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on Business Economics |
| By: | David De Meza; David C Webb |
| Abstract: | Compensation schemes often reward success but do not penalize failure. Fixed salaries with stock options or bonuses have this feature. Yet the standard principal–agent model implies that pay is normally monotonically increasing in performance. This paper shows that, under loss aversion, there will be intervals over which pay is insensitive to performance, with the use of carrots but not sticks is frequently optimal, especially when risk aversion is low and reference income is endogenous. A further benefit of capping losses, for example through options, is to discourage reckless behavior by executives seeking to resurrect their fortunes. (JEL: F3, F4) |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp571&r=bec |
| By: | Lawrence J. Christiano; Joshua M. Davis |
| Abstract: | Using “business cycle accounting,” Chari, Kehoe, and McGrattan (2006) conclude that models of financial frictions which create a wedge in the intertemporal Euler equation are not promising avenues for modeling business cycle dynamics. There are two reasons that this conclusion is not warranted. First, small changes in the implementation of business cycle accounting overturn Chari, Kehoe, and McGrattan’s conclusions. Second, one way that shocks to the intertemporal wedge affect the economy is by their spillover effects onto other wedges. This potentially important mechanism for the transmission of intertemporal-wedge shocks is not identified under business cycle accounting. Chari, Kehoe, and McGrattan potentially understate the importance of these shocks by adopting the extreme position that spillover effects are zero. |
| Keywords: | Business cycles |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0612&r=bec |
| By: | Christian Belzil (GATE CNRS); Michael Bognanno (Temple University, Philadelphia) |
| Abstract: | This paper explores the dynamics of wage growth in corporate hierarchies. Using panel data techniques, we estimate the causal effect of current and past transitions in reporting level and past earnings growth on components of current earnings and earnings growth using a large panel of US executives. After conditioning on unobserved heterogeneity, current compensation growth is positively correlated with past promotion outcomes but negatively correlated with past compensation growth. In a flexible model of wage growth, there is an important asymmetry between the effect of a promotion and a demotion. The effect of promotion is smaller in magnitude than the effect of a demotion. The causal effect of a promotion is positive on both growth in base pay and total cash compensation but is negative on bonus growth. The effect of a demotion is negative on growth in all pay components. |
| Keywords: | earning growth, promotion, reputation |
| JEL: | C33 J41 M5 M51 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:0606&r=bec |
| By: | Michel Normandin (IEA, HEC Montréal); Pascal Saint-Amour |
| Abstract: | This paper analyzes the important time variation in U.S. aggregate portfolio allocations. To do so, we first use flexible descriptions of preferences and investment opportunities to derive optimal decision rules that nest tactical, myopic, and strategic portfolio allocations. We then compare these rules to the data through formal statistical analysis. Our main results reveal that i) purely tactical and myopic investment behaviors are unambiguously rejected, ii) strategic portfolio allocations are strongly supported, and iii) the Fama-French factors best explain empirical portfolio shares. |
| Keywords: | Dynamic Hedging; Risk Aversion; Inter-temporal Substitution; Time-Varying Investment Opportunity Set. |
| JEL: | G11 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:iea:carech:0502&r=bec |
| By: | Kaarbøe, Oddvar M. (Programme for Health Economics (HEB), Department of Economics, University of Bergen); Olsen, Trond E. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration) |
| Abstract: | Incentive contracts must typically be based on performance measures that do not exactly match agents' true contribution to principals' objectives. Such misalignment may impose difficulties for effective incentive design. We analyze to what extent implicit dynamic incentives such as career concerns and ratchet effects alleviate or aggravate these problems. Our analysis demonstrates that the interplay between distorted performance measures and implicit incentives implies that career and ratchet effects have real effects, that career and monetary incentives may be complements, and that stronger ratchet effects or more distortion may increase optimal monetary incentives. |
| Keywords: | Incentive contracts; Performance measures |
| JEL: | J41 |
| Date: | 2004–12–29 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhhfms:2004_021&r=bec |
| By: | Michel Normandin (IEA, HEC Montréal); Martin Boileau |
| Abstract: | Several authors argue that international real business cycle (IRBC) models with incomplete financial markets offer a good explanation of the ranking of cross-country correlations. Unfortunately, this conclusion is suspect, because it is commonly based on an analysis of the near steady state dynamics using a linearized system of equations. The baseline IRBC model with incomplete financial markets does not possess a unique deterministic steady state and, as a result, its linear system of difference equations is not stationary. We show that the explanation of the ranking of cross-country correlations is robust to modifications that ensure a unique steady state and a stationary system of linear difference equations. We find, however, that the modifications affect the quantitative predictions regarding key macroeconomic variables. |
| Keywords: | Incomplete markets, stationarity, cross-country correlations, wealth effects. |
| JEL: | F32 G15 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:iea:carech:0503&r=bec |
| By: | Kyoji Fukao; Ryo Kambayashi; Daiji Kawaguchi; Hyeog Ug Kwon; Young Gak Kim; Izumi Yokoyama |
| Abstract: | Wage increases, along with job tenure, are one of the most robust empirical regularities found in labor economics. Several theories explain these empirical regularities, and such theories offer sharp empirical predictions for the relation between productivity-tenure and wage-tenure profiles. The human capital model, with cost and benefit sharing between workers and employers, predicts a steeper productivity-tenure profile than wage-tenure profile. The matching quality model predicts that the two profiles will overlap. Theories that involve the information asymmetry between employers and employees predict a steeper wage-tenure profile than productivity-tenure profile to induce workers' effort and enhance efficiency. This paper estimates the productivity-tenure profile and the wage-tenure profile by estimating the plant-level production function and the wage equation using employer-employee matched data from Japan. These estimations offer a comprehensive test for the relative applicability of the two theories on the wage-tenure profile. Estimation results indicate a steeper wage-tenure profile than productivity-tenure profile and point to the relative importance of the deferred wage payment contract. |
| Keywords: | Wage, Productivity, Employer-Employee Matched Data, Japan |
| JEL: | J24 J31 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:hst:hstdps:d06-187&r=bec |
| By: | Michel Normandin (IEA, HEC Montréal); Bruno Powo Fosso |
| Abstract: | This paper documents the relative importance of global and country-specific shocks for international business cycles. For this purpose, we rely on a symmetric twocountry, dynamic, general-equilibrium model with costly, incomplete, international financial markets. We also relate exogenous technologies and government expenditures to unobservable common and idiosynchratic components, and apply a Kalman filter to extract the associated global and country-specific shocks. We show that the baseline parametrization of the model, including all shocks, closely matches the cyclical fluctuations of key macroeconomic variables for the United States and a non-US aggregate over the post-1975 period. We then experiment alternative parametrizations, isolating the effects of each shock, and find that country-specific technology shocks constitute a prime determinant of international business cycles. Also, global technology shocks have marginal contributions, whereas global and country-specific government-expenditure shocks have negligible effects on cyclicalfluctuations. |
| Keywords: | General Equilibrium, Kalman Filter, Symmetric Economies. |
| JEL: | F32 F41 C32 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:iea:carech:0507&r=bec |
| By: | Désiré Vencatachellum (IEA, HEC Montréal); Bruno Versaevel |
| Abstract: | There is evidence that competing firms delegate R&D to the same independent profit-maximizing laboratory. We draw on this stylilzed fact to construct a model where two firms in the same industry offer transfer payments in exchange of user-specific R&D services from a common laboratory. Inter-firm and within-laboratory externalities affect the intensiti of competition among delegating firms on the intermediate market for technology. Whether competition is relatively soft or tight is reflected by each firm’s transfer payment offers to the laboratory. This in turn determines the laboratory’s capacity to earn profits, R&D outcomes, delegating firms’ profits, and social welfare. We compare the delegated R&D game to two other one where firms (i) cooperatively conduct in-house R&D, and (ii) non-cooperatively choose in-house R&D. The delegated R&D game Pareto dominates the other two games, and the laboratory earns positive profits, only if within-laboratory R&D services are sufficiently complementary, but inter-firm spillovers are sufficiently low. We find no room for policy intervention, because the privately profitable decision to delegate R&D, when the laboratory participates, always benefits consumers. |
| Keywords: | Research and development, externalities, common agency. |
| JEL: | C72 L13 O31 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:iea:carech:0501&r=bec |
| By: | Claus Schnabel (University of Erlangen-Nuremberg and IZA Bonn); Joachim Wagner (University of Lueneburg and IZA Bonn) |
| Abstract: | An empirical analysis of various waves of the ALLBUS social survey shows that union density fell substantially in western Germany from 1980 to 2004 and in eastern Germany from 1992 to 2004. Such a negative trend can be observed for men and women and for different groups of the workforce. Regression estimates indicate that the probability of union membership is related to a number of personal and occupational variables such as age, public sector employment and being a blue collar worker (significant in western Germany only). A decomposition analysis shows that differences in union density over time and between eastern and western Germany to a large degree cannot be explained by differences in the characteristics of employees. Contrary to wide-spread perceptions, changes in the composition of the workforce seem to have played a minor role in the fall in union density in western and eastern Germany. |
| Keywords: | union membership, union density, Germany, decomposition |
| JEL: | J51 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2388&r=bec |
| By: | Felix J. J. Vardy; John Morgan |
| Abstract: | We study a model where an employer, trying to fill a vacancy, engages in optimal sequential search by drawing from two subpopulations of candidates who differ in their "discourse systems": during an interview, a minority candidate with a discourse system not shared with the employer conveys a noisier unbiased signal of ability than does a majority candidate. We show that, when the employer is "selective," minority candidates are underrepresented in the permanent workforce, fired at greater rates, and underrepresented among initial hires, even though the employer has no taste for discrimination and the populations are alike in their average ability. Furthermore, workplace diversity is increased if: (1) the cost of firing is reduced, (2) the cost of interviewing is increased, (3) the opportunity cost of leaving the position unfilled is increased, or (4) the prior probability that a candidate can perform the job is increased. Indeed, if the prior probability is sufficiently high, or the cost of firing sufficiently low, then minority candidates may be overrepresented in the permanent workforce. |
| Keywords: | diversity , sequential search , statistical discrimination , reverse discrimination , discourse systems , |
| Date: | 2006–10–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/237&r=bec |
| By: | Oleg Badunenko (European University Viadrina Frankfurt (Oder), Germany); Michael Fritsch (University of Jena, Faculty of Economics, Max Planck Institute of Economics Jena, and Institute for Economic Research (DIW Berlin)); Andreas Stephan (European University Viadrina Frankfurt (Oder) and the German Institute for Economic Research (DIW Berlin)) |
| Abstract: | This paper investigates the factors that explain the level of technical efficiency of a firm. In our empirical analysis, we use a unique sample of about 35,000 firms in 256 industries from the German Cost Structure Census over the years 1992-2004. We estimate the technical efficiency of the firms and relate it to firm- and industry-specific characteristics. One third of the explanatory power is due to industry effects. Size accounts for another 25 percent and the headquarters? location explains ten percent of the variation in efficiency. Most other firm characteristics such as ownership structure, legal form, age of the firm and outsourcing activities have an extremely small explanatory power. R&D activity does not exert any positive influence on technical efficiency. |
| Keywords: | Frontier analysis, determinants of technical efficiency, firm performance, industry effects, regional effects. |
| JEL: | D24 L10 L25 |
| Date: | 2006–11–06 |
| URL: | http://d.repec.org/n?u=RePEc:jen:jenasw:2006-33&r=bec |
| By: | Junichiro Ishida (Osaka School of International Public Policy, Osaka University) |
| Abstract: | It is widely accepted in social psychology that the need to maintain and enhance self-esteem is a fundamental human motive. We incorporate this factor into an otherwise ordinary principal-agent framework and examine its impact on the optimal incentive scheme and the agent's behavior, especially focusing on a form of intrapersonal strategy known as self-handicapping. Incorporating self-esteem concerns into a contracting situation yields an implication that goes against the conventional wisdom: the standard tradeoff between risk and incentives may break down in the presence of self-esteem concerns because uncertainty mitigates the need for self-handicapping, providing a potential reason for why we do not empirically observe this tradeoff in a robust manner. We characterize an intuitive condition for this anomaly to arise and present a set of testable implications. Along the way, we also show that the fragility of self-esteem (the variance) is just as important as its level (the mean) in selecting agents. Finally, this simple logic is applied to a team problem to show why and how people are better motivated under team production than under individual production. |
| Keywords: | Self-esteem, Bayesian learning, Tradeoff between risk and incentives, Contract |
| JEL: | D81 D86 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:osp:wpaper:06e004rev.&r=bec |
| By: | Georges Dionne (IEA, HEC Montréal); Benoit Dostie (IEA, HEC Montréal) |
| Abstract: | In this paper, we provide new evidence on the determinants of absenteeism using the Workplace Employee Survey (WES) 1999-2002 from Statistics Canada. Our paper extends the typical labour-leisure model used to analyze the decision to skip work to include firm-level policy variables relevant to the absenteeism decision and uncertainty about the cost of absenteeism. It also provides a non-linear econometric model that explicitly takes into account the count nature of absenteeism data and unobserved heterogeneity at both the individual and firm level. Controlling for very detailed demographic, job and firm characteristics (including workplace practices), we find that dissatisfaction with contracted hours is a significant determinant of absence. |
| Keywords: | Absenteeism; Linked Employer-Employee Data; Unobserved Heterogeneity; Count Data Models. |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:iea:carech:0504&r=bec |
| By: | Simon C. Parker (Durham University and IZA Bonn); C. Mirjam van Praag (University of Amsterdam and IZA Bonn) |
| Abstract: | We analyse the decision to become an entrepreneur by either taking over an established business or starting a new venture from scratch. A model is developed which predicts how several individual- and firm-specific characteristics influence entrepreneurs’ entry mode. The new venture creation mode is associated with higher levels of schooling and wealth, whereas managerial experience, new venture start-up capital requirements and risk promote the takeover mode. Entrepreneurs whose parents run a family firm are predicted to invest the least in schooling, since schooling reduces search costs and these individuals have the lowest probability of needing to search for a business opportunity outside their family. A sample of data on entrepreneurs from the Netherlands provides broad support for the theory; implications for policy-makers concerned about the survival of family firms lacking withinfamily successors are discussed. |
| Keywords: | entrepreneurship, business entry, venture start-up, business takeover, human capital |
| JEL: | J24 M13 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2382&r=bec |
| By: | Hielke Buddelmeyer (University of Melbourne and IZA Bonn); Paul H. Jensen (University of Melbourne); Elizabeth Webster (University of Melbourne) |
| Abstract: | While many firms compete through the development of new technologies and products, it is well known that new-to-the-world innovation is inherently risky and therefore may increase the probability of firm death. However, many existing studies consistently find a negative association between innovative activity and firm death. We argue that this may occur because authors fail to distinguish between innovation investments and innovation capital. Using an unbalanced panel of over 290,000 Australian companies, we estimate a piecewiseconstant exponential hazard rate model to examine the relationship between innovation and survival and find that current innovation investments increase the probability of death while innovation capital lowers it. |
| Keywords: | firm survival, innovation |
| JEL: | O31 O32 C41 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2386&r=bec |
| By: | Hideaki Sakawa (Graduate School of Economics, Osaka University); Naoki Watanabel (Osaka School of International Public Policy) |
| Abstract: | This paper examines the relationship between the level of Japanese business managers' compensation and the quality of corporate governance, and whether weaker governance structures lead to poorer future performance. The conclusions of this paper are as follows. First, the level of Japanese business managers' compensation increases as the percentage of 'old', 'bank' and 'gray' outside directors increases. Compensation also increases with board stockholding and block holding. This suggests weak monitoring by old, bank and gray outside directors and block holders. Second, our results show that firms with weaker governance structures have poorer performance. These results suggest the existence of an overcompensation problem with Japanese managers similarly to the US. |
| Keywords: | Board of Directors, Corporate Governance, Managers' Compensation, Ownership Structure. |
| JEL: | G30 G32 J33 L22 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:0629&r=bec |
| By: | Nisvan Erkal; Daniel Piccinin |
| Abstract: | Antitrust authorities view the possibility of entry as a key determinant of whether a proposed merger will be harmful to society. This paper examines the effects of horizontal mergers in models of non-localized, differentiated Bertrand oligopoly that allow for free entry. The analysis of the long run effects of mergers in differentiated products markets raises issues that are significantly different from those in the short run or in homogeneous products markets due to the introduction of new varieties. Our analysis reveals that determining the properties of consumer preferences is crucial to the antitrust analysis of mergers in differentiated products markets. Specifically, we show that if the demand system satisfies the Independence from Irrelevant Alternatives (IIA) property and if the number of firms is treated as a continuous variable, mergers in differentiated products markets have no long run effect on consumer welfare. Moreover, in this case, marginal cost savings are to a large extent irrelevant to the consumer welfare effects of mergers. If the number of firms is treated as a discrete variable, fixed or marginal cost savings are a necessary condition for mergers to have zero or positive effect on consumer welfare. Using the example of linear demand, we show that if the demand system does not satisfy the IIA property, mergers in differentiated products markets can harm consumer welfare in long run equilibrium. Moreover, the amount of harm increases with consumers’ taste for variety. |
| Keywords: | Horizontal mergers; free entry; product differentiation; independence from irrelevant alternatives; antitrust policy |
| JEL: | L13 L22 L41 K21 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:mlb:wpaper:976&r=bec |
| By: | Tjai Nielsen (The George Washington University School of Business); Eric Sundstrom (University of Tennessee, Knoxville) |
| URL: | http://d.repec.org/n?u=RePEc:gwu:wpaper:0009&r=bec |
| By: | James B. Rebitzer; Lowell J. Taylor |
| Abstract: | We study the economics of employment relationships through theoretical and empirical analyses of an unusual set of firms, large law firms. Our point of departure is the Òproperty rightsÓ approach that emphasizes the centrality of ownershipÕs legal rights to control important, nonhuman assets of the enterprise. From this perspective, large law firms are an interesting and potentially important object of study, because the most valuable assets of these firms take the form of knowledgeÑparticularly knowledge of the needs and interests of clients. We argue that the two most distinctive organizational features of large law firms, the use of Òup or outÓ promotion contests and the practice of having winners become residual claimants in the firm, emerge naturally in this setting. In addition to explaining otherwise anomalous features of the up-or-out partnership system, this paper suggests a general framework for analyzing organizations where assets reside in the brains of employees. |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_477&r=bec |
| By: | Renata Kosova (The George Washington University School of Business); Francine Lafontaine (University of Michigan) |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:gwu:wpaper:0007&r=bec |