nep-bec New Economics Papers
on Business Economics
Issue of 2006‒08‒26
sixteen papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. PERFORMANCE PAY AND WAGE INEQUALITY By Thomas Lemieux; W. Bentley Macleod; Daniel Parent
  2. Reaching for the Stars: Who Pays for Talent in Innovative Industries? By Fredrik Andersson; Matthew Freedman; John C. Haltiwanger; Julia Lane; Kathryn L. Shaw
  3. How has CEO Turnover Changed? Increasingly Performance Sensitive Boards and Increasingly Uneasy CEOs By Steven N. Kaplan; Bernadette Minton
  4. Performance Pay and Earnings: Evidence from Personnel Records By Tuomas Pekkarinen; Chris Riddell
  5. Sectoral Explanations of Employment in Europe: The Role of Services By Antonello D’Agostino; Roberta Serafini; Melanie Ward
  6. Default risk sharing between banks and markets: the contribution of collateralized debt obligations By Günter Franke; Jan Pieter Krahnen
  7. Cross-Border Acquisitions and Target Firms' Performance: Evidence From Japanese Firm-Level Data By Kyoji Fukao; Keiko Ito; Hyeog Ug Kwon; Miho Takizawa
  8. On the Consequences of Demographic Change for Rates of Returns to Capital, and the Distribution of Wealth and Welfare By Dirk Krueger; Alexander Ludwig
  9. Working Late: Do Workplace Sex Ratios Affect Partnership Formation and Dissolution? By Michael Svarer
  10. The Brevity and Violence of Contractions and Expansions By Alisdair McKay; Ricardo Reis
  11. Optimal Taxation of Entrepreneurial Capital with Private Information By Stefania Albanesi
  12. Resource Allocation and Firm Scope By Guido Friebel; Michael Raith
  13. Incentive Contracts and Hedge Fund Management By Jens Carsten Jackwerth; James E. Hodder
  14. Science and Industry: Tracing the Flow of Basic Research through Manufacturing and Trade By James D. Adams; Roger Clemmons
  15. Evaluating Wireless Carrier Consolidation Using Semiparametric Demand Estimation By Patrick Bajari; Jeremy T. Fox; Stephen Ryan
  16. Patents and the Performance of Voluntary Standard Setting Organizations By Marc Rysman; Tim Simcoe

  1. By: Thomas Lemieux; W. Bentley Macleod; Daniel Parent
    Abstract: An increasing fraction of jobs in the U.S. labor market explicitly pay workers for their performance using a bonus, a commission, or a piece rate. In this paper, we look at the effect of the growing incidence of performance pay on wage inequality. The basic premise of the paper is that performance pay jobs have a more "competitive" pay structure that rewards productivity differences more than other jobs. Consistent with this view, we show that compensation in performance pay jobs is more closely tied to both measured (by the econometrician) and unmeasured productive characteristics of workers. We conclude that the growing incidence of performance pay accounts for 25 percent of the growth in male wage inequality between the late 1970s and the early 1990s.
    JEL: D3 J31 J33
    Date: 2006–08
  2. By: Fredrik Andersson; Matthew Freedman; John C. Haltiwanger; Julia Lane; Kathryn L. Shaw
    Abstract: Innovation in the U.S. economy is about employing and rewarding highly talented workers to produce new products. Using unique longitudinal matched employer-employee data, this paper makes a key connection between talent and firms in markets with risky product innovations. We show that software firms that operate in product markets with highly skewed returns to innovation, or high variance payoffs, are more likely to attract and pay for star workers. Thus, firms in high variance product markets pay more up-front—in starting salaries—to attract and motivate star employees, because if these star workers produce home-run innovations, the firm’s winnings will be huge. However, we also find these same firms pay highly for loyalty: star workers that stay with a firm have much higher earnings in firms with high variance product market payoffs. The large effects on earnings are robust to the inclusion of a wide range of controls for both workers and firm characteristics. One key control is that we also show that in firms that have actually hit home runs, with high revenues, the rewards for star talent are even greater. We also find that the dispersion of earnings is higher within firms with high variance product payoffs.
    JEL: J24 J31 L2 L86
    Date: 2006–08
  3. By: Steven N. Kaplan; Bernadette Minton
    Abstract: We study CEO turnover – both internal (board driven) and external (through takeover and bankruptcy) – from 1992 to 2005 for a sample of large U.S. companies. Annual CEO turnover is higher than that estimated in previous studies over earlier periods. Turnover is 14.9% from 1992 to 2005, implying an average tenure as CEO of less than seven years. In the more recent period since 1998, total CEO turnover increases to 16.5%, implying an average tenure of just over six years. Internal turnover is significantly related to three components of firm performance – performance relative to industry, industry performance relative to the overall market, and the performance of the overall stock market. Also in the more recent period since 1998, the relation of internal turnover to performance is more strongly related to all three measures of performance in the contemporaneous year. External turnover is not significantly related to any of the measures of stock performance over the entire sample period, nor over the two sub-periods. We discuss the implications of these findings for various issues in corporate governance.
    JEL: G3 L2
    Date: 2006–08
  4. By: Tuomas Pekkarinen (Uppsala University and IZA Bonn); Chris Riddell (Queen's University)
    Abstract: This paper examines the effects of performance pay on earnings using linked employeeemployer panel data from Finland. These payroll data contain information on the exact share of earnings obtained and hours worked on a performance pay contract. Using these data, we estimate the effects of performance pay in the presence of both individual and firm-specific unobserved heterogeneity. Furthermore, we are able to estimate the effects of performance pay contracts in tasks of different complexity and for the subsample of workers who change jobs following an establishment closure. Unobservable firm characteristics explain 30-50% of the variance in performance pay. After controlling for unobservable individual and firm characteristics, performance pay workers earn substantially more than fixed rate workers. The effects persist when only workers who changed firms, and contracts, due to an establishment closure are used for identification. There is also a strong, negative relationship between job complexity and the incentive effects of performance pay. Finally, we exploit several ‘natural experiments’ where there was a compensation regime change in one plant of a given firm, but not in other plants. The plants are highly similar pre-regime change, and had a common trend in earnings pre-regime change. These experiments also yield substantial earnings premiums.
    Keywords: performance pay, piece rates, incentives
    JEL: J33 J41
    Date: 2006–08
  5. By: Antonello D’Agostino (Central Bank and Financial Service Authority of Ireland); Roberta Serafini (European Central Bank and ISAE); Melanie Ward (European Central Bank and IZA Bonn)
    Abstract: This paper investigates the determinants of the service sector employment share in the EU- 15, for the aggregate service sector, four sub-sectors and twelve service sector branches. Recently, both Europe and the US have experienced an increase in the share of servicerelated jobs in total employment. Although converging in all European countries, a significant gap in the share of service jobs in Europe relative to the US persists. Understanding the main factors behind this gap is key to achieving higher employment levels in Europe. This paper focuses on the role of barriers in the EU-15 which may have hindered its ability to absorb labour supply and therefore to adjust efficiently to the sectoral reallocation of labour. We find that a crucial role in this process has been played by the institutional framework affecting flexibility in the labour market and by the mismatch between workers’ skills and job vacancies.
    Keywords: services, sectoral adjustment, employment share, Europe, US, institutions in the labour and product market
    JEL: E24 J21 J23 J24 L80
    Date: 2006–08
  6. By: Günter Franke (Department of Economics, University of Konstanz); Jan Pieter Krahnen (Center for Financial Studies, Goethe-University Frankfurt)
    Abstract: This paper contributes to the economics of financial institutions risk management by exploring how loan securitization affects their default risk, their systematic risk, and their stock prices. In a typical CDO transaction a bank retains through a first loss piece a very high proportion of the default losses, and transfers only the extreme losses to other market participants. The size of the first loss piece is largely driven by the average default probability of the securitized assets. If the bank sells loans in a true sale transaction, it may use the proceeds to expand its loan business, thereby affecting systematic risk. For a sample of European CDO issues, we find an increase of the banks’ betas, but no significant stock price effect around the announcement of a CDO issue.
    Date: 2005–08–18
  7. By: Kyoji Fukao; Keiko Ito; Hyeog Ug Kwon; Miho Takizawa
    Abstract: Using Japanese firm-level data for the period from 1994-2002, this paper examines whether a firm is chosen as an acquisition target based on its productivity level, profitability and other characteristics and whether the performance of Japanese firms that were acquired by foreign firms improves after the acquisition. In our previous study for the Japanese manufacturing sector, we found that M&As by foreigners brought a larger and quicker improvement in total factor productivity (TFP) and profit rates than M&As by domestic firms. However, it may argued that firms acquired by foreign firms showed better performance simply because foreign investors acquired more promising Japanese firms than Japanese investors did. In order to address this potential problem of selection bias problem, in this study we combine a difference-in-differences approach with propensity score matching. The basic idea of matching is that we look for firms that were not acquired by foreign firms but had similar characteristics to firms that were acquired by foreigners. Using these firms as control subjects and comparing the acquired firms and the control subjects, we examine whether firms acquired by foreigners show a greater improvement in performance than firms not acquired by foreigners. Both results from unmatched samples and matched samples show that foreign acquisitions improved target firms’ productivity and profitability significantly more and quicker than acquisitions by domestic firms. Moreover, we find that there is no positive impact on target firms’ profitability in the case of both within-group in-in acquisitions and in-in acquisitions by domestic outsiders. In fact, in the manufacturing sector, the return on assets even deteriorated one year and two years after within-group in-in acquisition, while the TFP growth rate was higher after within-group in-in acquisitions than after in-in acquisitions by outsiders. Our results imply that in the case of within-group in-in acquisitions, parent firms may be trying to quickly restructure acquired firms even at the cost of deteriorating profitability.
    JEL: C14 D24 F21 F23
    Date: 2006–08
  8. By: Dirk Krueger; Alexander Ludwig
    Abstract: This paper employs a multi-country large scale Overlapping Generations model with uninsurable labor productivity and mortality risk to quantify the impact of the demographic transition towards an older population in industrialized countries on world-wide rates of return, international capital flows and the distribution of wealth and welfare in the OECD. We find that for the U.S. as an open economy, rates of return are predicted to decline by 86 basis points between 2005 and 2080 and wages increase by about 4.1%. If the U.S. were a closed economy, rates of return would decline and wages increase by less. This is due to the fact that other regions in the OECD will age even more rapidly; therefore the U.S. is "importing" the more severe demographic transition from the rest of the OECD in the form of larger factor price changes. In terms of welfare, our model suggests that young agents with little assets and currently low labor productivity gain, up to 1% in consumption, from higher wages associated with population aging. Older, asset-rich households tend to lose, because of the predicted decline in real returns to capital.
    JEL: C68 D33 E17 E25
    Date: 2006–08
  9. By: Michael Svarer (Department of Economics, University of Aarhus)
    Abstract: In this paper, I analyse the association between workplace sex ratios and partnership formation and dissolution. I find that the risk of dissolution increases with the fraction of coworkers of the opposite sex at both the female and male workplace. On the other hand, workplace sex ratios are not important for the overall transition rate from singlehood to partnership. The results suggest that the workplace constitutes a more important marriage market segment for individuals who are already in a partnership presumably due to higher search cost for (alternative) partners in general.
    Keywords: partnership formation; dissolution; workplace sex ratios
    JEL: J12
    Date: 2006–07
  10. By: Alisdair McKay; Ricardo Reis
    Abstract: Early studies of business cycles argued that contractions in economic activity were briefer (shorter) and more violent (rapid) than expansions. This paper systematically investigates this claim and in the process discovers a robust new business cycle fact: expansions and contractions in output are equally brief and violent but contractions in employment are briefer and more violent than expansions. The difference arises because employment typically lags output around peaks but both series roughly coincide in their troughs. We discuss the performance of existing business cycle models in accounting for this fact, and conclude that none can fully account for it. We then show that a simple model that combines three familiar ingredients–labor hoarding, a choice of when to scrap old technologies, and job training or job search–can account for the business cycle fact.
    JEL: E32 E23 E24 J60
    Date: 2006–08
  11. By: Stefania Albanesi
    Abstract: This paper studies optimal taxation of entrepreneurial capital and financial assets in economies with private information. Returns to entrepreneurial capital are risky and depend on entrepreneurs' hidden effort. It is shown that the idiosyncratic risk in capital returns implies that the intertemporal wedge on entrepreneurial capital that characterizes constrained-efficient allocations can be positive or negative. The properties of optimal marginal taxes on entrepreneurial capital depend on the sign of this wedge. If the wedge is positive, the optimal marginal capital tax is decreasing in capital returns, while the opposite is true when the wedge is negative. Optimal marginal taxes on other assets depend on their correlation with idiosyncratic capital returns. The optimal tax system equalizes after tax returns on all assets, thus reducing the variance of after tax returns on capital relative to other assets. If entrepreneurs are allowed to sell shares of their capital to outside investors, returns to externally owned capital are subject to double taxation- at the level of the entrepreneur and at the level of the outside investors. Even if entrepreneurs can purchase private insurance against their idiosyncratic risk, optimal asset taxes are essential to implement the constrained-efficient allocation if entrepreneurial portfolios are private information.
    JEL: D82 E22 E62 G18 H2 H21 H25 H3
    Date: 2006–08
  12. By: Guido Friebel (University of Toulouse (EHESS and IDEI), CEPR and IZA Bonn); Michael Raith (University of Rochester and University of Southern California)
    Abstract: We develop a theory of firm scope in which integrating two firms into one facilitates the allocation of resources, but leads to weaker incentives for effort, compared with nonintegration. Our theory makes minimal assumptions about the underlying agency problem. Moreover, the benefits and costs of integration originate from the same problem – to allocate resources efficiently, the integrated firm's top management must obtain information about the possible use of resources from division managers. The division managers' job is to create profitable investment projects. Giving the managers incentives to do so biases them endogenously towards their own divisions, and gives them a motive to overstate the quality of their projects in order to receive more resources. We show that paying managers based on firm performance in addition to individual performance can establish truthful upward communication, but creates a free-rider problem and raises the cost of inducing effort. This effect exists even though with perfect information, centralized resource allocation would improve the managers' incentives. The resulting tradeoff between a better use of resources and diminished incentives for effort determines whether integration or non-integration is optimal. Our theory thus provides a simple answer to Williamson's “selective-intervention” puzzle concerning the limits of firm size and scope. In addition, we provide an incentivebased argument for the prevalence of hierarchically structured firms in which higher-level managers coordinate the actions of lower-level managers.
    Keywords: theory of the firm, coordination, authority, incentives, strategic information transmission
    JEL: D23 D82 L22 M52
    Date: 2006–08
  13. By: Jens Carsten Jackwerth (Department of Economics, University of Konstanz); James E. Hodder (Finance Department, University of Wisconsin-Madison)
    Abstract: This paper investigates dynamically optimal risk-taking by an expected-utility maximizing manager of a hedge fund. We examine the effects of variations on a compensation structure that includes a percentage management fee, a performance incentive for exceeding a specified highwater mark, and managerial ownership of fund shares. In our basic model, there is an exogenous liquidation barrier where the fund is shut down due to poor performance. We also consider extensions where the manager can voluntarily choose to shut down the fund as well as to enhance the fund’s Sharpe Ratio through additional effort. We find managerial risk-taking which differs considerably from the optimal risk-taking for a fund investor with the same utility function. In some portions of the state space, the manager takes extreme risks. In another area, she pursues a lock-in style strategy. Indeed, the manager’s optimal behavior even results in a trimodal return distribution. We find that seemingly minor changes in the compensation structure can have major implications for risk-taking. Additionally, we are able to compare results from our more general model with those from several recent papers that turn out to be focused on differing parts of the larger picture.
    Date: 2005–05–23
  14. By: James D. Adams; Roger Clemmons
    Abstract: This paper describes flows of basic research through the U.S. economy and explores their implications for scientific output at the industry and field level. The time period is the late 20th century. This paper differs from others in its use of measures of science rather than technology. Together its results provide a more complete picture of the structure of basic research flows than was previously available. Basic research flows are high within petrochemicals and drugs and within a second cluster composed of software and communications. Flows of chemistry, physics, and engineering are common throughout industry; biology and medicine are almost confined to petrochemicals and drugs, and computer science is nearly as limited to software and communications. In general, basic research flows are more concentrated within scientific fields than within industries. The paper also compares effects of different types of basic research on scientific output. The main finding is that the academic spillover effect significantly exceeds that of industrial spillovers or industry basic research. Finally, within field effects exceed between field effects, while the within- and between industry effects are equal. Therefore, scientific fields limit basic research flows more than industries.
    JEL: D2 O3
    Date: 2006–08
  15. By: Patrick Bajari; Jeremy T. Fox; Stephen Ryan
    Abstract: The US mobile phone service industry has dramatically consolidated over the last two decades. One justification for consolidation is that merged firms can provide consumers with larger coverage areas at lower costs. We estimate the willingness to pay for national coverage to evaluate this motivation for past consolidation. As market level quantity data is not publicly available, we devise an econometric procedure that allows us to estimate the willingness to pay using market share ranks collected from a popular online retailer, Amazon. Our semiparametric maximum score estimator controls for consumers’ heterogeneous preferences for carriers, handsets and minutes of calling time. We find that national coverage is strongly valued by consumers, providing an efficiency justification for across-market mergers. The methods we propose can estimate demand for other products using data from Amazon or other online retailers where quantities are not observed, but product ranks are observed. Since Amazon data can easily be gathered by researchers, these methods may be useful for the analysis of other product markets where high quality data are not publicly available.
    JEL: L1 C1
    Date: 2006–08
  16. By: Marc Rysman (Boston University, Department of Economics); Tim Simcoe (J.L. Rotman School of Management, University of Toronto)
    Abstract: This paper measures the technological significance of voluntary standard setting organizations (SSOs) by examining citations to patents disclosed in the standard setting process. We find that SSO patents are cited far more frequently than a set of control patents, and that SSO patents receive citations for a much longer period of time. Furthermore, we find a significant correlation between citation and the disclosure of a patent to an SSO, which may imply a marginal impact of disclosure. These results provide the first empirical look at patents disclosed to SSOs, and show that these organizations not only select important technologies, but may also play a role in establishing their significance.
    Date: 2005–10

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