nep-bec New Economics Papers
on Business Economics
Issue of 2006‒06‒03
23 papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Entrepreneurship and Asymmetric Information in Input Markets By Robin Boadway; Motohiro Sato
  2. The Myth of Decline: A New Perspective on the Supply Chain and Changing Inventory-Sales Ratios By Adam Fein
  3. Pairwise Tests of Purchasing Power Parity Using Aggregate and Disaggregate Price Measures By M. Hashem Pesaran; Ron P. Smith; Takashi Yamagata; Liudmyla Hvozdyk
  4. Major Provisions of Labour Contracts and their Theoretical Coherence By Louis Christofides; Amy Chen Peng
  5. La formation qualifiante et transférable en milieu de travail By Yanick Labrie; Claude Montmarquette
  6. Exchange Rates and Order Flow in the Long Run By M. Martin Boyer; Simon van Norden
  7. On Delegation under Relational Contracts By Oliver Gürtler
  8. Firm Entry and Exit in the U.S. Retail Sector, 1977-1997 By Javier Miranda; Shawn Klimek; Ron Jarmin
  9. Bypassing the Financial Growth Cycle: Evidence from Capital Pool Companies By Cécile Carpentier; Jean-Marc Suret
  10. Motivation and the theory of the firm By Gottschalg, Oliver; Zollo, Maurizio
  11. Entrepreneurial capabilities inherited from previous employment By Sierdjan Koster
  12. The Role of Cash Holdings in Reducing Investment-Cash Flow Sensitivity: Evidence from a Financial Crisis Period in an Emerging Market By Ozgur Arslan; Chrisostomos Florackis; Aydin Ozkan
  13. The Macroeconomic Impact Of Bank Capital Requirements In Emerging Economies: Past Evidence To Assess The Future By Maria Concetta Chiuri; Giovanni Ferri; Giovanni Majnoni
  14. The Intensity of Incentives in Firms and Markets: Moral Hazard with Envious Agents By Björn Bartling; Ferdinand von Siemens
  15. Decentralization, Hierarchies and Incentives: A Mechanism Design Perspective By Dilip Mookherjee
  16. Organizational Design and Resource Evaluation By Michael Christensen; Thorbjørn Knudsen
  17. The Power of Positional Concerns: A Panel Analysis By Benno Torgler; Sascha L. Schmidt; Bruno S. Frey
  18. Three Lenses on the Multinational Enterprise: Politics, Corruption and Corporate Social Responsibility. By Peter Rodriguez; Donald S. Siegel; Amy Hillman; Lorraine Eden
  19. Measuring the Interaction Between Manufacturing and Services By Dirk Pilat; Anita Wölfl
  20. Sourcing Patterns of Foreign-owned Multinational Subsidiaries in Europe By Ana Teresa Tavares; Stephen Young
  21. Firm Structure, Multinationals, and Manufacturing Plant Deaths By J. Bradford Jensen; Andrew Bernard
  22. The Impact of Absenteeism on the Quality of Assembly Line Production: Is the Value of Worker Expertise Decreasing? By Ricardo Mateo
  23. Outstanding Outsourcers: A Firm- and Plant-Level Analysis of Production Sharing By Christopher Johann Kurz

  1. By: Robin Boadway (Queen's University); Motohiro Sato (Hitotsubashi University)
    Abstract: Entrepreneurs starting new firms face two sorts of asymmetric information problems. Information about the quality of new investments may be private, leading to adverse selection in credit markets. And, entrepreneurs may not observe the quality of workers applying for jobs, resulting in adverse selection in labor markets. We construct a simple model to illustrate some consequences of new firms facing both sorts of asymmetric information. Multiple equilibria can occur. Stable equilibria can be in the interior, or at a corner in which no entrepreneurs enter. Stable interior equilibria can involve involuntary unemployment, as well as credit rationing. Equilibrium outcomes mismatch workers to firms, and will generally result in an inefficient number of new firms. With involuntary unemployment, there will be too few new firms, but with full employment, there may be too many or too few. Taxes or subsidies on new firms and employment can be used to achieve a second-best optimum. Alternative information assumptions are explored.
    Keywords: entrepreneurship, asymmetric information, adverse selection
    JEL: D82 G14 H25
    Date: 2006–05
  2. By: Adam Fein
    Abstract: There is a widely held perception that improved supply chain practices and new technologies have led to declines in the inventory-sales ratio. Our empirical analyses of 87 inventory-sales ratios in 45 manufacturing, wholesale distribution, and retail trade industries casts doubt on assumptions of widespread declines in these ratios. We find that less than half of the ratios showed statistically significant declines during the 12 year period from January 1992 through December 2003. Information technology may indeed have improved inventory management, but this improvement is not reflected in inventory-sales ratio data for many U.S. industries. Our detailed case study of the pharmaceutical supply chain also offers additional insights by showing how relevant technological investments led to an extended period in which inventory-to-sales ratios increased.
    Date: 2004–10
  3. By: M. Hashem Pesaran; Ron P. Smith; Takashi Yamagata; Liudmyla Hvozdyk
    Abstract: In this paper we adopt a new approach to testing for purchasing power parity, PPP, that is robust to base country effects, cross-section dependence, and aggregation. Given data on N +1 countries, i, j = 0, 1, 2, ..., N, the standard procedure is to apply unit root or stationarity tests to N relative prices against a base country, 0, e.g. the US. The evidence is that such tests are sensitive to the choice of base country. In addition, the analysis is subject to a high degree of cross section dependence which is difficult to deal with particularly when N is large. In this paper we test for PPP applying a pairwise approach to the disaggregated data set recently analysed by Imbs, Mumtaz, Ravan and Rey (2005, QJE). We consider a variety of tests applied to all possible N(N +1)/2 pairs of real exchange rate pairs between the N + 1 countries and estimate the proportion of the pairs that are stationary, for the aggregates and each of the 19 commodity groups. This approach is invariant to base country effects and the proportion that are non-stationary can be consistently estimated even if there is cross-sectional dependence. To deal with small sample problems and residual cross section dependence, we use a factor augmented sieve bootstrap approach and present bootstrap pairwise estimates of the proportions that are stationary. The bootstrapped rejection frequencies at 26%-49% based on unit root tests suggest some evidence in favour of the PPP in the case of the disaggregate data as compared to 6%-14% based on aggregate price series.
    Keywords: purchasing power parity, panel data, pairwise approach, cross section dependence
    JEL: C23 F31 F41
    Date: 2006
  4. By: Louis Christofides; Amy Chen Peng
    Abstract: Theoretical work on indexation and contract duration suggests no role for the expected rate of inflation in equations explaining these variables. Yet, stand-alone or two-equation studies of indexation and contract duration often report that this variable is statistically significant. We study a wider econometric system which includes, in addition, non-contingent wage adjustment. This third, jointly dependent, variable and its nominal anchor (the expected rate of inflation) play a role in the duration and indexation decisions and offer a context within which earlier findings can be understood. In this three-equation system, the wage equation accommodates complex mechanisms through which price inflation feeds into wage adjustment both within and across contracts. The elasticity of indexation is modelled as a latent variable, supporting consideration of both the incidence and the intensity of indexation and linking consistently with the wage equation. In our results, the expected rate of inflation has no role in the duration equation and only a minor one in the elasticity of indexation equation. These findings are more consistent with received theory but they also suggest that more complex models involving all three variables and the sequence of contracts signed by a bargaining pair are needed.
    Keywords: contracts, duration, indexation, wage adjustment, simultaneity
    JEL: E31 J41 J50
    Date: 2006
  5. By: Yanick Labrie; Claude Montmarquette
    Abstract: <P>Comment définir une formation qualifiante et transférable? Comment favoriser et obtenir une telle formation en milieu de travail? Qui doit payer pour cette formation? Pourquoi certaines entreprises offrent une formation structurée à leurs employés contrairement à d’autres? Qui reçoit cette formation? Pourquoi plusieurs employés refusent la formation offerte par leur employeur? Pourquoi certaines économies ont senti le besoin de légiférer sur cette question en instaurant une obligation financière de formation et d’autres ne l’ont pas fait? Pour répondre à ces questions et à plusieurs autres questions connexes, nous avons répertorié et analysé plus de 140 travaux provenant essentiellement des écrits des économistes sur le sujet.<P> Notre étude rapporte plusieurs éléments de réponse à ces questions et discute plusieurs autres dimensions connexes aux déterminants de la formation en entreprise (impacts de la formation, incitatifs et barrières à la formation, les politiques publiques en matière de formation). Il est possible cependant que certaines réponses demeurent insatisfaisantes aux yeux de la Commission des Partenaires du marché du travail. C’est notamment ce que nous appréhendons au sujet de la définition d’une formation qualifiante et transférable. Chez les économistes, ces termes ne sont pas comme tels retenus. Ce sont les concepts de formation générale et de formation spécifique qui sont discutés amplement dans la littérature économique.<P>Par formation générale, on entend chez les économistes une formation qui a de la valeur autant au sein de l’entreprise qui choisit de l’offrir à ses employés qu’au sein d’entreprises extérieures. À cet égard, il est reconnu que ce type de formation est pleinement transférable. Par contraste, la formation spécifique n’est utile qu’au sein de l’entreprise qui choisit de l’offrir à ses employés. Ce type de formation n’est donc aucunement transférable. Récemment, on a proposé l’idée que toutes les compétences acquises en cours de formation seraient de nature générale, mais que la combinaison de ces compétences générales serait de nature spécifique à l’entreprise. <P>En ce qui concerne la formation qualifiante, elle peut être définie comme un processus par lequel l’individu développe les compétences nécessaires à l’exercice d’une fonction ou d’un métier sur le marché du travail. Or, ce n’est qu’ex post que la formation est qualifiante, c’est-à-dire lorsqu’elle se traduit par une hausse de productivité, une hausse de salaire, ou une hausse de mobilité professionnelle. Par ailleurs, d’autres éléments ne sont pas de nature à simplifier la recherche d’un cadre opérationnel aux termes de la Loi portant sur la question de la formation « qualifiante » et « transférable ». Par exemple, une formation non qualifiante peut le devenir par l’innovation et il est aussi possible que dans certains cas un délai dans le temps soit nécessaire pour qu’une formation devienne qualifiante.<P>Si plusieurs réponses demeurent incomplètes, il existe néanmoins un certain agrément sur plusieurs points et cela est grandement susceptible d’éclairer le débat entourant la promotion de la formation en entreprise. D’abord, la portée du sujet est indéniable : la question de la formation des travailleurs en entreprise est fondamentale dans un contexte de concurrence mondiale accrue. Cette situation est particulièrement importante pour le Québec avec son économie largement ouverte sur les marchés extérieurs. La formation en milieu de travail est un investissement en capital humain qui est un facteur majeur de la croissance économique et une condition garante d’une meilleure qualité de vie pour les individus. Il existe aussi un consensus à l’effet que la formation en entreprise soit d’abord et avant tout le privilège des travailleurs les plus habiles et les mieux éduqués à la base. Un autre constat bien évident est que plusieurs conditions semblent nécessaires pour favoriser la formation en milieu de travail, que ce soit, par exemple, l’abolition des contraintes institutionnelles ou la simple amélioration de la reconnaissance des acquis, alors qu’aucune n’est en soi suffisante. La Loi favorisant le développement de la formation de la main-d’œuvre, qui oblige toutes les entreprises d’une certaine taille à investir 1% de leur masse salariale dans la formation de la main-d’œuvre n’apparaît pas être une condition suffisante. S’il en était autrement, elle serait universelle et non l’exception dans les économies. Que cette loi soit une condition nécessaire au Québec est une autre question qui nous amène à nous interroger, comme nous l’avons fait dans ce travail, sur les déterminants fondamentaux de la formation en milieu de travail. À la base de ces déterminants, on retrouve la nécessité que la formation soit un investissement rentable autant pour l’individu que pour la firme qui l’embauche.<P> Notre étude se termine en offrant quelques recommandations pour favoriser la formation en entreprise tout en suggérant diverses pistes pour des recherches futures.
    Date: 2005–03–01
  6. By: M. Martin Boyer; Simon van Norden
    Abstract: Several recent papers have underlined the importance of the microstructure effects in understanding exchange rate behavior by documenting stable long-run relationships between cumulated order flows and spot exchange rates. This stands in contrast to the widely-studied failure of exchange rates to conform to the long-run behavior implied by “conventional” macroeconomic models and is consistent with the prediction of micro-structure models. We reexamine the evidence for stable long-run relationships. We find that such evidence exists only for a small number of the major currencies we examine and that is it statistically fragile. We conclude that this implication of microstructure models does not fit the data as well as previous studies suggest. <P>Plusieurs études récentes ont souligné l’importance de la microstructure des marchés pour la compréhension des comportements des taux de change en documentant les relations stables à long terme entre les flux des commandes cumulées et les taux de change courants. Les résultats contrastent avec ceux de nombreuses études sur l’échec des taux de change de se conformer au comportement à long terme que supposent les modèles macroéconomiques « conventionnels » et sont conformes à la prédiction des modèles microstructurels. Nous réexaminons l’évidence de relations stables à long terme et constatons que celle-ci n’existe que dans un petit nombre des taux de change étudiés et qu’elle est fragile du point de vue statistique. Nous concluons que l’implication des modèles microstructurels ne correspond pas aux données aussi bien que des études précédentes laissent supposer.
    Keywords: cointegration, foreign exchange rates, order flow, microstructure, cointégration, flux de commandes, microstructure, taux de change
    JEL: F31 G15
    Date: 2006–05–01
  7. By: 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
    Abstract: In this paper, a principal’s decision between delegating two tasks or handling one of the two tasks herself is analyzed. We assume that the principal uses both, formal contracts and informal agreements sustained by the value of future relationships (relational contracts) as incentive device. It is found that the principal is less likely to delegate both tasks in a dynamic setting than in a static one (where formal contracts are the only feasible incentive device), as handling one task herself enables a much wider use of relational contracts.
    Keywords: Job design, relational contracts, formal contracts, delegation
    JEL: D82 J33 L23 M52 M54
    Date: 2006–05
  8. By: Javier Miranda; Shawn Klimek; Ron Jarmin
    Abstract: The development of longitudinal micro datasets in recent years has helped economists develop a number of stylized facts about producer dynamics. However, most of the widely cited studies use only manufacturing data. This paper uses the newly constructed Longitudinal Business Database (LBD) to examine producer dynamics in the U.S. the retail sector. The LBD is constructed by linking twenty-six years (1975-2000) of the U.S. Census Bureau's Business Register at the establishment level. The result is a dataset on the universe of employer establishments in the U.S. on an annual basis with detailed geographic, industry, firm ownership, and employment information. We use the LBD to examine patterns of firm entry and exit in the U.S. retail sector. We find that many of the patterns observed by Dunne, Roberts, and Samuelson (1988) are also observed within the retail sector, but interesting and important differences do exist.
    Keywords: retail sector, entry-exit, longitudinal establishment data
    JEL: L11
    Date: 2004–10
  9. By: Cécile Carpentier; Jean-Marc Suret
    Abstract: To close an asserted equity gap, the Canadian regulators implemented the Capital Pool Company program, which enables small firms to directly access the stock market, thus bypassing the conventional growth cycle. Similar to American Blind Pools/Blank-Checks, Capital Pool Companies have spawned more than half of the new issues on Canadian stock markets between 1995 and 2001. Underlying this program, along with several other governmental actions, are three postulates: 1) a significant number of profitable companies cannot be financed using conventional tools, 2) small firms can grow and succeed without the full set of services usually provided by the specialized intermediaries, and 3) individual investors are able to correctly price the stocks issued by small and generally young firms. Our analysis of close to 450 issuers resulting from this program fails to confirm any of these postulates. Companies that access the stock market through this program are of low quality, which is consistent with the adverse selection paradigm. Their abnormally low subsequent operating performance can be traced to the lack of incentive and monitoring tools, along with the “lemon” principle. Moreover, their market performance is also abnormally poor, confirming that individual investors cannot correctly assess the fair value of new ventures, in a strong asymmetric information context. In terms of public policy, development of mechanisms intended to facilitate the entry of emerging companies on the stock market apparently requires serious reexamination. Our results confirm the essential role played by financial intermediaries in small business finance. <P>Pour remédier à une discontinuité de marché supposée, les autorités canadiennes des valeurs mobilières ont mis en place le programme des sociétés de capital de démarrage. Celui-ci permet aux petites entreprises d’accéder directement au marché boursier, sans avoir recours aux étapes traditionnelles de financement de la croissance. Comparables aux Blind Pools américaines, les sociétés de capital de démarrage représentent plus de la moitié des émissions publiques initiales au Canada entre 1995 et 2001. Les hypothèses sous jacentes à ce programme, ainsi qu’à d’autres initiatives gouvernementales, sont les suivantes : 1) un nombre significatif de projets rentables ne peuvent pas être financés en utilisant les moyens de financement conventionnels, 2) les petites entreprises peuvent croître et être rentables sans les services fournis habituellement par les intermédiaires traditionnels, 3) les investisseurs individuels sont capables d’évaluer correctement le prix d’émission des petites, et généralement jeunes, entreprises. Notre analyse de près de 450 émetteurs résultants de ce programme ne permet pas de confirmer ces hypothèses. Les entreprises qui accèdent au marché boursier au moyen de ce programme sont de mauvaise qualité, ce qui est cohérent avec le paradigme de l’anti-sélection. Leur performance opérationnelle subséquente est anormalement faible, ce qui peut être relié à un manque d’outils d’incitation et de surveillance, ainsi qu’au même paradigme de l’anti-sélection. En outre, leur performance boursière est également anormalement faible, ce qui tend à montrer que les investisseurs individuels ne sont pas en mesure d’évaluer correctement le prix de ces nouvelles émissions, dans un contexte d’asymétrie informationnelle forte. En termes de politiques publiques, le développement de mécanismes de marché visant à faciliter l’accès au marché boursier d’entreprises en démarrage requiert un sérieux réexamen. Nos résultats confirment le rôle crucial joué par les intermédiaires de financement traditionnels auprès des petites entreprises.
    Keywords: capital pool company, small business finance, initial public offering, société de capital de démarrage, financement de la PME, émission publique initiale
    Date: 2004–09–01
  10. By: Gottschalg, Oliver; Zollo, Maurizio
    Abstract: This paper proposes to revisit the debate on the theory of the firm using motivation theory as the primary analytical tool.
    Keywords: theory of the firm; motivation theory
    JEL: L21 L25
    Date: 2006–02–08
  11. By: Sierdjan Koster
    Abstract: The start-up process of every firm is unique; backgrounds of the founders differ, the goals of the firm differ, sectors differ. However, in firm demographic research there is a continuing quest for regularities in order to understand the start-up process of firms better. In relation to problems with the new foundings birth rate, an important dimension in the start-up process is the influence of existing firms on the start-up of new ones. Is the new firm an individual effort or is the new firm heavily influenced by another firm? This question can be approached from a organisational and an individual perspective. The organisational view takes the firm as a starting point, whereas the individual perspective focuses on the entrepreneur. Both views allow an analysis of the influence of other firms. Taking the organisational viewpoint, new firms can be classified from totally new entities to diversified parts of large existing firms. The former is a totally new configuration of resources, but the latter heavily builds on existing structures and organisation. The processes are pretty straightforward to recognize as the path history of the firms can be traced back pretty easily. However, little is known about the importance of different groups. How many firms are actual new configurations, and how many built upon existing firms? From the individual viewpoint, the influence of other firms is less easily recognised. Many studies reason along the lines of experience. Firms influence the start-up of new ones by educating their employees and giving them expertise in this way. The entrepreneurs use this to start up their own firm. Experienced founders start better firms than other entrants. Several studies have come up with this logically appealing result. After all, it makes sense that entrepreneurs with a reasonable degree of knowledge about the new firm and its sector will perform better than entrepreneurs with less experience. The experience of founders, however, is usually rather loosely defined and in many cases there is only a dichotomy between sector experience (spin-offs) and entrepreneurship experience (habitual entrepreneurs). At the level of the knowledge itself, very little is known and the mechanisms of knowledge transfer from existing firms to new ones are treated as a black-box. Consequently, the role of existing firms as educational institutes for entrepreneurs is only approximately known. This paper focuses on the question to what extent firms are actually new, or that they can be seen as rearrangements of old firms. Which are the most important resources transferred from firm to firm? Both the organisational approach and the individual are applied. The empirical results are based on a large questionnaire (N=347) of Dutch entrepreneurs and a follow-up in the form of focus interviews with the entrepreneurs. It appears that most entrepreneurs have a solid background in the business they are in. About 80% of all entrepreneurs has built up knowledge during their previous job, that they now use being an entrepreneur. Besides 20% of all entrepreneurs even receive direct help from their previous employers. From an organisational perspective, a large share of all firms has been based on existing firms, either as a continuation of a stopped firm (18%), or a diversified part of a larger company (10%). The paper concludes by proposing a framework, based on the above findings, that facilitates a new approach to birth rate calculation methods.
    Date: 2005–08
  12. By: Ozgur Arslan; Chrisostomos Florackis; Aydin Ozkan
    Abstract: This paper investigates the relationship between financing constraints and investment-cash flow sensitivities by focusing on cash holdings of firms as the basic classification scheme to separate firms into financially constrained and unconstrained categories. The idea is that high cash reserves increase the ability of firms to undertake profitable investment opportunities. Our classification scheme is based on an optimal cash model, which helps us identify the firms that deviate significantly from their target cash ratio. We conduct the analysis for an emerging market, just before and during a financial crisis to test the hypothesis that the hedging role of cash is more critical in states of the world characterized by high asymmetric information and excessive costs of external finance. The results are in line with our expectations and show that constrained firms exhibit greater investment to cash flow sensitivities than unconstrained firms. Also, there is strong evidence that cash stands as an effective device for firms mainly, during the crisis period.
    Keywords: Cash holdings, investment, financial constraints, financial crisis, emerging markets
    JEL: G31 G32
    Date: 2006–04
  13. By: Maria Concetta Chiuri (Dipartimento di Scienze Economiche - Università di Bari); Giovanni Ferri (Dipartimento di Scienze Economiche - Università di Bari); Giovanni Majnoni (World Bank)
    Abstract: We test for emerging economies the hypothesis - previously verified for G-10 countries only - that the enforcement of bank capital asset requirements (CARs) exerts a detrimental effect on the supply of credit. The econometric analysis on individual bank data suggests three main results. First, CAR enforcement - according to the 1988 Basel standard - significantly curtailed credit supply, particularly at less-well capitalized banks. Second, such negative impact was larger for countries enforcing CARs in the aftermath of a currency/financial crisis. Third, the adverse impact of CARs on the credit supply was significantly smaller for foreign-owned banks, suggesting that opening up to foreign investors may be an effective way to partly shield the domestic banking sector from negative shocks. Overall, CAR enforcement - by inducing banks to reduce their lending - may well have induced an aggregate credit slowdown or contraction in the examined emerging countries. This paper is relevant to the ongoing debate on the impact of the revision of bank CARs, as contemplated by the 1999 Basel proposal. Our results suggest that in several emerging economies the revision of bank CARs could well induce a credit supply retrenchment, which should not be underestimated.
    Keywords: bank capital asset requirements, capital crunch
    JEL: G18 G21 G28
  14. By: Björn Bartling (; Ferdinand von Siemens (
    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.
    Keywords: Envy, moral hazard, flat-wage contracts, within-Firm vs. market interactions
    JEL: D82 J3 M5
    Date: 2006–04
  15. By: Dilip Mookherjee (Department of Economics, Boston University)
    Abstract: In summary, the most important lacuna of existing theoretical incentive-based literature is that it focuses on costs rather than the benefits of delegation. The latter are difficult to incorporate into traditional contract theory. Perhaps the most important benefit of delegation is the distribution of information processing tasks, but no progress has occurred in theories that marry information processing costs with incentives. Some progress has been possible with communication costs and simple measures of contract complexity, but these need better foundations. What have we learnt from the existing literature? It identifies a number of potential costs of delegation: moral hazard for intermediaries owing to non-coincidence of their own objectives with the principal’s, and their monopsony power over subordinates. These can result in production distortions (insufficient sourcing from subordinates), cascading of information rents across vertical layers, and problems of coordinating different horizontal branches. If agents do not collude, these agency costs of delegation can be avoided if (and only if) the principal can monitor subcontract costs or quantities, if contracts flow down the hierarchy, and agents are risk-neutral. If any one of these conditions do not hold then agency costs cannot be avoided. The only significant problem pertains to vertical control loss; if they can be avoided (i.e., under the above mentioned conditions) then incentive considerations do not complicate horizontal coordination across branches of the hierarchy: ‘group’-based incentive contracts can be designed to costlessly internalize these horizontal externalities. On the other hand, managerial risk aversion or limited capacity for principals to monitor local conditions or agent decisions can cause significant control losses from delegation, that grow with the size and complexity of the organization. This provides an explanation of organizational diseconomies of scale, i.e, why larger firms tend to be more ‘bureaucratic’ and less able to control costs. If agents collude, centralization is also subject to unobserved side contracting among agents, limiting the ability of the principal to moderate ‘control loss’. However, centralization potentially allows greater control over side contracting outcomes by the principal offering outside options to subordinates that limit monopsony power of intermediaries. Depending on the precise distortions engendered, this added dimension of control may or may not be valuable. Overall, the presence of collusion among agents enlarges the range of circumstances where delegation implements optimal allocations. There are numerous open questions and fruitful avenues for future research. I conclude by listing some of these. First, a better understanding of effects of collusion is still needed. The few papers on this topic emerge with different results the intuitive basis for which is not very clear. One hopes a more unified perspective will emerge in due course. There is a need to explore implications of different formulations of side-contracting, e.g., more general assignment of bargaining power within coalitions, or alternative timing assumptions. Baron-Besanko (1999) provide an intriguing model in which agents themselves decide ex ante whether to consolidate themselves into a single entity, a decision which the principal observes and takes into account before offering a contract. In the models we described, the principal can anticipate a particular pattern of side contracting, but cannot observe whether or not the agents actually do side-contract. In contexts with more agents and vertical layers, the possibility of collusion-within-collusion further complicates the analysis. Second, more effort needs to be devoted to explaining the potential benefits of delegation. Models integrating information processing or communication costs with incentive considerations are needed to provide a full-blown theory of the trade-off between centralization and decentralization. This would render the theory useful in applied work assessing the effectiveness of innovative human resource management practices and their complementarity with new information technology. A third possible avenue would consider applications and extensions to contexts involving more productive agents and a richer specification of the production technology. Questions concerning the optimal shape of hierarchies can then be addressed, e.g., tradeoffs between span of control and number of vertical layers, how to group agents within departments, organizational diseconomies of scale, and the advantages of non-hierarchical organizations. One hopes that both theory and empirical datasets regarding these organizational attributes can be developed interactively, permitting better understanding of their productivity implications, and how they respond to changes in market competition or information technology.
    Date: 2005–09
  16. By: Michael Christensen; Thorbjørn Knudsen
    Abstract: A crucial problem of evaluating, discovering, and creating the value of resources remains at the center of the subject of business strategy. The present article draws on reliability theory to advance an analytical platform that can address part of this problem, the evaluation of resource value. Reliability theory offers a way to model managerial ability and to derive the evaluation properties of organizations, boards, teams and committees. It is shown how the problem of resource evaluation can be remedied by proper evaluation structures. An evaluation structure that is build out of a very few agents can achieve significant improvements. A simulation of the classical n-armed bandit problem shows how evaluation structures can help managers select innovations of better economic value.
    Keywords: Reliability theory; resource value
    JEL: D46 O31
    Date: 2006
  17. By: Benno Torgler; Sascha L. Schmidt; Bruno S. Frey
    Abstract: Many studies have established that people care a great deal about their relative economic position and not solely, as standard economic theory assumes, about their absolute economic position. However, behavioral evidence is rare. This paper provides an empirical analysis on how individuals’ relative income position affects their performance. Using a unique data set for 1040 soccer players over a period of eight seasons, our analysis suggests that the larger the income differences within a team, the worse the performance of the soccer players is. The more the players are integrated in a particular social environment (their team), the more evident this negative effect is. Moreover, we find that positional effects lowering performance are stronger among high performing teams.
    Keywords: Relative income; positional concerns; envy; performance; social integration
    JEL: D00 D60 L83
    Date: 2006–05
  18. By: Peter Rodriguez (Darden Graduate School of Business Administration, University of Virginia, P.O. Box 6550, Charlottesville, VA 22906-6550, USA); Donald S. Siegel (Department of Economics, Rensselaer Polytechnic Institute, Troy, NY 12180-3590, USA); Amy Hillman (Department of Management, W. P. Carey School of Business, Arizona State University, Box 874006, Tempe, AZ 85287-4006, USA); Lorraine Eden (Department of Management, Mays Business School, TAMU 4221, 420B Wehner Bldg, Texas A&M University, College Station, Texas, 77843-4221, USA.)
    Abstract: Scholars who study multinational enterprises (MNEs) recognize the complex relationship between international business and society. However, compared to other international business topics, research on politics, corruption and corporate social responsibility (CSR) -- three 'lenses' on the MNE -- remains somewhat embryonic, with critical unresolved issues regarding frameworks, measurement, methods and theory. This creates rich opportunities for integration and extension of disciplinary perspectives, which we explore in this article. Building on the three lenses framework, we identify common concepts and tools, outline an agenda for additional theoretical and empirical research, and review the papers in a Focused Issue of the Journal of International Business Studies.
    JEL: F23 F02 M14 D21
    Date: 2006–04
  19. By: Dirk Pilat; Anita Wölfl
    Abstract: This paper examines the interaction between services and manufacturing using several types of data and shows that the distinction between manufacturing and services is blurring. Services make important contributions to production, mainly through their direct contribution to total output and final demand, but to some degree also through their indirect contribution via other industries. However, services are more independent from other industries than the manufacturing sector. Most inputs that are necessary to produce services are derived from the services sector itself. Moreover, their role as providers of intermediate inputs to other industries is not yet as strong as that of the manufacturing sector. The paper also shows that a growing share of workers in the manufacturing sector is engaged in services-related occupations. Using a broad definition of service-related workers, up to 50% of manufacturing workers are in such occupations. Using firm-level data the paper finds that, despite anecdotal evidence on a growing share of services turnover within the manufacturing sector, manufacturing enterprises in most countries are not very diversified in their constituting establishment, i.e. they do not have many establishments engaged in services production. Canada is a notable exception in this respect. In other countries, it is likely that diversification primarily occurs at the level of the enterprise group. On the other hand, data on products suggest that manufacturing firms and establishments appear to derive a growing share of turnover from services, notably in countries such as Finland and Sweden. <P>Mesure de l'interaction entre les industries manufacturières et les services Cette étude examine l’interaction qui existe entre les services et les industries manufacturières, en s’appuyant sur différents types de données. Elle montre que la distinction entre les industries manufacturières et les services tend à s’estomper. Les services apportent d’importantes contributions à la production, principalement sous forme d’apports directs à la production totale et à la demande finale, mais aussi, dans une certaine mesure, à travers leur contribution indirecte. Toutefois, les services sont plus indépendants des autres industries que ne l’est le secteur manufacturier. La plus grande partie des intrants nécessaires à la production des services procède du secteur des services lui-même. De plus, la place des services dans la fourniture d’intrants intermédiaires à d’autres secteurs n’est pas encore aussi importante que celle de l’industrie manufacturière. Ce travail révèle en outre qu’une proportion croissante des travailleurs du secteur manufacturier est employée à des fonctions liées aux services. Si l’on utilise une définition large des fonctions liées aux services, jusqu’à 50 % des travailleurs du secteur manufacturier relèvent de telles fonctions. En s’appuyant sur des données micro-économiques, ce document montre que, malgré des éléments épars qui sembleraient indiquer qu’une part croissante du chiffre d’affaires du secteur manufacturier correspond à des activités de services, dans la plupart des pays, les entreprises manufacturières restent assez peu diversifiées, ce qui signifie qu’elles ne comptent pas beaucoup d’établissements produisant des services. Le Canada constitue une exception notable à cet égard. Dans d’autres pays, il semble plutôt que la diversification s’opère essentiellement au niveau du groupe. Enfin, les données sur les produits suggèrent que les entreprises et les établissements du secteur manufacturier réalisent une part plus importante de leur chiffre d’affaires grâce aux services, notamment dans des pays comme la Finlande et la Suède.
    Date: 2005–05–31
  20. By: Ana Teresa Tavares; Stephen Young
    Abstract: The paper investigates the determinants of the sourcing patterns of foreign-owned multinational subsidiaries in a cross-country European setting. Sourcing decisions (namely, buying locally versus internationally) represent a highly relevant theme for regional and national host economies, given the potential impact these decisions can have on indigenous industrial systems. The subject under analysis attracts considerable attention in regional economics, given the importance of multinationals’ local linkages in generating externalities and technology spillovers and in supporting industrial agglomeration. Additionally, a concern with growing import levels exists, since the globalization of supply chains is creating major competitive pressures for local suppliers, as companies explore global sourcing options. Inter-firm linkages between multinationals and host country suppliers are investigated. The paper is structured as follows: firstly, a thorough literature review on local sourcing, spillovers and regional impact of multinational enterprises is offered. Then, the paper puts forward a general framework of the factors influencing the choice between international and local sourcing, and formulates hypotheses (based on that conceptual framework), on subsidiary roles/characteristics (such as subsidiary age, whether subsidiary was established before or after host country EU integration, entry mode, subsidiary size) and country (home and host) and industry characteristics. Subsequently, an econometric analysis of the main determinants of sourcing decisions is conducted. The empirical setting is multi-country, EU-based. Data result from a large-scale survey of the main foreign-owned subsidiaries in four EU countries (Ireland, Portugal, Spain and the UK). The main contributions of the paper lie in an improved understanding of the influence of foreign-owned subsidiary strategies and economic integration in sourcing patterns, topics on which little research exists. Important conclusions are drawn on the scope to increase local sourcing through policy intervention at national and regional levels. Major findings concern the impact of subsidiary roles and economic integration on sourcing patterns. Regional and global integration are leading to a greater import-orientation among MNE subsidiaries, including high value-added Product Mandate subsidiaries which are assumed to be strongly embedded within host economies.It was found that economic integration (along with age of subsidiary) has a significant impact on sourcing patterns, meaning that subsidiaries established after their host countries’ EU accession are less embedded via sourcing; and that subsidiaries in global industries buy less locally, as well as subsidiaries located in small EU economies (that have lower supplying capabilities as the local industry is less diversified). Our results did not find a significant association of subsidiary size, home country and entry mode with the import propensity of the multinational subsidiaries surveyed. This research confirms the significant body of evidence that multinationals have seldom developed extensive input linkages with their host economy, and strengthens the conclusion of previous authors that the potential for local linkages is now significantly reduced as compared with the past. The results cast serious doubts on the effectiveness of traditional criteria for investment attraction; and confirm that stimulating local sourcing is problematic. Specific policy implications are developed relating to the attraction of inward foreign direct investment and to corporate development policies.
    Date: 2004–08
  21. By: J. Bradford Jensen; Andrew Bernard
    Abstract: Plant shutdowns shape industry and aggregate productivity paths and play a major role in the dynamics of employment and industrial restructuring. Plant closures in the U.S. manufacturing sector account for more than half of gross job destruction. While multi-plant firms and multinationals dominate U.S. manufacturing, theoretical and empirical work has largely ignored the role of firms in the plant shutdown decision. This paper examines the effects of firm structure on manufacturing plant closures. Using U.S. data, we find that plants belonging to multi-plant firms are less likely to exit. Similarly, plants owned by U.S. multinationals are less likely to close. However, the superior survival chances are due to the characteristics of the plants themselves rather than the nature of the firms. Controlling for plant and industry attributes that reduce the probability of death, we find that plants owned by multi-unit firms and U.S. multinationals are much more likely to close. A recent change in ownership also increases the chances that a plant will be closed.
    Keywords: Exit, shutdown, closure, multi-plant firms, multinational firms, takeovers, entry costs, agglomeration, specialization
    JEL: D21 D24 F23 L20 L6
    Date: 2005–10
  22. By: Ricardo Mateo (Facultad de Económicas, Universidad de Navarra)
    Abstract: Absenteeism among manual workers is, without doubt, one of the most significant factors to affect the functioning of assembly lines in developed markets. That high levels of absenteeism have negative repercussions on the quality and costs of operations is a widely held view. According to the scientific theory of work, workers who temporarily stand in for their absent colleagues affect production quality levels because of a lack of work specialization. However, as the technology of assembly lines has improved, the need for line operator specialization has gone into decline. In this article, we analyse the effects of absenteeism on four assembly lines over the course of one year. The analysis of two hundred working days reveals more than two hundred thousand instances of effects on the quality of products. In contrast to established thinking, the empirical evidence we present here confirms that absenteeism does not produce problems in the quality of operations even at the highest levels. This evidence can be explained by the fact that the value of specialisation among manual workers has been significantly reduced by the invention of more sophisticated and specialised machinery.
    Keywords: assembly lines, quality, absenteeism, performance
    JEL: M54 M51
  23. By: Christopher Johann Kurz
    Abstract: This paper examines the differences in characteristics between outsourcers and nonoutsourcers 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.
    Date: 2006–01

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