nep-bec New Economics Papers
on Business Economics
Issue of 2006‒11‒04
sixteen papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Task Assignment and Organizational Form By Kerstin Puschke
  2. Can News About the Future Drive the Business Cycle? By Jaimovich, Nir; Rebelo, Sérgio
  3. Female Managers and their Wages in Central Europe By Jurajda, Stepan; Paligorova, Teodora
  4. Intangible Capital, Corporate Valuation and Asset Pricing By Danthine, Jean-Pierre; Jin, Xiangrong
  5. Mixed Oligopoly Equilibria When Firms' Objectives Are Endogenous By De Donder, Philippe; Roemer, John E
  6. Behavioural Theories of the Business Cycle By Jaimovich, Nir; Rebelo, Sérgio
  7. Where Do Firms Incorporate? By Becht, Marco; Mayer, Colin; Wagner, Hannes
  8. Aggregate Shocks or Aggregate Information? Costly Information and Business Cycle Comovement By Veldkamp, Laura; Wolfers, Justin
  9. Does Services Liberalization Benefit Manufacturing Firms? By Arnold, Jens; Mattoo, Aaditya; Smarzynska Javorcik, Beata
  10. The distribution of contract durations across firms - a unified framework for understanding and comparing dynamic wage and price setting models By Huw Dixon
  11. Innovate or Die? A critical review of the literature on innovation and performance By Stefano Brusoni; Elena Cefis; Luigi Orsenigo
  12. Are U.S. White-Collar Really at Risk of Service Offshoring? By Rosario Crino
  13. Outsourcing Induced by Strategic Competition By Yutian Chen; Pradeep Dubey; Debapriya Sen
  14. Skill vs. Luck in Entrepreneurship and Venture Capital: Evidence from Serial Entrepreneurs By Paul Gompers; Anna Kovner; Josh Lerner; David Scharfstein
  15. The Economics of Earnings Manipulation and Managerial Compensation By Keith J. Crocker; Joel Slemrod
  16. Option chain and change management : a structural equation application. By Thierry Burger-Helmchen

  1. By: Kerstin Puschke (Free University of Berlin, Department of Economics)
    Abstract: This paper shows that a firm prefers a process-based task assignment compared to a function based one if the tasks are from functional areas which are neither too complementary nor too substitutable. We consider several projects with contributions from several functional areas. The organization can be structured along processes like product lines (M-form) or along functional areas like marketing or production (U-form). The U-form enables cost savings due to specialization or scale economies. We show that the more effective incentives under the M-form might outweigh these savings if the functions are neither too complementary nor too substitutable.
  2. By: Jaimovich, Nir; Rebelo, Sérgio
    Abstract: We propose a model that generates an economic expansion in response to good news about future total factor productivity (TFP) or investment-specific technical change. The model has three key elements: variable capital utilization, adjustment costs to investment, and preferences that exhibit a weak short-run wealth effect on the labour supply. These preferences nest the two classes of utility functions most widely used in the business cycle literature as special cases. Our model can generate recessions that resemble those of the post-war U.S. economy without relying on negative productivity shocks. The recessions are caused not by contemporaneous negative shocks but rather by lackluster news about future TFP or investment-specific technical change.
    Keywords: business cycles; expectations; news
    JEL: E3
    Date: 2006–10
  3. By: Jurajda, Stepan; Paligorova, Teodora
    Abstract: This paper examines the gender gaps in employment and wages among top- and lower-level managerial employees in a recent sample of Czech firms. Unlike the existing analyses of managerial gender pay gaps, we acknowledge the adverse consequences of the low and uneven representation of women for the Oaxaca-Blinder decomposition and offer an alternative set of results based on a matching procedure. Only 7% of top-level Czech managers are women and their wages are about 20 percent lower even when compared only to their comparable male colleagues.
    Keywords: gender pay gap; managers
    JEL: J31 J71 P31
    Date: 2006–10
  4. By: Danthine, Jean-Pierre; Jin, Xiangrong
    Abstract: Recent studies have found unmeasured intangible capital to be large and important. In this paper we observe that by nature intangible capital is also very different form physical capital. We find it plausible to argue that the accumulation process for intangible capital differs significantly from the process by which physical capital accumulates. We study the implications of this hypothesis for rational firm valuation and asset pricing using a two-sector general equilibrium model. Our main finding is that the properties of firm valuation and stock prices are very dependent on the assumed accumulation process for intangible capital. If one entertains the possibility that intangible investments translates into capital stochastically, we find that plausible level of macroeconomic volatility are compatible with highly variable corporate valuations, P/E ratios and stock returns.
    Keywords: coporate valuation; intangible capital; stock return volatility
    JEL: D24 D50 G12
    Date: 2006–10
  5. By: De Donder, Philippe; Roemer, John E
    Abstract: We study a vertically differentiated market where two firms simultaneously choose the quality and price of the good they sell and where consumers also care for the average quality of the goods supplied. Firms are composed of two factions whose objectives differ: one is maximizing profit while the other maximizes revenues. The equilibrium concept we model, called Firm Unanimity Nash Equilibrium (FUNE), corresponds to Nash equilibria between firms when there is efficient bargaining between the two factions inside both firms. One conceptual advantage of FUNE is that oligopolistic equilibria exist in pure strategies, even though the strategy space (price, quality) is multi-dimensional. We first show that such equilibria are inefficient, with both firms underproviding quality. We then assume that the government takes a participation in one firm, which introduces a third faction, bent on welfare maximization, in that firm. We study the characteristics of equilibria as a function of the extent of government's participation. Our main results are twofold. First, government's participation in the firm providing the low quality good decreases efficiency while participation in the firm providing the high quality good increases efficiency. Second, the optimal degree of government's participation in the high-quality firm increases with how much consumers care for average equality.
    Keywords: factions; mixed oligopoly; party-unanimity Nash equilibrium; vertical differentiation
    JEL: D21 D43 D62 H82
    Date: 2006–10
  6. By: Jaimovich, Nir; Rebelo, Sérgio
    Abstract: We explore the business cycle implications of expectation shocks and of two well-known psychological biases, optimism and overconfidence. The expectations of optimistic agents are biased toward good outcomes, while overconfident agents overestimate the precision of the signals that they receive. Both expectation shocks and overconfidence can increase business-cycle volatility, while preserving the model's properties in terms of comovement, and relative volatilities. In contrast, optimism is not a useful source of volatility in our model.
    Keywords: business cycles; expectations; optimism; overconfidence
    JEL: E3
    Date: 2006–10
  7. By: Becht, Marco; Mayer, Colin; Wagner, Hannes
    Abstract: Over the last few years, a series of rulings by the European Court of Justice (ECJ) has opened up the European Union to cross-border mobility in incorporation. In this paper we explore how deregulation and the costs of regulation have affected the location decisions of firms. Using a newly constructed dataset of companies from around the world incorporating in the U.K. between 1997 and 2005 we find a large increase in new incorporations of limited liability firms from E.U. Member States following the ECJ rulings. We find that incorporation costs, in particular minimum capital requirements, and delays in incorporation are significant influences on firms’ location decisions. Our results confirm the relevance of price to firms’ choice of legal systems. We also report that cross-border incorporation has prompted regulatory competition between E.U. Member States to provide low-cost corporate law to limited liability companies.
    Keywords: entrepreneurship; financial regulation; incorporation; regulatory competition
    JEL: G38 K22
    Date: 2006–10
  8. By: Veldkamp, Laura; Wolfers, Justin
    Abstract: When similar patterns of expansion and contraction are observed across sectors, we call this a business cycle. Yet explaining the similarity and synchronization of these cycles across industries remains a puzzle. Whereas output growth across industries is highly correlated, identifiable shocks, like shocks to productivity, are far less correlated. While previous work has examined complementarities in production, we propose that sectors make similar input decisions because of complementarities in information acquisition. Because information about driving forces has a high fixed cost of production and a low marginal cost of replication, it can be more efficient for firms to share the cost of discovering common shocks than to invest in uncovering detailed sectoral information. Firms basing their decisions on this common information make highly correlated production choices. This mechanism amplifies the effects of common shocks, relative to sectoral shocks.
    Keywords: business cycles; comovement puzzle; costly information; information markets
    JEL: D82 E32
    Date: 2006–10
  9. By: Arnold, Jens; Mattoo, Aaditya; Smarzynska Javorcik, Beata
    Abstract: While there is considerable empirical evidence on the impact of liberalizing trade in goods, the effects of services liberalization have not been empirically established. This study examines the link between services sector reforms and the productivity of manufacturing industries relying on services inputs. The results, based on firm-level data from the Czech Republic for the period 1998-2003, show a positive relationship between services sector reform and the performance of domestic firms in downstream manufacturing sectors. When several aspects of services liberalization are considered, namely, the presence of foreign providers, privatization and the level of competition, we find that allowing foreign entry into services industries is the key channel through which services liberalization contributes to improved performance of downstream manufacturing sectors. As most barriers to foreign investment today are not in goods but in services sectors, our findings may strengthen the argument for reform in this area.
    Keywords: foreign direct investment; productivity; services liberalization
    JEL: D24 F2 L8
    Date: 2006–10
  10. By: Huw Dixon (Economics Department, University of York, YO10 5DD, UK.)
    Abstract: This paper shows how any steady state distribution of ages and related hazard rates can be represented as a distribution across firms of completed contract lengths. The distribution is consistent with a Generalised Taylor Economy or a Generalised Calvo model with duration dependent reset probabilities. Equivalent distributions have different degrees of forward lookingness and imply different behaviour in response to monetary shocks. We also interpret data on the proportions of firms changing price in a period, and the resultant range of average contract lengths. JEL Classification: E50.
    Keywords: Contract length, steady state, hazard rate, Calvo, Taylor.
    Date: 2006–09
  11. By: Stefano Brusoni (CESPRI-CRORA, Bocconi University and Silvio Tronchetti-Provera Foundation, Milano,Italy.); Elena Cefis (Utrecht School of Economics, Utrecht University and Bergamo University); Luigi Orsenigo (University of Brescia and CESPRI, Bocconi University, Italy)
    Abstract: The idea that innovation leads to positive economic performance has become a sort of truism in recent years. However, empirical evidence showing that innovating organizations and countries outperform non-innovating ones remains scant and scattered. In many ways, the jury is still out. First of all, there is still little agreement about what ‘performance’ means. The range of indicators adopted in the literature varies widely: financial performance, market shares, new products introduced into the market, patents, GDP growth, and so on. Second, the time lag between innovative efforts and performance is often so large, and so industry specific, that it remains just very hard to produce reliable estimates. Third, it is still unclear at what level of analysis one should go looking for positive economic performance. Studies exist that look at the relationship between performance and innovation at the level of design teams, projects, firms, networks, industries, and countries. This paper aims at critically reviewing the wide, yet remarkably scattered literature that aims at measuring and explaining the relationship between innovation and performance. It builds upon an extensive review of contributions in economics, management and organisation sciences to identify trends and results that are consistent and robust. In a nutshell, this paper argues that country- and sectoral-level approaches which emphasize the role that knowledge, spillovers and human capital play in fostering economic growth trough innovation need to consider the fundamental role played by competition among heterogeneous organisations in igniting the growth process. In this respect, micro-and firm-level studies can provide useful insights about how competition fosters learning, innovation and ultimately growth.
    Keywords: Innovation, Growth, Knowledge, Performance, Competition.
    JEL: O14 O33 O40
    Date: 2006–08
  12. By: Rosario Crino (CESPRI-Bocconi University, Milano,Italy.)
    Abstract: This paper deals with recent concerns about potentially negative effects of service offshoring on U.S. white-collar workers. At this purpose, the paper uses highly disaggregated occupational data and develops a Flexible and Separable Translog model in which service offshoring is allowed to affect labor demand for both minor white-collar occupations and major white-collar groups. The model is estimated through Quasi-Maximum Likelihood to account for the presence of corner solutions. Results suggest that concerns about service offshoring are ill-founded: service offshoring stimulates labor demand for the white-collar and changes its skill distribution in favor of high-skilled occupations.
    Keywords: Service Offshoring, White-Collar Workers, Labor Demand, Censored Demand System Estimation.
    JEL: F16 J23 C34
    Date: 2006–10
  13. By: Yutian Chen (Dept. of Economics, SUNY-Stony Brook); Pradeep Dubey (Dept. of Economics, SUNY-Stony Brook); Debapriya Sen (Dept. of Economics, SUNY-Stony Brook)
    Abstract: We show that intermediate goods can be sourced to firms on the "outside" (that do not compete in the final product market), even when there are no economies of scale or cost advantages for these firms. What drives the phenomenon is that "inside" firms, by accepting such orders, incur the disadvantage of becoming Stackelberg followers in the ensuing competition to sell the final product. Thus they have incentive to quote high provider prices to ward off future competitors, driving the latter to source outside.
    Keywords: Intermediate goods, Outsourcing, Cournot duopoly, Stackelberg duopoly
    JEL: D41 L11 L13
    Date: 2006–11
  14. By: Paul Gompers; Anna Kovner; Josh Lerner; David Scharfstein
    Abstract: This paper argues that a large component of success in entrepreneurship and venture capital can be attributed to skill. We show that entrepreneurs with a track record of success are more likely to succeed than first time entrepreneurs and those who have previously failed. Funding by more experienced venture capital firms enhances the chance of success, but only for entrepreneurs without a successful track record. Similarly, more experienced venture capitalists are able to identify and invest in first time entrepreneurs who are more likely to become serial entrepreneurs. Investments by venture capitalists in successful serial entrepreneurs generate higher returns for their venture capital investors. This finding provides further support for the role of skill in both entrepreneurship and venture capital.
    JEL: G24
    Date: 2006–10
  15. By: Keith J. Crocker; Joel Slemrod
    Abstract: This paper examines managerial compensation in an environment where managers may take a hidden action that affects the actual earnings of the firm. When realized, these earnings constitute hidden information that is privately observed by the manager, who may expend resources to generate an inflated earnings report. We characterize the optimal managerial compensation contract in this setting, and demonstrate that contracts contingent on reported earnings cannot provide managers with the incentive both to maximize profits, and to report those profits honestly. As a result, some degree of earnings management must be tolerated as a necessary part of an efficient agreement.
    JEL: A12
    Date: 2006–10
  16. By: Thierry Burger-Helmchen
    Abstract: The aim of this work is to establish empirically with a structural equation model (SEM) the existence of links between the options perceived by the members of an industry, the expectation of future rents produced by the exercise of these options and firm or industry specific factors. The theoretical part of this work is based on the notion of option chain developed by Bowman and Hurry (1993). The empirical part is on the video-game industry. A questionnaire based dataset on 211 video-game creators allows us to represent the concepts of potential and real option from a strategic point of view. The study shows that the relations between perceived opportunities, capacities building and rent expectations are shared by the members of this industry and can be expressed as options.
    Keywords: Real options, Innovation and change management, structural equation analysis, video-game industry.
    Date: 2006

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