nep-bec New Economics Papers
on Business Economics
Issue of 2006‒05‒06
twenty-two papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Shareholders Should Welcome Knowledge Workers as Directors By Margit Osterloh; Bruno S. Frey
  2. Transition Dynamics in Vintage Capital Models: Explaining the Postwar Catch-up of Germany and Japan By Simon Gilchrist; John C. Williams
  3. Selecting Copulas for Risk Management By Koedijk, Kees; Kole, Erik; Verbeek, Marno
  4. What Can Account for Fluctuations in the Terms of Trade? By Marianne Baxter; Michael A. Kouparitsas
  5. Managerial Career Concerns and Risk Management By Nam, Jouahn; Wang, Jun; Zhang, Ge
  6. Productivity and U.S. Macroeconomic Performance: Interpreting the Past and Predicting the Future with a Two-Sector Real Business Cycle Model By Peter N. Ireland; Scott Schuh
  7. Work Hours Instability in Canada By Heisz, Andrew; Larochelle-Côté, Sébastien
  8. A multi-level approach to program objectives: definitions and managerial implications By De Hertogh, S.; Van den Broecke, E.; Vereecke, A.; Viaene, S.; Harpham, A.
  9. The Dynamic Wage Barganing Problem By Renuka Metcalfe
  10. Changes in Foreign Control under Different Regulatory Climates: Multinationals in Canada By Baldwin, John R.; Gellatly, Guy; Sabourin, David
  11. Do not forget the strategic architecture of your manufacturing network while offshoring By Vereecke, A.; De Meyer, A.
  12. Implicit Contracts: Two Different Approaches By Oliver Gürtler
  13. Power Inside the Firm and the Market: A General Equilibrium Approach By Dalia Marin; Thierry Verdier
  14. Liaisons globales : Les avantages de l'investissement direct de l'étranger pour les établissements sous contrôle canadien - le rôle des liens verticaux By Lileeva, Alla
  15. Consulting an expert with potentially conflicting preferences By T. Lanzi; J. Mathis
  16. A new input-output control order release mechanism: how workload control improves manufacturing operations in a job shop By M. Rosário Moreira; Rui Alves
  17. Why Racial Stereotyping Doesn’t Just Go Away: The Question of Honesty and Work Ethic By Elaine McCrate
  18. Linking behavioral control to frontline employee commitment and performance: a test of two alternative explanations using motivation theories By Dewettinck, K.; Buyens, D.
  19. Path Dependence or Convergence? The Evolution of Corporate Ownership Around the World By Andrew J.Y. Yeh; Steven Lim; Ed Vos
  20. Distribution of Ability and Earnings in a Hierarchical Job Assignment Model By Robert M. Costrell; Glenn C. Loury
  21. Competing for Ownership By Patrick Legros; Andrew F. Newman
  22. Capital Accumulation and Horizontal Mergers in Differential Oligopoly Games By R. Cellini; L. Lambertini

  1. By: Margit Osterloh; Bruno S. Frey
    Abstract: The most influential approach of corporate governance, the view of shareholders supremacy does not take into consideration that the key task of modern corporations is to generate and transfer firm-specific knowledge. It proposes that, in order to overcome the widespread corporate scandals, the interests of top management and directors should be increasingly aligned to shareholder interests by making the board more responsible to shareholders, and monitoring of top management by independent outside directors should be strengthened. Corporate governance reform needs to go in another direction altogether. Firm-specific knowledge investments are, like financial investments, not ex ante contractible, leaving investors open to exploitation by shareholders. Employees therefore refuse to make firmspecific investments. To gain a sustainable competitive advantage, there must be an incentive to undertake such firm-specific investments. Three proposals are advanced to deal with this dilemma: (1) The board should rely more on insiders. (2) The insiders should be elected by those employees of the firm who are making firm-specific knowledge investments. (3) The board should be chaired by a neutral person. These proposals have major advantages: they provide incentives for knowledge investors; they countervail the dominance of executives; they encourage intrinsic work motivation and loyalty to the firm by strengthening distributive and procedural justice, and they ensure diversity on the board while lowering transaction costs. These proposals for reforming the board may help to overcome the crisis corporate governance is in. At the same time, they provide a step in the direction of a more adequate theory of the firm as a basis for corporate governance.
    Keywords: Corporate governance; shareholders; board directors; insiders; firm-specific knowledge
    JEL: D23 D83 L14 G34 M50
    Date: 2006–04
  2. By: Simon Gilchrist (Institute for Economic Development, Boston University); John C. Williams (Board of Governors, Federal Reserve System)
    Abstract: We consider a neoclassical interpretation of Germany and Japan’s rapid postwar growth that relies on a catch-up mechanism through capital accumulation where technology is embodied in new capital goods. Using a putty-clay model of production and investment, we are able to capture many of the key empirical properties of Germany and Japan’s postwar transitions, including persistently high but declining rates of labor and total-factor productivity growth, a U-shaped response of the capital-output ratio, rising rates of investment and employment, and moderate rates of return to capital.
    Keywords: putty-clay, embodied technology, productivity growth, convergence
    JEL: D24 E22 N10 O41
  3. By: Koedijk, Kees; Kole, Erik; Verbeek, Marno
    Abstract: Copulas offer financial risk managers a powerful tool to model the dependence between the different elements of a portfolio and are preferable to the traditional, correlation-based approach. In this paper we show the importance of selecting an accurate copula for risk management. We extend standard goodness-of-fit tests to copulas. Contrary to existing, indirect tests, these tests can be applied to any copula of any dimension and are based on a direct comparison of a given copula with observed data. For a portfolio consisting of stocks, bonds and real estate, these tests provide clear evidence in favour of the Student’s t copula, and reject both the correlation-based Gaussian copula and the extreme value-based Gumbel copula. In comparison with the Student’s t copula, we find that the Gaussian copula underestimates the probability of joint extreme downward movements, while the Gumbel copula overestimates this risk. Similarly we establish that the Gaussian copula is too optimistic on diversification benefits, while the Gumbel copula is too pessimistic. Moreover, these differences are significant.
    Keywords: copulas; distributional tests; financial dependence; risk management; tail dependence
    JEL: C12 C14 G11
    Date: 2006–04
  4. By: Marianne Baxter (Institute for Economic Development, Boston University); Michael A. Kouparitsas (Federal Reserve Bank of Chicago)
    Keywords: Terms of Trade; International business cycles
    JEL: E32 F41
  5. By: Nam, Jouahn (Pace University); Wang, Jun (Baruch College); Zhang, Ge (University of New Orleans)
    Abstract: We present a dynamic model of corporate risk management and managerial career concerns. We show that managers with high (low) career concerns are more likely to speculate (hedge) early in their careers. In the later stage of their careers when managers have less career concerns, there is no speculative motive for self interested managers. On the other hand, managers with minimal career concerns engage in neither hedging nor speculation early in their careers, but they may choose to hedge after poor early performance.
    Keywords: Risk management, Dynamic model, Hedging, Speculation
    JEL: G34 C73
    Date: 2005
  6. By: Peter N. Ireland (Boston College); Scott Schuh (Federal Reserve Bank of Boston)
    Abstract: A two-sector real business cycle model, estimated with postwar U.S. data, identifies shocks to the levels and growth rates of total factor productivity in distinct consumption- and investment-goods-producing technologies. This model attributes most of the productivity slowdown of the 1970s to the consumption-goods sector; it suggests that a slowdown in the investment-goods sector occurred later and was much less persistent. Against this broader backdrop, the model interprets the more recent episode of robust investment and investment-specific technological change during the 1990s largely as a catch-up in levels that is unlikely to persist or be repeated anytime soon.
    Keywords: productivity, real business cycle
    JEL: E32 O41 O47
    Date: 2006–04–01
  7. By: Heisz, Andrew; Larochelle-Côté, Sébastien
    Abstract: Numerous studies of working hours have drawn important conclusions from cross-sectional surveys. For example, the share of individuals working long hours is quite large at any given point in time. Moreover, this appears to have increased over the past two decades, raising the call for policies designed to alleviate working hours discrepancies among workers, or reduce working time overall. However, if work hours vary substantially at the individual level over time, then conclusions based upon studies of cross-sectional data may be incomplete. Using longitudinal data from the Canadian Survey of Labour and Income Dynamics, we find that there is substantial variation in annual working hours at the individual level. In fact, as much as half of the cross-sectional inequality in annual work hours can be explained by individual-level instability in hours. Moreover, very few individuals work chronically long hours. Instability in work hours is shown to be related to low-job quality, non-standard work, low-income levels, stress and bad health. This indicates that working variable work hours is not likely done by choice; rather, it is more likely that these workers are unable to secure more stable employment. The lack of persistence in long work hours, plus the high level of individual work hours instability undermines the equity based arguments behind working time reduction policies. Furthermore, this research points out that policies designed to reduce hours instability could benefit workers.
    Keywords: Labour, Employment
    Date: 2006–03–29
  8. By: De Hertogh, S.; Van den Broecke, E.; Vereecke, A.; Viaene, S.; Harpham, A.
    Abstract: Projects are recognized as the building blocks of strategy. Outputs, outcomes, benefits and related concepts have been put forward by the program management community to bridge the gap between strategy and projects. Yet, firstly there appears to be some discordance among authors on the exact nature of these concepts. Secondly, these frameworks may not yet fully reflect the specific nature of strategy implementation. Therefore it is hard to accept them as the basis for communication between the project/program organisation and the business management when managing strategy implementation through programs of projects. We will borrow three concepts (resources, competencies and capabilities) from the resource based view of the company (RBV). We shall use them to define three levels of program objectives. We will illustrate these levels through a case of a strategic program in a professional information services company. We conclude with implications on current program management practice and research.
    Keywords: program management, program objectives, strategy implementation, benefits management
    Date: 2006–04–25
  9. By: Renuka Metcalfe (University of Swansea)
    Abstract: This paper considers dynamic equilibria in wage bargaining unifying for the first time the models of Coles and Wright (1998) and Pissarides and producing in contrast to the Coles and Wright model, a non-deficient equilibrium. In sharp contrast to the Pissarides model we analyse a fully dynamic model with non-linear cost functions and risk-averse agents, to provide overall, saddle-path stability and unique wage and employment outcome which is devoid of limit cycles.
    Keywords: Wage determination, job matching, unemployment, labour markets, bargaining.
    JEL: J23 J31 J40 J64
    Date: 2006–04
  10. By: Baldwin, John R.; Gellatly, Guy; Sabourin, David
    Abstract: This paper examines the incidence of foreign control in Canadian non-financial industries. It focuses on changes in the share of assets and revenues under foreign control over a long-run period during which Canada's regulatory climate shifted from being more restrictive to more liberal in its treatment of inward foreign direct investment. These regulatory changes coincided with a retrenchment and then a resurgence in the activities of foreign multinationals in Canadian industry. We report aggregate results for non-financial industries, along with specific tabulations for the energy sector. More detailed industry tabulations are presented for the 2000-2003 period.
    Keywords: National accounts, Business enterprises, Economic conditions, Business conditions
    Date: 2006–03–23
  11. By: Vereecke, A.; De Meyer, A.
    Abstract: Offshoring manufacturing to low labor cost countries has become trendy. Nearly everyday one sees an announcement in the business press of companies moving to China or India. Whilst production cost is an important consideration in choosing a location for the factory, we argue that one should not become victim of a herd effect and that other parameters e.g. quality, flexibility, transportation and energy costs, etc. need to be taken into consideration in the determination of the optimal manufacturing network. Relocating a factory is changing the strategic architecture of the company’s manufacturing network and requires a long term view and a good model to design the architecture of the manufacturing network. Based on empirical survey research and a set of case studies we provide such a model to think about the roles of factories in the strategic manufacturing network of the firm. But we go beyond a classification and a descriptive model and we provide a set of six managerial issues that require senior management’s attention in determining the optimal manufacturing network and its dynamic evolution. We argue for example that senior management needs to build a balanced portfolio of different types of factories, has to have a performance measurement system adapted to the type of factory, as well as the appropriate leadership for each of the different types of factories and needs to actively manage the dynamics and the flows of innovation in the factory network.
    Keywords: international manufacturing, network management, outsourcing
    Date: 2006–04–26
  12. By: Oliver Gürtler (Oliver Gürtler, Department of Economics, BWL II, University of Bonn, Adenauer- allee 24-42, D-53113 Bonn, Germany. Tel.:+49-228-739214, Fax:+49-228-739210; E-mail:
    Abstract: In this paper, I compare two different approaches to model implicit contracting, the infinite-horizon approach typically used in the literature and afinite-horizon approach building on an adverse-selection model. I demonstrate that even the most convincing result of the infinite-horizon approach, namely that implicit contracting is improved, if the discountrate is lowered, does not carry over to the alternative modeling approach. Predictions of the first approach should therefore be handled with care and subject to athorough reinvestigation.
    Keywords: Trust, finite horizon, infinite horizon, discounting, implicit contracting
    JEL: D82 D83 J33 M52
    Date: 2006–04
  13. By: Dalia Marin (Department of Economics, Ludwigstr. 28, 80539 Munich, phone: +49-89-2180-2446, fax: +49-89-2180-6227, e-mail address:; Thierry Verdier (DELTA, Paris)
    Abstract: Recent years have witnessed an enormous amount of reorganization of the corporate sector in the US and in Europe. This paper examines the role of market competition for this trend in corporate reorganization. We find that at intermediate levels of competition the CEO of the corporation decides to have less power inside the firm and to delegate control to lower levels of the firms’ hierarchy. Thus, workers empowerment and the move to flatter firm organizations emerge as an equilibrium when competition is not too tough and not too weak. The model predicts merger waves or waves of outsourcing when countries become more integrated into the world economy as the corporate sector reorganizes in response to an increase in international competition.
    Keywords: monopolistic competition, international trade, corporate reorganisation, flattening firm hierarchies
    JEL: F12 D23 L22 L1
    Date: 2001–12
  14. By: Lileeva, Alla
    Abstract: À l'aide de données sur les établissements manufacturiers en exploitation au Canada de 1981 à 1997, nous estimons l'effet des variations du niveau d'investissement direct étranger (IDE) sur la productivité du travail dans les établissements sous contrôle canadien. Nous faisons la distinction entre l'IDE dans l'industrie propre des établissements sous contrôle canadien et dans les industries liées à ces établissements à titre de fournisseurs ou d'utilisateurs d'intrants intermédiaires. Nous constatons que l'IDE intensifie la croissance de la productivité des établissements sous contrôle canadien d'une façon allant de pair avec le transfert de technologie des fournisseurs étrangers vers les établissements sous contrôle canadien. Les effets positifs de l'IDE sur la productivité sont plus prononcés dans les établissements qui externalisent la production d'une grande quantité d'intrants intermédiaires et ceux qui achètent des intrants intermédiaires à vocation scientifique (c'est à dire produits électroniques, machines et équipement, produits chimiques) que dans les autres. Nous concluons aussi que la concurrence étrangère a un effet négatif sur la productivité des producteurs canadiens
    Keywords: Comptes nationaux, Fabrication, Productivité, Industries manufacturières
    Date: 2006–04–13
  15. By: T. Lanzi; J. Mathis
    Date: 2005
  16. By: M. Rosário Moreira (Faculdade de Economia, Universidade do Porto); Rui Alves (Faculdade de Economia, Universidade do Porto)
    Abstract: Make-to-order companies, such as job shops, have been extensively studied. Some of those studies emphasise the importance of the workload control in order to improve manufacturing operations. In this paper a multiple decision-making scheme, with the purpose of planning and controlling operations and getting better delivery and workload related performance measures, as well as one order release decision rule are proposed. The decision-making scheme includes four main decisions: (i) accept or reject an in-coming order; (ii) define the order’s due date; (iii) release the accepted jobs; and (iv) dispatch the jobs at the station level. Extensive simulation experiments were performed to compare the proposed rule with the benchmark mechanisms, as well as with rules presented in previous studies. They led to the conclusion that considering the four decisions simultaneously can improve the job shop measures of performance, and that the proposed release rule is the best in almost all instances.
    Keywords: job shop, input-output control, workload control, order release
    JEL: M11
    Date: 2006–04
  17. By: Elaine McCrate
    Abstract: One of the most persistent stereotypes about blacks concerns honesty and work ethic. These characteristics are also central to employers' evaluation of prospective and current workers; employers say that these traits matter more than skills. However, honesty and work ethic are difficult to observe and assess, placing them squarely in the terrain of statistical discrimination theory. One common criticism of this theory is that employers should be able to collect enough information on prospective workers to render race irrelevant, and that high-quality workers have incentives to signal their productivity to employers regardless of race. As a result, inefficient stereotypes should erode over time. In contrast, I argue that there are many reasons for inefficient stereotypes about honesty and work ethic to persist, and I investigate the empirical evidence for these theories.
    Keywords: racial discrimination, statistical discrimination, honesty, work effort, work ethic, stereotypes
    JEL: J70 J71
    Date: 2006
  18. By: Dewettinck, K.; Buyens, D.
    Abstract: We propose and empirically test a model in which behavioral control is linked to frontline employee commitment and performance. We test two alternative explanations by examining the intermediate role of job autonomy and situational learning orientation. The hypotheses are tested using multiple-source survey data from a sample of 1184 frontline employees and their supervisors. Results indicate that situational learning orientation is an important construct in linking behavioral control to performance. Job autonomy shows to be important in explaining employee outcomes but is only marginally related to behavioral control. Theoretical and managerial implications are discussed.
    Date: 2006–04–27
  19. By: Andrew J.Y. Yeh (Reserve Bank of New Zealand); Steven Lim (University of Waikato); Ed Vos (University of Waikato)
    Abstract: We offer a theory that sheds light on the current debate over whether the form of corporate ownership converges to the Berle-Means image. Our analytical results are threefold. First, legal rules and firm-specific protective arrangements are complementary. Secondly, corporate ownership patterns can be convergent or path dependent depending on the relative importance of these protective arrangements. We predict, for example, diffuse stock ownership in countries that impose legal limits on blockholders’ power to expropriate minority investor rights. Thirdly, we find that convergence toward diffuse share ownership is a movement towards the social optimum. Our empirical results suggest a case for the co-existence of path dependence and functional convergence (convergence to the diffuse form of share ownership through cross-listings on U.S. stock exchanges that impose more stringent disclosure and listing requirements). These results have implications for the design of executive compensation, the case for institutional investor activism and the proposal to increase shareholder power.
    Keywords: corporate governance; ownership concentration; institutions; quality of governance; path dependence; functional convergence
    JEL: G32 G34 O17
    Date: 2006–04–01
  20. By: Robert M. Costrell (University of Massachusetts at Amherst); Glenn C. Loury (Institute for Economic Development, Boston University)
  21. By: Patrick Legros (ECARES, Universite Libre de Bruxelles); Andrew F. Newman (Institute for Economic Development, Boston University)
    Abstract: We study how the internal organization of firms — specifically, the allocation of ownership of assets and the distribution of profit among the firm’s managers — is determined in a competitive market. We ask how scarcity of assets, skills or liquidity in the market translates into ownership and control allocations within organizations. Firms will be more integrated when the terms of trade are more favorable to the short side of the market, when liquidity is unequally distributed among existing firms and when there is a positive uniform shock to productivity. The model identifies a price-like mechanism whereby local liquidity or productivity shocks propagate and lead to widespread organizational restructuring.
  22. By: R. Cellini; L. Lambertini

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