nep-bec New Economics Papers
on Business Economics
Issue of 2006‒08‒05
thirteen papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Reputations, Relationships and the Enforcement of Incomplete Contracts By W. Bentley MacLeod
  2. Asymmetric labor force participation decisions over the business cycle: evidence from U.S. microdata By Julie L. Hotchkiss; John C. Robertson
  3. Piece Work Pay and Hourly Pay over the Cycle By Robert A. Hart
  4. Uncertainty Determinants of Firm Investment By Christopher F. Baum; Mustafa Caglayan; Oleksandr Talavera
  5. Performance Related Pay and Labor Productivity By Anne C. Gielen; Marcel J.M. Kerkhofs; Jan C. van Ours
  6. In search of distress risk By Campbell, John Y.; Hilscher, Jens; Szilagyi, Jan
  7. Why Has CEO Pay Increased So Much? By Xavier Gabaix; Augustin Landier
  8. Multinational enterprises international trade, and productivity growth : Firm-level evidence from the United States By Keller, Wolfgang; Yeaple, Stephen R.
  9. The determinants of intra-firm trade : in search for export-import magnification effects By Egger, Peter; Pfaffermayr, Michael
  10. Going multinational: What are the effects on home market performance? By Jäckle, Robert
  11. Outsourcing Jobs? Multinationals and US Employment By Ann E. Harrison; Margaret S. McMillan
  12. Who invests in training if contracts are temporary? - Empirical evidence for Germany using selection correction By Jan Sauermann
  13. Of the significance of business relationships By Filipe J. Sousa; Luís M. de Castro

  1. By: W. Bentley MacLeod
    Abstract: This paper discusses the literature on the enforcement of incomplete contracts. It compares legal enforcement to enforcement via relationships and reputations. A number of mechanisms, such as the repeat purchase mechanism (Klein and Leffler (1981)) and efficiency wages (Shapiro and Stiglitz (1984)), have been offered as solutions to the problem of enforcing an incomplete contract. It is shown that the efficiency of these solutions is very sensitive to the characteristics of the good or service exchanged. In general, neither the repeat purchase mechanism nor efficiency wages is the most efficient in the set of possible relational contracts. In many situations, total output may be increased through the use of performance pay and through increasing the quality of law.
    Keywords: contract, law and economics, reputation, repeated games, incomplete contracts, transactions costs, institutional economics, contract enforcement
    JEL: C70 D86 K12 O17
    Date: 2006
  2. By: Julie L. Hotchkiss; John C. Robertson
    Abstract: The purpose of this paper is to explore the microfoundations of the observed asymmetric movement in aggregate unemployment rates. Using U.S. data, we find that individual labor force participation responds asymmetrically to changes in local labor market conditions, consistent with the pattern of movements in the aggregate unemployment rate. Differences in the asymmetry and sensitivity of labor force participation decisions are found across gender, age, and education groups, and these differences are used to anticipate changes in the aggregate movements as population characteristics change over time.
    Date: 2006
  3. By: Robert A. Hart (University of Stirling and IZA Bonn)
    Abstract: This paper investigates the relative cyclical behavior of the pay of piece workers and hourly paid workers. It uses a unique data set of blue-collar workers in British engineering between 1926 and 1966. The statistics are obtained from the payrolls of firms belonging to the Engineering Employers Federation (EEF). Roughly, the EEF accounted for one-third of the total engineering workforce. The data consist of cell averages delineated by 15 occupations in 29 engineering districts. Via a firm-union bargaining modelling structure, the question is examined as to likely earnings responses to price shocks under the two payment systems. The empirical work entails testing for cyclical differences in the two payments methods Insights are gained from distinguishing between the relatively tight post-war and slack prewar labor markets.
    Keywords: piece work pay, hourly pay, business cycle
    JEL: E32 J31 J33
    Date: 2006–07
  4. By: Christopher F. Baum (Boston College); Mustafa Caglayan (University of Glasgow); Oleksandr Talavera (DIW Berlin)
    Abstract: We investigate the impact of measures of uncertainty on firms' capital investment behavior using a panel of U.S. firms. Increases in firm-specific and CAPM-based measures have a significant negative impact on investment spending, while market-based uncertainty has a positive impact.
    Keywords: capital investment, asymmetric information, financial frictions, uncertainty, CAPM
    JEL: E22 D81 C23
    Date: 2006–07–28
  5. By: Anne C. Gielen (Tilburg University, CentER, OSA and IZA Bonn); Marcel J.M. Kerkhofs (OSA, Tilburg University); Jan C. van Ours (Tilburg University, CentER, CEPR and IZA Bonn)
    Abstract: This paper uses information from a panel of Dutch firms to investigate the labor productivity effects of performance related pay (PRP). We find that PRP increases labor productivity at the firm level with about 9% and employment with about 5%.
    Keywords: performance related pay, labor productivity
    JEL: C41 H55 J64 J65
    Date: 2006–07
  6. By: Campbell, John Y.; Hilscher, Jens; Szilagyi, Jan
    Abstract: This paper explores the determinants of corporate failure and the pricing of financially distressed stocks using US data over the period 1963 to 2003. Firms with higher leverage, lower profitability, lower market capitalization, lower past stock returns, more volatile past stock returns, lower cash holdings, higher market-book ratios, and lower prices per share are more likely to file for bankruptcy, be delisted, or receive a D rating. When predicting failure at longer horizons, the most persistent firm characteristics, market capitalization, the market-book ratio, and equity volatility become relatively more significant. Our model captures much of the time variation in the aggregate failure rate. Since 1981, financially distressed stocks have delivered anomalously low returns. They have lower returns but much higher standard deviations, market betas, and loadings on value and small-cap risk factors than stocks with a low risk of failure. These patterns hold in all size quintiles but are particularly strong in smaller stocks. They are inconsistent with the conjecture that the value and size effects are compensation for the risk of financial distress.
    Date: 2005
  7. By: Xavier Gabaix; Augustin Landier
    Abstract: This paper develops a simple equilibrium model of CEO pay. CEOs have different talents and are matched to firms in a competitive assignment model. In market equilibrium, a CEO’s pay changes one for one with aggregate firm size, while changing much less with the size of his own firm. The model determines the level of CEO pay across firms and over time, offering a benchmark for calibratable corporate finance. The sixfold increase of CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large US companies during that period. We find a very small dispersion in CEO talent, which nonetheless justifies large pay differences. The data broadly support the model. The size of large firms explains many of the patterns in CEO pay, across firms, over time, and between countries.
    JEL: D2 D3 G34 J3
    Date: 2006–07
  8. By: Keller, Wolfgang; Yeaple, Stephen R.
    Abstract: We estimate international technology spillovers to U.S. manufacturing firms via imports and foreign direct investment (FDI) between the years of 1987 and 1996. In contrast to earlier work, our results suggest that FDI leads to substantial productivity gains for domestic firms. The size of FDI spillovers is economically important, accounting for about 11% of productivity growth in U.S. firms between 1987 and 1996. In addition, there is some evidence for imports-related spillovers, but it is weaker than for FDI. The paper also gives a detailed account of why our study leads to results different from those found in previous work. This analysis indicates that our results are likely to generalize to other countries and periods.
    Date: 2005
  9. By: Egger, Peter; Pfaffermayr, Michael
    Abstract: This paper studies the determinants of Austrian bilateral intra-firm trade in a panel of industry-level intra-firm goods trade flows. Economic size, unit labor costs and the magnification effects originating from multiple border crossing of sequentially finished products are found to be the most important determinants of trade within multinational firms. Especially, our evidence lends support to multiple border crossing of sequentially finished products, an argument that recently has been put forward in the outsourcing literature.
    Date: 2005
  10. By: Jäckle, Robert
    Abstract: A number of recent studies nd evidence for the existence of a persistent performance gap between multinational enterprises (MNE) and their domestic competitors. Therefore, the question arises whether successful rms become MNEs or whether going abroad improves home market performance. This paper investigates to what extent MNEs have superior performance characteristics, both prior to and after they have switched from national to multinational activities. In the rst case results are quite clear: Future multinationals outperform domestic rms. Since self-selection occurs, an endogenous treatment approach is necessary for comparing ex-post performance of rms. Using probit estimates of the decision to become a MNE, Heckman’s (1978) treatment model is applied to account for potential endogeneity issues. The results suggest that after switching, both productivity and wage growth are higher for newly founded MNEs than for national rms. Employment growth is superior before switching but does not exhibit signi cantly higher ex-post growth rates. Moreover, capital intensities at multinationals evolve towards the use of capital.
    Keywords: Multinational enterprises, productivity, endogenous treatment
    JEL: D24 F10 F21 F23
    Date: 2006
  11. By: Ann E. Harrison; Margaret S. McMillan
    Abstract: Critics of globalization claim that firms are being driven by the prospects of cheaper labor to shift employment abroad. Yet the evidence, beyond anecdotes, is slim. This paper focuses on the labor market decisions of US multinationals at home and abroad for the years 1977 to 1999. Using firm level data collected by the US Bureau of Economic Analysis (BEA), we separately estimate the impact on US manufacturing employment of affiliate activity abroad, imports and exports within multinational firms, and technological change. We begin by reporting correlations between US multinational employment at home and abroad. Evidence based on the operations of US multinationals suggests that the sign of the correlation depends upon the crucial distinction between affiliates in high-income and low-income countries. US employment and employment in low-income (high-income) countries are substitutes (complements). The complementarity is driven by an overall contraction in manufacturing employment both in the US and in affiliates based in high-income countries. We then develop an empirical framework which allows the firm to determine employment at home and abroad simultaneously. Using a variety of different theoretical approaches to estimating labor demand and a range of econometric techniques, we find that employment in low income countries substitutes for employment at home. Employment in high income affiliates, however, is generally complementary with US employment. Second, US capital investments in both high and low income affiliates are associated with lower employment in the United States. Finally, our results show that other factors have made important contributions to falling manufacturing employment in the United States, including technological change and import competition. Taken together, our results suggest that concerns over the impact of globalization on US jobs are grounded in reality.
    JEL: F16
    Date: 2006–07
  12. By: Jan Sauermann
    Abstract: This study deals with the effect of fixed-term contracts on work-related training. Though previous studies found a negative effect of fixed-term contracts on the participation in training, from the theoretical point of view it is not clear whether workers with fixed-term contracts receive less or more training, compared to workers with permanent contracts. In addition to the existing strand of literature, we especially distinguish between employer- and employee-financed training in order to allow for diverging investment patterns of worker and firm. Using data from the German Socio-Economic Panel (GSOEP), we estimate a bivariate probit model to control for selection effects that may arise from unobservable factors, affecting both participation in training and holding fixed-term contracts. Finding negative effects for employer-sponsored, as well as for employee-sponsored training, leads us to conclude that workers with fixed-term contracts do not compensate for lower firm investments.
    Keywords: training, fixed-term contracts, bivariate probit model
    JEL: C35 J24 J42
    Date: 2006–07
  13. By: Filipe J. Sousa (Departamento de Gestão e Economia (DGE), Universidade da Madeira (UMa)); Luís M. de Castro (Faculdade de Economia, Universidade do Porto)
    Abstract: The Industrial Network Theory aims to describe and explain the business relationships and networks in which the focal firm is deeply embedded. One of its major propositions is that business relationships somehow influence, to different extents and over time, the focal firm’s survival. This pertains to the diverse and time-varying significance of business relationships for the focal firm. It has often been implicitly sustained that such significance is strongly related to the role played by business relationships and consequently the relationship outcomes accruing to the focal firm. The logic underlying the relationship significance proposition is outwardly oriented, somewhat overlooking the focal firm’s inside and in particular the conspicuous influence of business relationships on what the focal firm does competently both within and across its vertical boundaries. Arguably, the (predominantly ‘functional’) network-based arguments currently advanced represent a necessary but not sufficient condition for relationship significance. This conceptual paper tentatively suggests that there may be missing a supplementary (essentially internal) explanation supported by Competence-based Theories of the Firm.
    Keywords: Industrial Network Theory; relationship significance proposition
    JEL: M31
    Date: 2006–07

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