggregate output By Pengfei Wang; Yi Wen
  12. Mergers and Acquisitions in Europe By Martynova,Marina; Renneboog,Luc
  13. Real business cycles By Ellen R. McGrattan
  14. Interest alignment and firm performance By Gottschalg, Oliver; Meier, Degenhard
  15. When cost improvements harm consumers By Nicolas Gruyer; Philippe Bontems
  16. "Irrational exuberance" in the Pigou cycle under collateral constraints By Keiichiro Kobayashi; Masaru Inaba
  17. Outstanding outsourcers: a firm- and plant-level analysis of production sharing By Christopher Johann Kurz
  18. WHY DO SOME MULTINATIONAL CORPORATIONS RELOCATE THEIR HEADQUARTERS OVERSEAS? By Birkinshaw, Julian; Braunerhjelm, Pontus; Holm, Ulf; Terjesen, Siri
  19. Starting anew: Entrepreneurial intentions and realizations subsequent to business closure By Erik Stam; Veronique Schutjens

  1. By: Ted O’Donoghue; Matthew Rabin
    Date: 2006–03–27
  2. By: Hanno Lustig
  3. By: Robin Boadway (Queen's University, Kingston, Canada)
    Abstract: This paper summarizes the procedure for the economic evaluation of government projects and policy reforms. It begins with the social welfare function underpinnings of cost-benefit analysis including the role of distributive weights and the choice of numeraire. It then turns to the conduct of a social cost-benefit analysis using the net present value criterion. This includes the shadow pricing of market products and inputs affected by the project, indirect welfare effects, the opportunity cost of project finance, the evaluation of non-marketed inputs and outputs, and the opportunity cost of risk. Issues involved in selecting a discount rate are discussed, especially those arising from imperfect capital markets. Finally, since many public projects have long-term consequences, the principles that might be used to take account of effects of projects on future generations are outlined. Techniques for accounting for these effects, such as generational accounting, are summarized and its shortcomings highlighted.
    Keywords: cost-benefit, net present value, shadow pricing
    JEL: D61
    Date: 2006–02
  4. By: Patrick Bolton; Jose Scheinkman; Wei Xiong
    Abstract: We argue that the root cause behind the recent corporate scandals associated with CEO pay is the technology bubble of the latter half of the 1990s. Far from rejecting the optimal incentive contracting theory of executive compensation, the recent evidence on executive pay can be reconciled with classical agency theory once one expands the framework to allow for speculative stock markets.
    JEL: G1 G3
    Date: 2006–03
  5. By: Christian Grund (RWTH Aachen University, Templergraben 59, 52056 Aachen, Germany, tel: +49 241 8096381.; Dirk Sliwka (University of Cologne, Herbert-Lewin-Str. 2, 50931 Köln, Germany, tel: +49 221 470-5888, fax: +49 221 470-5078.
    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: Agency theory, GSOEP, Incentives, Pay for performance, Performance appraisal, Risk, Risk aversion
    JEL: J33 M52 D80
    Date: 2006–03
  6. By: Leonardo Martinez
    Abstract: This paper studies Holmstrom's [1999] seminal model of career concerns, but considers that a small change in the beliefs about the agent's future productivity may imply a large change in his compensation — because, for example, the agent may be fired or promoted. This allows us to study how the agent's effort decision depends on his current reputation — with reputation we refer to the beliefs about the agent's future productivity. We shall show that the market's and the agent's problems can be written recursively. We find that the relationship between the agent's decisions and his current reputation is typically nonmonotonic: equilibrium effort is hump-shaped over reputation. Furthermore, equilibrium effort may be higher if there is less dispersion in the distribution of abilities; it may be higher later in the agent's career; and it may be higher than the efficient effort level.
    Keywords: Stochastic analysis
    Date: 2006
  7. By: Paul Gomme; B. Ravikumar; Peter Rupert
    Abstract: Real business cycle models have difficulty replicating the volatility of S&P 500 returns. This fact should not be surprising since real business cycle theory suggests that the return to capital should be measured by the return to aggregate market capital, not stock market returns. We construct a quarterly time series of the after-tax return to business capital. Its volatility is considerably smaller than that of S&P 500 returns. Our benchmark model captures almost 40 percent of the volatility in the return to capital (relative to the volatility of output). We consider several departures from the benchmark model; the most promising is one with higher risk aversion, which captures over 60 percent of the relative volatility in the return to capital.
    Keywords: Business cycles ; Capital
    Date: 2006
  8. By: Yi Wen
    Abstract: This paper studies conditions under which demand-side shocks can generate realistic business cycles in RBC models. Although highly persistent demand shocks are necessary for generating procyclical investment, variable capacity utilization and habit formation can reduce the required degree of persistence.
    Keywords: Business cycles
    Date: 2006
  9. By: Pengfei Wang; Yi Wen
    Abstract: This paper shows that imperfect competition can be a rich source of sunspots equilibria and coordination failures. This is demonstrated in a dynamic general equilibrium model that has no major distortions except imperfect competition. In the absence of fundamental shocks, the model has a unique certainty (fundamental) equilibrium. But there is also a continuum of stochastic (sunspots) equilibria that are not mere randomizations over fundamental equilibria. Markup is always counter-cyclical in sunspots equilibria, which is consistent with empirical evidence. The paper provides a justification for exogenous variations over time in desired markups, which play an important role as a source of cost-push shocks in the monetary policy literature. We show that fluctuations driven by self-fulfilling expectations (or sunspots) look very similar to fluctuations driven by technology shocks, and we prove that such fluctuations are welfare reducing.
    Keywords: Equilibrium (Economics) ; Business cycles
    Date: 2006
  10. By: Toepoel,Vera; Vis,Corrie; Das,Marcel; Soest,Arthur van (Tilburg University, Center for Economic Research)
    Abstract: In this study we use an information-processing perspective to explore the impact of response scales on respondents answers in a web survey. This paper has four innovations compared to the existing literature: research is based on a different mode of administration (web), we use an open-ended format as a benchmark, four different question types are used, and the study is conducted on a representative sample of the population. We find strong effects of response scales. Questions requiring estimation strategies are more affected by the choice of response format than questions in which direct recall is used. Respondents with a low need for cognition and respondents with a low need to form opinions are more affected by the response categories than respondents with a high need for cognition and a high need to evaluate. The sensitivity to contextual clues is also significantly related to gender, age and education
    Keywords: web survey;questionnaire design;measurement error;context effects;response categories;need for cognition;need to evaluate
    JEL: C42 C81 C93
    Date: 2006
  11. By: Pengfei Wang; Yi Wen
    Abstract: This paper shows that imperfect competition can lead to indeterminacy in aggregate output in a standard DSGE model that features no distortions except imperfect competition. Indeterminacy arises in the model from the composition of aggregate output. In sharp contrast to the indeterminacy literature pioneered by Benhabib and Farmer (1994) and Gali (1994), indeterminacy in our model is global (i.e., independent of the eigenvalues near the steady state); hence it is robust to parameter values of the utility function and production technologies. In addition, sunspots shocks to expectations in our model can be autocorrelated. The paper provides a justification for exogenous variations over time in desired markups, which play an important role as a source of cost-push shocks in the monetary policy literature. Our model can explain procyclical marginal cost and procyclical labor productivity simultaneously, and it outperforms a standard RBC model driven by technology shocks in explaining fluctuations in the labor market.
    Keywords: Prices ; Business cycles
    Date: 2006
  12. By: Martynova,Marina; Renneboog,Luc (TILEC (Tilburg Law and Economics Center))
    Abstract: This paper provides a comprehensive overview of the European takeover market. We characterize the main features of the domestic and cross-border corporate takeovers involving European companies in the period 1993-2001. We provide detailed and comparable information on the size and dynamics of takeover activity in 28 Continental European countries, the UK and Ireland. The data is supplemented with the characteristics of takeover transactions, including the type of takeovers (negotiated acquisition or tender offer), bid attitude (friendly or hostile), payment method (all-cash, all-equity, or mixed deals), legal status of the target firm (public or private), takeover strategy (focus or diversification), amongst other factors. In addition, we investigate the shortterm wealth effects of 2,419 European mergers and acquisitions. We find announcement effects of 9% for target firms compared to a statistically significant announcement effect of only 0.5% for the bidders. Including the price run-up, the share price reaction amounts to 21% for the targets and 0.9% for the bidders. We show that the estimated shareholder wealth effect strongly depends on the different attributes of the takeovers. The type of takeover bid has a large impact on the short-term wealth effects for the target firm shareholders with hostile takeovers triggering substantially larger price reactions than friendly transactions. When a UK target is involved, the abnormal returns are higher than those of bids involving a Continental European target. There is strong evidence that the means of payment has a large impact on the share prices of both bidder and target
    Keywords: takeovers;mergers and acquisitions;diversification;takeover waves;means of payment
    JEL: G34
    Date: 2006
  13. By: Ellen R. McGrattan
    Abstract: Real business cycles are recurrent fluctuations in an economy’s incomes, products, and factor inputs—especially labor—that are due to nonmonetary sources. These sources include changes in technology, tax rates and government spending, tastes, government regulation, terms of trade, and energy prices. Most real business cycle (RBC) models are variants or extensions of a neoclassical growth model. One such prototype is introduced. It is then shown how RBC theorists, applying the methodology of Kydland and Prescott (Econometrica 1982), use theory to make predictions about actual time series. Extensions of the prototype model, current issues, and open questions are also discussed.
    Date: 2006
  14. By: Gottschalg, Oliver; Meier, Degenhard
    Abstract: This study derives testable hypotheses from their framework and thus provides an empirical test of interest alignment theory based on a sample of 69 management buyouts in the UK. The results of the multivariate regression model suggest that in this setting, interest alignment does have a significant influence on firm performance.
    Keywords: competitive advantage; interest alignment; motivation; buyouts
    JEL: M10
    Date: 2005–01–01
  15. By: Nicolas Gruyer (LEEA (air transport economics laboratory), ENAC); Philippe Bontems (Université de Toulouse (INRA, IDEI))
    Abstract: This paper demonstrates that in a vertical structure, improving cost efficiency might sometimes be detrimental to consumers, by increasing market price. This is in stark contrast to the standard result in oligopoly theory which suggests that the surplus generated by any efficiency gain in production is shared between firms and final consumers, depending on the degree of market power. These results are applied in contexts such as international trade, diffusion of knowledge and techniques, and government intervention through income support programs.
    Keywords: oligopsonists, retail, vertical structure, procurement.
    JEL: L11 L12
    Date: 2006–03–24
  16. By: Keiichiro Kobayashi; Masaru Inaba
    Abstract: The boom-bust cycles such as the episode of the "Internet bubble" in the late 1990s may be described as the business cycle driven by changes in expectations, which is called the Pigou cycle by Beaudry and Portier (An exploration into Pigou's theory of cycles, Journal of Monetary Economics, 2004). The key feature of the notion of the Pigou cycle is the comovements in the consumption, the labor, and the investment, in response to changes in expectations. We show that with the assumption that firms are subject to the collateral constraint in financing labor input (and investment), a fairly standard neoclassical model can generate the Pigou cycle. We also show that the collateral-constraint model with the private information can generate the "irrational exuberance," i.e., a boom in which each firm correctly anticipates that its own productivity will not rise, while it also believes wrongly that the productivity of the other firms will rise dramatically.
    Date: 2006–03
  17. By: Christopher Johann Kurz
    Abstract: This paper examines the differences in characteristics between outsourcers and non-outsourcers with a particular focus on productivity. The measure of outsourcing comes from a question in the 1987 and 1992 Census of Manufactures regarding plant-level purchases of foreign intermediate materials. There are two key findings. First, outsourcers are "outstanding." That is, all else equal, outsourcers tend to have premia for plant and firm characteristics, such as being larger, more capital intensive, and more productive. One exception to this outsourcing premia is that wages tend to be the same for both outsourcers and non-outsourcers. Second, outsourcing firms, but not plants, have significantly higher productivity growth.
    Keywords: Industrial productivity ; Manufactures
    Date: 2006
  18. By: Birkinshaw, Julian (London Business School,); Braunerhjelm, Pontus (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology); Holm, Ulf (Department of Business Studies, Uppsala University,); Terjesen, Siri (Cranfield School of Management)
    Abstract: This paper examines the decision by a multinational corporation (MNC) to relocate its business unit and/or corporate HQ overseas. We argue that business unit HQs move overseas in response to changes in the internal configuration of their unit’s activities and the demands of the product markets in which they operate, whereas corporate HQs move overseas is response to the demands of external stakeholders, in particular global financial markets and shareholders. Using data on 125 business unit HQs and 35 corporate HQs, we test and find support for these arguments. The research highlights important differences between corporate- and business-level strategy, and it suggests ways in which the theory of the MNC needs to be reconsidered.
    Keywords: Multinational Corporation; Headquarters; Corporate Strategy; Internationalization
    JEL: D21 F23 G34 L22 O31 O33
    Date: 2006–03–28
  19. By: Erik Stam; Veronique Schutjens
    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

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