nep-bec New Economics Papers
on Business Economics
Issue of 2006‒04‒22
twenty papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. The return to firm investment in human capital By Rita Almeida; Pedro Carneiro
  2. Effects of Exchange Rate Volatility on the Volume and Volatility of Bilateral Exports By Christopher F. Baum; Mustafa Caglayan
  3. Perfect Equilibria in a Negotiation Model with Different Time Preferences By Harold Houba; Quan Wen
  4. Flight to Quality and Collective Risk Management By Ricardo J. Caballero; Arvind Krishnamurthy
  5. Household Finance By John Y. Campbell
  6. An Economist Sells Bagels: A Case Study in Profit Maximization By Steven D. Levitt
  7. The U.S. Current Account Deficit: Gradual Correction or Abrupt Adjustment? By Sebastian Edwards
  8. Booms and busts: consumption, house prices and expectations By Orazio Attanasio; Laura Blow; Robert Hamilton; Andrew Leicester
  9. Bubbles and Busts: The 1990s in the Mirror of the 1920s By Eugene N. White
  10. A Portfolio Theory of International Capital Flows By Michael B. Devereux; Makoto Saito
  11. Business Cycle and Stock Market Volatility: A Particle Filter Approach By Roberto Casarin; Carmine Trecroci
  12. Information Technology, Organisational Change and Productivity Growth: Evidence from UK Firms By Gustavo Crespi; Chiara Criscuolo; Jonathan Haskel
  13. La simulation de Monte Carlo: forces et faiblesses (avec applications Visual Basic et Matlab et présentation d’une nouvelle méthode QMC) By Francois-Éric Racicot; Raymond Théoret
  14. The Intensity of Incentives in Firms and Markets: Moral Hazard with Envious Agents By Bartling, Björn; von Siemens, Ferdinand
  15. Income Inequality and Job Satisfaction of Full-Time Employees in Germany By Christoph Wunder; Johannes Schwarze
  16. A Selection-Based Theory of the Transition from Employment to Entrepreneurship: The Role of Employer Size By Simon C. Parker
  17. Exact Methods for the Preemptive Resource-Constrained Project Scheduling Problem By Verma Sanjay
  18. Outsourcing and offshoring of business services: how important is ICT? By Laura Abramovsky; Rachel Griffith
  19. The impact of training on productivity and wages: evidence from British panel data By Lorraine Dearden; Howard Reed; John Van Reenen
  20. A Simple Model of Self-Assessments By Silvia Dominguez Martinez; Otto H. Swank

  1. By: Rita Almeida; Pedro Carneiro (Institute for Fiscal Studies and University College, London)
    Abstract: In this paper we estimate the rate of return to firm investments in human capital in the form of formal job training. We use a panel of large firms withun usually detailed information on the duration of training, the direct costs of training, and several firm characteristics such as their output,workforce characteristics and capital stock. Our estimates of the return to training vary substantially across firms. On average it is - 7% for firms not providing training and 24% for those providing training. Formal job training is a good investment for many firms and the economy, possibly yielding higher returns than either investments in physical capitalor investments in schooling. In spite of this, observed amounts of formal training are very small.
    Keywords: On-the-Job Training, Panel Data, Production Function, Rate of Return
    JEL: C23 D24 J31
    Date: 2005–12
  2. By: Christopher F. Baum (Boston College); Mustafa Caglayan (University of Glasgow)
    Abstract: We present an empirical investigation of a recently suggested but untested proposition that exchange rate volatility can have an impact on both the volume and variability of trade flows, considering a broad set of countries' bilateral real trade flows over the period 1980-1998. We generate proxies for the volatility of real trade flows and real exchange rates after carefully scrutinizing these variables' time series properties. Similar to the findings of earlier theoretical and empirical research, our first set of results show that the impact of exchange rate uncertainty on trade flows is indeterminate. Our second set of results provide new and novel findings that exchange rate volatility has a consistent positive and significant effect on the volatility of bilateral trade flows.
    Keywords: exchange rates, volatility, fractional integration, trade flows
    JEL: F17 F31 C22
    Date: 2006–04–16
  3. By: Harold Houba (Vrije Universiteit Amsterdam); Quan Wen (Vanderbilt University, Nashville, USA)
    Abstract: There has been a long debate on equilibrium characterization in the negotiation model when players have different time preferences. We show that players behave quite differently under different time preferences than under common time preferences. Conventional analysis in this literature relies on the key assumption that all continuation payoffs are bounded from above by the bargaining frontier. However, when players have different time preferences, intertemporal trade may lead to continuation payoffs above the bargaining frontier. We provide a thorough study of this problem without imposing the conventional assumption. Our results tie up all the previous findings, and also clarify the controversies that arose in the past.
    Keywords: Bargaining; Negotiation; Time Preference; Endogenous Threats
    JEL: C72 C73 C78
    Date: 2006–03–23
  4. By: Ricardo J. Caballero; Arvind Krishnamurthy
    Abstract: We present a model of flight to quality episodes that emphasizes systemic risk and the Knightian uncertainty surrounding these episodes. Agents make risk management decisions with incomplete knowledge. They understand their own shocks, but are uncertain of how correlated their shocks are with systemwide shocks. Aversion to this uncertainty leads them to question whether their private risk management decisions are robust to aggregate events, generating conservatism and excessive demand for safety. We show that agents’ actions lock-up the capital of the financial system in a manner that is wasteful in the aggregate and can trigger and amplify a financial accelerator. The scenario that the collective of conservative agents are guarding against is impossible, and known to be so even given agents’ incomplete knowledge. A lender of last resort, even if less knowledgeable than private agents about individual shocks, does not suffer from this collective bias and finds that pledging intervention in extreme events is valuable. The benefit of such intervention exceeds its direct value because it unlocks private capital markets.
    JEL: E30 E44 E5 F34 G
    Date: 2006–04
  5. By: John Y. Campbell
    Abstract: The welfare benefits of financial markets depend in large part on how effectively households use these markets. The study of household finance is challenging because household behavior is difficult to measure accurately, and because households face constraints that are not captured by textbook models, including fixed costs, uninsurable income risk, borrowing constraints, and contracts that are non-neutral with respect to inflation. Evidence on participation, diversification, and the exercise of mortgage refinancing options suggests that many households are reasonably effective investors, but a minority make significant mistakes. This minority appears to be poorer and less well educated than the majority of more successful investors. There is some evidence that households understand their own limitations, and try to avoid financial strategies that require them to make decisions they do not feel qualified to make. Some financial products involve a cross-subsidy from naive households to sophisticated households, and this can inhibit the emergence of products that would promote effective financial decision making by households.
    JEL: G12
    Date: 2006–04
  6. By: Steven D. Levitt
    Abstract: Profit maximizing behavior on the part of firms is a fundamental, but rarely tested, assumption of economics. In this paper, I analyze the decisions made by an MIT trained economist running a company that delivers bagels and donuts. The simplicity and transparency of the business (e.g. marginal cost is easily observed) allow for direct tests of profit maximization in the quantities delivered each day and the prices that are charged. Using thirteen years of data representing more than 80,000 deliveries, I find that the company is extremely adept at determining how many bagels and donuts to deliver to a particular customer on a given day. In stark contrast, the company appears to price on the inelastic portion of the demand curve for the entire period, thereby foregoing a substantial share of available profits. I argue that these results generalize well beyond this particular case study: firms are likely to be close to the efficient frontier on dimensions for which there is frequent and informative feedback regarding profits, but absent that feedback, systematic deviations from profit maximization are more likely.
    JEL: L2
    Date: 2006–04
  7. By: Sebastian Edwards
    Abstract: In this paper I use a large multi-country data set to analyze the determinants of abrupt and large “current account reversals.” The results from a variance-component probit model indicate that the probability of experiencing a major current account reversal is positively affected by larger current account deficits, lower prices of exports relative to imports, and expansive monetary policies. On the other hand, this probability is lower for more advanced countries, and for countries with flexible exchange rates. An analysis of the marginal effects of current account deficits and of the predicted probability of reversal indicates that both have increased significantly for the U.S. since 1999. However, the level of this probability is still on the low side. I estimate that the predicted probability of a current account reversal in the U.S. has increased from 1.7% in 1999, to 14.9% in 2006.
    JEL: F02 F43 O11
    Date: 2006–04
  8. By: Orazio Attanasio (Institute for Fiscal Studies and University College London); Laura Blow (Institute for Fiscal Studies); Robert Hamilton; Andrew Leicester (Institute for Fiscal Studies)
    Abstract: Over much of the past 25 years, the cycles of house price and consumption growth have been closely synchronised. Three main hypotheses for this co-movement have been proposed in the literature. First, that an increase in house prices raises households’ wealth, particularly for those in a position to trade down the housing ladder, which increases their desired level of expenditure. Second, that house price growth increases the collateral available to homeowners, reducing credit constraints and thereby facilitating higher consumption. And third, that house prices and consumption have tended to be influenced by common factors. This paper finds that the relationship between house prices and consumption is stronger for younger than older households, which appears to contradict the wealth channel. These findings therefore suggest that common causality has been the most important factor behind the link between house price and consumption.
    Keywords: House prices, consumption booms, wealth effects, collateral effects, common causality
    JEL: C13 D10 D91 E21
    Date: 2005–11
  9. By: Eugene N. White
    Abstract: This paper surveys the twentieth century booms and crashes in the American stock market, focusing on a comparison of the two most similar events in the 1920s and 1990s. In both booms, claims were made that they were the consequence a “new economy” or “irrational exuberance.” Neither boom can be readily explained by fundamentals, represented by expected dividend growth or changes in the equity premium. The difficulty of identifying the fundamentals implies that central banks would not be successful in preventing pre-emptive policies, although they still would have a critical role to play in preventing crashes from disrupting the payments system or sparking an intermediation crisis.
    JEL: E5 G1 N1 N2
    Date: 2006–04
  10. By: Michael B. Devereux; Makoto Saito
    Abstract: This paper constructs a model in which the currency composition of national portfolios is an essential element in facilitating capital ‡ows between countries. In a two country environment, each country chooses optimal nominal bond portfolios in face of real and nominal risk.Current account deficits are financed by increases in domestic currency debt, but balanced by increases in foreign currency credit. This is combined with an evolution of risk-premiums such that the rate of return on the debtor country’s gross liabilities is lower than the return on its gross assets. This ensures stability of the world wealth distribution.
    Date: 2006–04–05
  11. By: Roberto Casarin; Carmine Trecroci
    Abstract: The recent observed decline of business cycle variability suggests that broad macroeconomic risk may have fallen as well. This may in turn have some impact on equity risk premia. We investigate the latent structures in the volatilities of the business cycle and stock market valuations by estimating a Markov switching stochastic volatility model. We propose a sequential Monte Carlo technique for the Bayesian inference on both the unknown parameters and the latent variables of the hidden Markov model. Sequential importance sampling is used for filtering the latent variables and kernel estimator with a multiple-bandwidth is employed to reconstruct the parameter posterior distribution. We find that the switch to lower variability has occurred in both business cycle and stock market variables along similar patterns.
  12. By: Gustavo Crespi (University of Sussex, AIM and CeRiBA); Chiara Criscuolo (CEP, LSE, AIM and CeRiBA); Jonathan Haskel (Queen Mary, University of London)
    Abstract: We examine the relationships between productivity growth, IT investment and organisational change (Δ<i>O</i>) using UK firm panel data. Consistent with the small number of other micro studies we find (a) IT appears to have high returns in a growth accounting sense when Δ<i>O</i> is omitted; when Δ<i>O</i> is included the IT returns are greatly reduced, (b) IT and Δ<i>O</i> interact in their effect on productivity growth, (c) non-IT investment and Δ<i>O</i> do not interact in their effect on productivity growth. Some new findings are (a) Δ<i>O</i> is affected by competition and (b) we also find strong effects on the probability of introducing Δ<i>O</i> from ownership. US-owned firms are much more likely to introduce Δ<i>O</i> relative to foreign owned firms who are more likely still relative to UK firms.
    Keywords: Information technology, Productivity growth, Organisational change
    JEL: D24 E22 L22 O31
    Date: 2006–04
  13. By: Francois-Éric Racicot (Département des sciences administratives, Université du Québec (Outaouais) et LRSP); Raymond Théoret (Département de stratégie des affaires, Université du Québec (Montréal))
    Abstract: Monte Carlo simulation has an advantage upon the binomial tree as it can take into account the multidimensions of a problem. However it convergence speed is slower. In this article, we show how this method may be improved by various means: antithetic variables, control variates and low discrepancy sequences: Faure, Sobol and Halton sequences. We show how to compute the standard deviation of a Monte Carlo simulation when the payoffs of a claim, like a contingent claim, are nonlinear. In this case, we must compute this standard deviation by doing a great number of repeated simulations such that we arrive at a normal distribution of the results. The mean of the means of these simulations is then a good estimator of the wanted price. We also show how to combine Halton numbers with antithetic variables to improve the convergence of a QMC. That is our new version of QMC which is then well named because the result varies from one simulation to the other in our version of the QMC while the result is fixed (not random) in a classical QMC, like in the binomial tree.
    Keywords: Financial engineering, derivatives, Monte Carlo simulation, low discrepancy sequences.
    JEL: G12 G13 G33
    Date: 2006–04–10
  14. By: Bartling, Björn; von Siemens, Ferdinand
    Abstract: While most market transactions are subject to strong incentives, transactions within firms are often not incentivized. We offer an explanation for this observation based on envy among agents in an otherwise standard moral hazard model with multiple agents. Envious agents suffer if other agents receive a higher wage due to random shocks to their performance measures. The necessary compensation for expected envy renders incentive provision more expensive, which generates a tendency towards flat-wage contracts. Moreover, empirical evidence suggests that social comparisons like envy are more pronounced among employees within firms than among individuals who interact only in the market. Flat-wage contracts are thus more likely to be optimal in firms than in markets.
    JEL: M5 J3 D82
    Date: 2006–04
  15. By: Christoph Wunder (University of Bamberg); Johannes Schwarze (University of Bamberg, DIW Berlin and IZA Bonn)
    Abstract: Using data from the German Socio-Economic Panel Study (GSOEP), it is shown that income comparison with persons who are better off has a clear impact on the job satisfaction of West German full-time employees. Two contrary effects can be identified. On the one hand, there is an aversion to disadvantageous regional income inequality, while on the other hand, individuals prefer inequality within their occupational group. The two effects are interpreted as envy and an information (or "tunnel") effect, respectively. The analysis of income comparison with persons who are worse off suggests a prestige effect. However, downward comparison is of minor importance for job satisfaction.
    Keywords: job satisfaction, income inequality, social comparison, envy, prestige, information effect (tunnel effect), German Socio-Economic Panel Study (GSOEP)
    JEL: D63 I31 D31
    Date: 2006–04
  16. By: Simon C. Parker (Durham University and IZA Bonn)
    Abstract: A simple occupational choice model is used to predict that entrepreneurs who found new firms are more likely to work for small than for large firms prior to start-up. The mechanism underlying the result is heterogeneous risk aversion. The model also predicts a positive association between new firm formation and previous self-employment experience. These predictions accord with previous empirical findings, but notably self-selection rather than productivity effects can explain them.
    Keywords: entrepreneurship, occupational choice, firm size
    JEL: J21 J23 J62
    Date: 2006–04
  17. By: Verma Sanjay
    Abstract: A simple best-first tree search scheme with pruning rules to minimize the completion time (makespan) of the project is described. A project consists of a set of activities partially ordered by precedence constraints. An activity has a given non-negative duration and uses renewable resources such as manpower and machinery. The total number of available units of each resource is constant and specified in advance. A unit of resource cannot be shared by two activities. An activity is ready to be processed only when all its predecessor activities are completed and the numbers of units of the various resources required by it are free and can be allocated to it. Once started, an activity can be interrupted and rescheduled later on without any increase in remaining duration of that activity. Each such part of the activity can be called a segment of that activity. There are no set-up times. The objective is to assign start times to the activities or segment of activities so that the makespan is minimized.
    Date: 2006–03–31
  18. By: Laura Abramovsky (Institute for Fiscal Studies); Rachel Griffith (Institute for Fiscal Studies)
    Abstract: This paper considers the impact that technology has on firms' choices over organisational form, in particular whether to produce inhouse or outsource and offshore services, and firms' decision over the location of activity. Technology reduces the transaction and adjustment costs of moving activity outside the firm and of carrying out at greater geographic distance. We find that more technology intensive firms purchase a greater amount of services on the market and purchase more offshore than less technologically intensive firms.
    Keywords: Outsourcing, offshoring, ICT, business services
    JEL: D21 F23 L23
    Date: 2005–10
  19. By: Lorraine Dearden (Institute for Fiscal Studies and Bedford Group, Institute of Education, University of London); Howard Reed (Institute for Fiscal Studies); John Van Reenen
    Abstract: It is standard in the literature on training to use wages as a sufficient statistic for productivity. This paper examines the effects of work-related training on direct measures of productivity. Using a new panel of British industries 1983-1996 and a variety of estimation techniques we find that work-related training is associated with significantly higher productivity. A one percentage point increase in training is associated with an increase in value added per hour of about 0.6% and an increase in hourly wages of about 0.3%. We also show evidence using individual level datasets that is suggestive of training externalities.
    Keywords: Productivity, training, wages, panel data
    JEL: J31 C23 D24
    Date: 2005–08
  20. By: Silvia Dominguez Martinez (Faculty of Economics, Erasmus Universiteit Rotterdam); Otto H. Swank (Faculty of Economics, Erasmus Universiteit Rotterdam)
    Abstract: We develop a simple model that describes individuals' self-assessments of their abilities. We assume that individuals learn about their abilities from appraisals of others and experience. Our model predicts that if communication is imperfect, then (i) appraisals of others tend to be too positive, and (ii) overconfidence leading to too much activism is more likely than underconfidence leading to too much passivity. The predictions of our model are consistent with findings in the social psychological literature.
    Keywords: self-assessments; learning about ability; coaching; overconfidence; underconfidence
    JEL: D81 D82 D83
    Date: 2006–01–17

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.