nep-bec New Economics Papers
on Business Economics
Issue of 2006‒09‒30
24 papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Endogenous Skill Bias in Technology Adoption: City-Level Evidence from the IT Revolution By Paul Beaudry; Mark Doms; Ethan Lewis
  2. Accounting for the Rise in Consumer Bankruptcies By Igor Livshits; James MacGee; Michele Tertilt
  3. Why Do U.S. Firms Hold So Much More Cash Than They Used To? By Thomas W. Bates; Kathleen M. Kahle; Rene M. Stulz
  4. The influence of the business cycle on bankruptcy probability By Suzan Hol
  5. Are Canadian Banks Efficient? A Canada–U.S. Comparison By Jason Allen; Walter Engert; Ying Liu
  6. Firm Structure, Multinationals, and Manufacturing Plant Deaths By Andrew B. Bernard; J. Bradford Jensen
  8. Forecasting Monthly GDP for Canada By Annabelle Mourougane
  9. Merger Negotiations and Ex-Post Regret By Dennis Gaertner; Armin Schmutzler
  10. Career progression and formal versus on-the-job training By Jerome Adda; Christian Dustmann; Costas Meghir; Jean-Marc Robin
  11. Consumption, house prices and expectations By Orazio Attanasio; Laura Blow; Robert Hamilton; Andrew Leicester
  12. On the “Adverse Selection” of Organizations By Matthias Kräkel
  13. Modelling manufacturing inventories By John D Tsoukalas
  14. Organizational Structure as the Channeling of Boundedly Rational Pre-play Communication By Ellingsen, Tore; Östling, Robert
  15. Switching to a Poor Business Activity: Optimal Capital Structure, Agency Costs and Convenant Rules By DÉCAMPS, Jean-Paul; DJEMBISSI, Bertrand
  16. When prices hardly matter: Incomplete insurance contracts and markets for repair goods By Nell, Martin; Richter, Andreas; Schiller, Jörg
  17. Labour Turnover and Labour Productivity in a Retail Organization By W. Stanley Siebert; Nikolay Zubanov; Arnaud Chevalier; Tarja Viitanen
  18. Minimum Wages and Firm Training By Wolfgang Lechthaler; Dennis J. Snower
  20. A note on performance measures for failure prediction models By Ooghe, H.; Spaenjers, C.
  21. A self-determination model of feedback-seeking behavior in organizations By De Stobbeleir, K.
  22. More management concepts in the academy: internationalization as an organizational change process By Kondakci, Y.; Van den Broecke, H.; Devos, G.
  23. Innovative Work Practices, Information Technologies and Working Conditions: Evidence for France By Philippe Askenazy; Eve Caroli
  24. Governing and Governance: A Social Housing Case Study By Dave Cowan; Morag McDermont; Jessica Prendergrast

  1. By: Paul Beaudry; Mark Doms; Ethan Lewis
    Abstract: This paper focuses on the bi-directional interaction between technology adoption and labor market conditions. We examine cross-city differences in PC-adoption, relative wages, and changes in relative wages over the period 1980-2000 to evaluate whether the patterns conform to the predictions of a neoclassical model of endogenous technology adoption. Our approach melds the literature on the effect of the relative supply of skilled labor on technology adoption to the often distinct literature on how technological change influences the relative demand for skilled labor. Our results support the idea that differences in technology use across cities and its effects on wages reflect an equilibrium response to local factor supply conditions. The model and data suggest that cities initially endowed with relatively abundant and cheap skilled labor adopted PCs more aggressively than cities with relatively expensive skilled labor, causing returns to skill to increase most in cities that adopted PCs most intensively. Our findings indicate that neo-classical models of endogenous technology adoption can be very useful for understanding where technological change arises and how it affects markets.
    JEL: E13 J31 O33
    Date: 2006–09
  2. By: Igor Livshits (University of Western Ontario); James MacGee (University of Western Ontario); Michele Tertilt (Stanford University)
    Abstract: Personal bankruptcies in the United States have increased dramatically, rising from 1.4 per thousand working age population in 1970 to 8.5 in 2002. We use a heterogeneous agent life-cycle model with competitive financial intermediaries who can observe households' earnings, age and current asset holdings to evaluate several commonly offered explanations. We find that increased uncertainty (income shocks, expense uncertainty) cannot quantitatively account for the rise in bankruptcies. Instead, stories related to a change in the credit market environment are more plausible. In particular, we find that a combination of a decrease in the transactions cost of lending and a decline in the cost of bankruptcy does a good job in accounting for the rise in consumer bankruptcy. We also argue that the abolition of usury laws and other legal changes are unimportant.
    Keywords: consumer bankruptcy; uncertainty; credit markets; stigma
    JEL: E21 E44 G18 K35
    Date: 2006
  3. By: Thomas W. Bates; Kathleen M. Kahle; Rene M. Stulz
    Abstract: The average cash to assets ratio for U.S. industrial firms increases by 129% from 1980 to 2004. Because of this increase in the average cash ratio, American firms at the end of the sample period can pay back their debt obligations with their cash holdings, so that the average firm has no leverage when leverage is measured by net debt. This change in cash ratios and net debt is the result of a secular trend rather than the outcome of the recent buildup in cash holdings of some large firms. It is concentrated among firms that do not pay dividends. The average cash ratio increases over the sample period because the cash flow of American firms has become riskier, these firms hold fewer inventories and accounts receivable, and the typical firm spends more on R&D. The precautionary motive for cash holdings appears to explain the increase in the average cash ratio.
    JEL: G30 G32 G35
    Date: 2006–09
  4. By: Suzan Hol (Statistics Norway)
    Abstract: I combine two fields of research on default prediction by empirically testing a bankruptcy prediction function where unlisted firms are evaluated on the basis of both their financial statement analysis and the macroeconomic environment. This combination is found to improve the default prediction compared to financial statements alone. The GDP-gap, a production index and the money supply M1 in combination with some financial health indicators for individual firms are found to be significant predictors on default for Norwegian firms during both a recovery and expansion in the 1990’s.
    Keywords: bankruptcy prediction; macroeconomic environment; financial ratios; logit model
    JEL: G32 G33
    Date: 2006–08
  5. By: Jason Allen; Walter Engert; Ying Liu
    Abstract: The authors compare the efficiency of Canada's largest banks with U.S. commercial banks over the past 20 years. Efficiency is measured in three ways. First, the authors study key performance ratios, and find that Canadian banks are as productive as U.S. banks. Second, they investigate whether there are economies of scale in the production functions of Canadian banks and broadly comparable U.S. bank-holding companies (BHCs). They find larger economies of scale for Canadian banks than for the U.S. BHCs, which suggests that Canadian banks are less efficient in terms of scale, and have more to gain in terms of efficiency benefits from becoming larger. Third, the authors measure cost-inefficiency in Canadian banks and in U.S. BHCs relative to the domestic efficient frontier in each country (the domestic best-practice institution). They find that Canadian banks are closer to the domestic efficient frontier than are the U.S. BHCs. Canadian banks have also moved closer to the domestic efficient frontier than have the U.S. BHCs over time. Finally, the authors examine the dispersion in cost-inefficiency found in Canadian banks and attribute some of the dispersion to differences in information and communication technology investment. Comparisons are made with the U.S. BHC experience.
    Keywords: Financial institutions
    JEL: G21 D24 C33
    Date: 2006
  6. By: Andrew B. Bernard (Dartmouth College); J. Bradford Jensen (Institute for International Economics)
    Abstract: Plant shutdowns shape industry productivity, the dynamics of employment, and industrial restructuring. Plant closures account for more than half of gross job destruction in US manufacturing. This paper examines the effects of firm structure on US manufacturing plant closures. Plants belonging to multi-plant firms and those owned by US multinationals are less likely to exit. However, the superior survival chances are due to the characteristics of the plants rather than the nature of the firms. Controlling for plant and industry attributes, we find that plants owned by multi-unit firms and US multinationals are much more likely to close.
    Keywords: Exit, shutdown, closure, multi-plant firms, multinational firms, takeovers, entry costs, agglomeration, specialization
    JEL: D21 D24 F23 L20 L6
    Date: 2006–09
  7. By: Hassan Benchekroun; Licun Xue
    Abstract: We study the stability of cartels in a differential game model of oligopoly with sticky prices (Fershtman and Kamien 1987). We show that when firms use closed-loop strategies and the rate of increase of the marginal cost is .small enough., the grand coalition (i.e., when the cartel includes all firms) is stable: it is unprofitable for a .firm to exit the cartel. Moreover, a cartel of 3 firms is stable for any positive rate of increase of the marginal cost: it is not profitable for an insider firm to exit the coalition, nor it is profitable for an outsider firm to join the coalition. When firms use open-loop strategies the grand coalition is never stable; moreover, we show that only a cartel of size 2 can be stable and it is so only when the rate of increase of the marginal cost is large enough.
    JEL: D43 L13 L12 C72
    Date: 2006–09
  8. By: Annabelle Mourougane
    Abstract: The objective of this paper is to develop a short-term indicator-based model to predict quarterly GDP in Canada by efficiently exploiting all available monthly information. To this aim, monthly forecasting equations are estimated using the GDP series published every month by Statistics Canada as well as other monthly indicators. The procedures are automated and the model can be run whenever major monthly data are released, allowing the appropriate choice of the model according to the information set available. The most important gain from this procedure is for the current-quarter forecast when one or two months of GDP data are available, with all monthly models estimated in the paper outperforming a standard quarterly autoregressive model in terms of size of errors. The use of indicators also appears to improve forecasting performance, especially when an average of indicator-based models is used. Real-time forecasting performance of the average model appear to be good, with an apparent stability of the estimates from one update to the next, despite the extensive use of monthly data. The latter result should nonetheless be interpreted with caution and will need to be re-assessed when more data become available. <P>Prévoir le PIB mensuel au Canada <BR>L’objectif de cet article est de développer un modèle d’indicateurs conjoncturels pour prédire le PIB trimestriel au Canada en utilisant de manière efficace toute l’information mensuelle disponible. À cette fin, des équations mensuelles de prévisions de court terme sont estimées en utilisant la série de PIB publiée chaque mois par Statistique Canada et d’autres indicateurs conjoncturels. Les procédures ont été automatisées et le modèle peut être mis à jour chaque fois qu’une donnée importante est publiée, la spécification du modèle variant ainsi en fonctions de l’ensemble des données disponibles. Le gain le plus important de la procédure développée est obtenue pour les prévisions du trimestre courant quand un ou deux mois de données du PIB mensuel sont disponibles. Dans ce cas, tous les modèles mensuels estimés dans cet article ont des erreurs de prévisions inférieures à celle d’un modèle trimestriel autorégressif standard. L’utilisation d’indicateurs conjoncturels améliore les performances en termes de prévisions, en particulier lorsqu’une moyenne de tous les modèles d’indicateurs conjoncturels est utilisée. Les prévisions réalisées en temps réel en faisant la moyenne des différents modèles d’indicateurs conjoncturels se sont avérées de qualité satisfaisante, avec une stabilité apparente des estimations successives, malgré l’utilisation extensive de données mensuelles. Ces résultats doivent toutefois être interprétés avec prudence et devront être vérifiés quand plus de données seront disponibles.
    Keywords: Canada, Canada, indicator models, modèle d'indicateurs conjoncturels, monthly GDP, short-term forecasts, real-time estimations, PIB mensuel, prévisions de court terme, estimations en temps réel
    JEL: C52 C53 E37
    Date: 2006–09–13
  9. By: Dennis Gaertner (Socioeconomic Institute, University of Zurich); Armin Schmutzler (Socioeconomic Institute, University of Zurich)
    Abstract: We consider a setting in which two potential merger partners each possess private information pertaining both to the profitability of the merged entity and to stand-alone profits, and investigate the extent to which this private information makes ex-post regret an unavoidable phenomenon in merger negotiations. To this end, we consider ex-post mechanisms, which use both players’ reports to determine whether or not a merger will take place and what each player will earn in each case. When the outside option of at least one player is known, the efficient merger decision can be implemented by such a mechanism under plausible budget-balance requirements. When neither outside option is known, we show that the potential for regret-free implementation is much more limited, unless the budget balance condition is relaxed to permit money-burning in the case of false reports.
    Keywords: Mergers, Mechanism Design, Asymmetric Information, Interdependent Valuations, Efficient Mechanisms
    JEL: D82 L10 G34
    Date: 2006–09
  10. By: Jerome Adda (Institute for Fiscal Studies and University College London); Christian Dustmann (Institute for Fiscal Studies and University College London); Costas Meghir (Institute for Fiscal Studies and University College London); Jean-Marc Robin (Institute for Fiscal Studies and EUREQua, University of Paris 1)
    Abstract: We develop a dynamic discrete choice model of training choice, employment and wage growth, allowing for job mobility, in a world where wages depend on firm-worker matches, as well as experience and tenure and jobs take time to locate. We estimate this model on a large administrative panel data set which traces labour market transitions, mobility across firms and wages from the end of statutory schooling. We use the model to evaluate the life-cycle return to apprenticeship training and find that on average the costs outweigh the benefits; however for those who choose to train the returns are positive. We then use our model to consider the long-term lifecycle effects of two reforms: One is the introduction of an Earned Income Tax Credit in Germany, and the other is a reform to Unemployment Insurance. In both reforms we find very significant impacts of the policy on training choices and on the value of realised matches, demonstrating the importance of considering such longer term implications.
    Date: 2006–08
  11. By: Orazio Attanasio; Laura Blow; Robert Hamilton; Andrew Leicester
    Abstract: Over much of the past 25 years, the cycles of house price and consumption growth have been closely synchronised. Three main hypotheses for this co-movement have been proposed in the literature. First, that an increase in house prices raises households' wealth, particularly for those in a position to trade down the housing ladder, which increases their desired level of expenditure. Second, that house price growth increases the collateral available to homeowners, reducing credit constraints and thereby facilitating higher consumption. And third, that house prices and consumption have tended to be influenced by common factors. This paper finds that the relationship between house prices and consumption is stronger for younger than older households, and that the consumption of homeowners and renters are equally aligned with the house price cycle. This suggests that neither the wealth nor the collateral channels have been the principal cause of the relationship between house prices and consumption - instead, the most important factor is likely to have been common causality.
  12. By: Matthias Kräkel
    Abstract: According to New Institutional Economics, two or more individuals will found an organization, if it leads to a benefit compared to market allocation. A natural consequence will then be internal rent seeking. We discuss the interrelation between profits, rent seeking and the foundation of organizations. Typically, we expect that highly profitable firms are always founded but it is not clear whether the same is true for firms with less optimistic prospects. We will show that internal rent seeking may lead to a completely reversed result. The impact of internal rent seeking on overall investment and the implications of firm size and competition on the foundation of organizations are also addressed.
    Keywords: contests; foundation of organizations; internal rent seeking
    JEL: D2 L2 M2
    Date: 2006–09
  13. By: John D Tsoukalas
    Abstract: This paper presents and applies a stage-of-fabrication inventory model to the UK manufacturing sector. The model emphasises the interaction between input (raw materials and work-in-process) and output (finished goods) inventories. This interaction is an important empirical regularity and proves critical for the ability of the model to fit the data. Decisions about input and output inventory investment cannot be considered in isolation from each other, but must be analysed jointly. Overall, the stage-of-fabrication model receives considerable support. Maximum likelihood estimation of the model's decision rules yields correctly signed and significant parameter estimates. In terms of producer behaviour, the results imply rising marginal costs of production and significant costs of adjusting production.
  14. By: Ellingsen, Tore (Dept. of Economics, Stockholm School of Economics); Östling, Robert (Dept. of Economics, Stockholm School of Economics)
    Abstract: We model organizational decision making as costless pre-play communication. Decision making is called authoritarian if only one player is allowed to speak and consensual if all players are allowed to speak. Players are assumed to have limited cognitive capacity and we characterize their behavior under each decision making regime for two different cognitive hierarchy models. Our results suggest that authoritarian decision making is optimal when players have conflicting preferences over the set of Nash equilibrium outcomes, whereas consensual decision making is optimal when players have congruent preferences over this set. The intuition is that authoritarian decision making avoids conflict, but sometimes creates insufficient mutual trust to implement socially optimal outcomes.
    Keywords: Organizational decision making; coordination games; communication; cognitive hierarchy models
    JEL: C72 L20 M21 M54
    Date: 2006–09–25
  15. By: DÉCAMPS, Jean-Paul; DJEMBISSI, Bertrand
    JEL: G30 G32 G33
    Date: 2005–09
  16. By: Nell, Martin; Richter, Andreas; Schiller, Jörg
    Abstract: This paper looks at markets characterized by the fact that the demand side is insured. In these markets a consumer purchases a good to compensate consequen¬ces of unfavorable events, such as an accident or an illness. Insurance policies in most lines of insurance base indemnity on the insureds actual expenses, i.e., the insured would be partially or completely reimbursed when purchasing certain goods. In this setting we discuss the interaction between insurance and repair markets by focusing, on the one hand, upon the development of prices and the structure of markets with insured consumers, and, on the other hand, the resulting backlash on optimal insurance contracting. We show that even in the absence of ex post moral hazard the extension of insurance coverage will lead to an increase in prices as well as to a socially undesirable increase in the number of repair service suppliers, if repair markets are imperfect.
    Keywords: insurance; incomplete contracts; repair markets
    JEL: C72 D43 G22
    Date: 2006
  17. By: W. Stanley Siebert (University of Birmingham Business School and IZA Bonn); Nikolay Zubanov (University of Birmingham Business School); Arnaud Chevalier (Royal Holloway, University of London and IZA Bonn); Tarja Viitanen (University of Sheffield and IZA Bonn)
    Abstract: We study the impact of labour turnover on labour productivity using a panel dataset of 347 shops belonging to a large UK clothing retailer over1995-1999. For the within-shop link – holding constant the shop’s permanent characteristics – we observe an inverted U-shape effect of labour turnover on productivity. The productivity-maximizing rates of FTE-adjusted quits and hires are each about 20% per year, improving productivity by 2.5% compared to the zero turnover level. We explain the difference between this optimal level of labour turnover and its observed average (quits and hires each around 10%) through the costs of hiring estimated at about £600 per hire. By contrast, between shops, there is a positive link between average rates of turnover and average productivity, suggesting that an unobservable management quality factor generates both high turnover and productivity, which we discuss.
    Keywords: labour productivity, labour turnover, matched employee-firm panel data, retailing
    JEL: J63 J24 L81
    Date: 2006–09
  18. By: Wolfgang Lechthaler; Dennis J. Snower
    Abstract: The paper analyzes the influence of minimum wages on firms’ incentive to train their employees. We show that this influence rests on two countervailing effects: minimum wages (i) augment wage compression and thereby raise firms’ incentives to train and (ii) reduce the profitability of employees, raise the firing rate and thereby reduce training. Our analysis shows that the relative strength of these two effects depends on the employees’ ability levels. Our striking result is that minimum wages give rise to skills inequality: a rise in the minimum wage leads to less training for low-ability workers and more training for those of higher ability. In short, minimum wages create a "low-skill trap."
    Keywords: Minimum Wage, Firm Training, Skills Inequality
    JEL: J24 J31
    Date: 2006–09
  19. By: Rabah Amir; Effrosyni Diamantoudi; Licun Xue
    Abstract: In view of the uncertainty over the ability of merging firms to achieve efficiency gains, we model the post-merger situation as a Cournot oligopoly wherein the outsiders face uncertainty about the merged entity’s final cost. At > the Bayesian equilibrium, a bilateral merger is profitable provided the non-merged firms sufficiently believe that the merger will generate large enough efficiency gains, even if ex post none actually materialize. The effects of the merger on market performance are shown to follow similar threshold rules. The findings are broadly consistent with stylized facts. An extensive welfare analysis is conducted, bringing out the key role of effciency gains and the different implications of consumer and social welfare standards.
    JEL: D43 L11 L22
    Date: 2006–09
  20. By: Ooghe, H.; Spaenjers, C.
    Abstract: This note briefly describes some important performance measures that can be used in failure prediction research. We do not only give an overview of the measures, but also clarify the connections between them and illustrate their use with numerical examples.
    Date: 2006–09–21
  21. By: De Stobbeleir, K.
    Abstract: The current paper presents a theoretical framework on feedback-seeking behavior in organizations. Based upon the model, which is derived from self-determination theory, we summarize and systematize two decades of research on feedback-seeking behavior and we identify potentially fruitful avenues for further research.
    Date: 2006–09–22
  22. By: Kondakci, Y.; Van den Broecke, H.; Devos, G.
    Abstract: The purpose of this paper is to elaborate on the internationalization process in higher education as an organizational level managerial issue. This approach brings a new perspective to internationalization in higher education. This is believed to be a necessary step toward filling a gap in the internationalization of higher education discussions. Nevertheless, the purpose of the study is not to falsify the dominant discussion in the literature. Rather, adopting the organizational change process conceptualization, this paper aims to fill a gap in the ongoing discussion on internationalization in the literature. To do this, the authors adopted the commonly accepted organizational change model of Burke and Litwin (1992) and made a comprehensive discussion on both transformational (external environment, mission and strategy, leadership, and organizational culture) and transactional (structure, task requirements and individual skills, individual needs and values, motivation, management practices, systems, climate) domains of the model from the perspective of internationalization in higher education. This approach is expected to clarify process, content, and context aspects of internationalization, which is essential for successful internationalization implementation.
    Date: 2006–09–21
  23. By: Philippe Askenazy (Paris Sciences Economiques and IZA Bonn); Eve Caroli (University Paris X, EconomiX and Paris Sciences Economiques)
    Abstract: We investigate the impact of new work practices and information and communication technologies (ICT) on working conditions in France. We use a unique French dataset providing information on individual workers for the year 1998. New work practices include the use of quality norms, job rotation, collective discussions on work organization and working time flexibility. Working conditions are captured by occupational injuries as well as indicators of mental strain. We find that workers involved in the new practices face working conditions that are significantly worse than those of workers in non innovative work practices. But, the picture is mixed for ICT that seem to make the workplace safer and less risky.
    Keywords: new work practices, technology, working conditions, occupational injuries
    JEL: J28 L23
    Date: 2006–09
  24. By: Dave Cowan; Morag McDermont; Jessica Prendergrast
    Abstract: This research project concerns the role of members of governing boards of formerly public assets, where these assets are transferred to a private or quasi-public organisation. Members of these governing boards, although drawn from particular constituencies, are meant to be neutral and experts. We use a case study approach and a qualitative methodology. The case study concerns the governing board of a housing association, which was set up to take on the management of properties formerly managed by a local authority (referred to as a 'large-scale voluntary transfer'). The research notes tensions in the notion of neutrality and explores what counts as 'expertise'.
    Keywords: governance; neutral; expertise; housing; representatives; transfer
    JEL: K10
    Date: 2006–06

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