nep-bec New Economics Papers
on Business Economics
Issue of 2006‒12‒09
twenty-two papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. The Irrelevance of Market Incompleteness for the Price of Aggregate Risk By Krüger, Dirk; Lustig, Hanno
  2. Moral Hazard Contracts: Does One Size Fit All? By Alexander K. Koch; Eloïc Peyrache
  3. Globalization and the Provision of Incentives Inside the Firm By Cuñat, Vicente; Guadalupe, Maria
  4. Outsourcing, Complementary Innovations and Growth By Naghavi, Alireza; Ottaviano, Gianmarco I P
  5. Relative Rewards within Team-Based Compensation By Bernd Irlenbusch; Gabriele K. Ruchala
  6. Gender Differences in Labor Supply to Monopsonistic Firms: An Empirical Analysis Using Linked Employer-Employee Data from Germany By Boris Hirsch; Thorsten Schank; Claus Schnabel
  7. Mergers of Equals and Unequals By Valerie Smeets; Kathryn Ierulli; Michael Gibbs
  8. Incentives and the Allocation of Effort Over Time: The Joint Role of Affective and Cognitive Decision Making By Lorenz Goette; David Huffman
  9. Multinational Enterprises and Manufacturing for Export in Developing Asian Countries: Emerging Patterns and Opportunities for Latecomers By Prema-chandra Athukorala
  10. Welfare or Farewell? Mental health and stress in the workplace By Heather Rolfe; Jim Foreman; Tylee, A.
  11. The Impact of Changing Demographics and Pensions on The Demand for Housing and Financial Assets By Lubo Schmidt; Aleš ?Cerný and David Miles
  12. Merger Negotiations and Ex-Post Regret By Gärtner, Dennis; Schmutzler, Armin
  13. Endogenous Mode of Competition in General Equilibrium By Neary, J Peter; Thakaran, Joe
  14. Selection of Boundedly Rational Firms and the Allocation of Resources By Saint-Paul, Gilles
  15. Bank income and profits over the business and interest rate cycle By Johann Burgstaller
  16. Layoffs as Part of an Optimal Incentive Mix: Theory and Evidence By Anders Frederiksen; Elöd Takáts
  17. Inter-organizational communities of practice: specificities and stakes By Moingeon, Bertrand; Quélin, Bertrand; Dalsace, Frédéric; Lumineau, Fabrice
  18. The Returns to General versus Job-Specific Skills: the Role of Information and Communication Technology By Simon Kirby; Rebecca Riley
  19. Human Capital and Wages in Exporting Firms By Jakob Roland Munch; Jan Rose Skaksen
  20. The Lag Structure of the Impact of Business Ownership on Economic Performance in OECD Countries By Carree, M.A.; Thurik, A.R.
  21. Horizontal Innovation-Based Growth and Product Market Competition By Alberto Bucci; Carmelo Parello
  22. Multi-Product Firms and Flexible Manufacturing in the Global Economy By Eckel, Carsten; Neary, J Peter

  1. By: Krüger, Dirk; Lustig, Hanno
    Abstract: In models with a large number of agents who have constant relative risk aversion (CRRA) preferences, the absence of insurance markets for idiosyncratic labour income risk has no effect on the premium for aggregate risk if the distribution of idiosyncratic risk is independent of aggregate shocks. In spite of the missing markets, a representative agent who consumes aggregate income prices the excess returns on stocks correctly. This result holds regardless of the persistence of idiosyncratic shocks, as long as they are not permanent, even when households face binding, and potentially very tight borrowing constraints. Consequently, in this class of models there is no link between the extent of self-insurance against idiosyncratic income risk and aggregate risk premia.
    Keywords: idiosyncratic income risk; incomplete markets; risk premium
    JEL: G12
    Date: 2006–11
  2. By: Alexander K. Koch (Royal Holloway, University of London and IZA Bonn); Eloïc Peyrache (HEC School of Management, Paris)
    Abstract: Incentive theory predicts that contract terms should respond to differences in agents’ productivities. Firms’ practice of anonymous contracts thus appears puzzling. We show that such a "one-size-fits-all" approach can be reconciled with standard agency theory if careers are marked by frequent transitions between employers, and agents have career concerns because complete long-term contracts are not feasible.
    Keywords: anonymous contracts, career concerns, incentive contracts, reputation
    JEL: D80 J33 L14 M12
    Date: 2006–11
  3. By: Cuñat, Vicente; Guadalupe, Maria
    Abstract: This paper studies the effect of changes in foreign competition on the incentives faced by U.S. managers in the form of wage structures, promotion profiles, and job turnover. We use a panel of executives and measure foreign competition as import penetration. Using tariffs and exchange rates as instrumental variables, we estimate the causal effect of globalization on the labour market outcomes of these workers. We find that higher foreign competition leads to more incentive provision in a variety of ways. First, it increases the sensitivity of pay to performance. Second, it raises the return to a promotion and increases pay inequality among the top executives of the firm, with CEOs typically experiencing wage increases while lower-ranking executives see their wages fall. Third, higher competition is associated with a higher probability of leaving the firm. Finally, we show that higher foreign competition also is associated with a higher demand for talent at the top of the firm. These results indicate that increased foreign competition can explain some of the recent trends in compensation structures.
    Keywords: demand for talent; foreign competition; globalization; incentives; job turnover; performance-related pay; product market competition; promotions; wage ladders; wage structure
    JEL: J31 L1 M52
    Date: 2006–11
  4. By: Naghavi, Alireza; Ottaviano, Gianmarco I P
    Abstract: This paper analyzes the organization of firms in a dynamic setting with endogenous growth to shed light on the link between economic growth and the parallel creation and adoption of complementary innovations by independent labs and plants. In the presence of search friction and incomplete outsourcing contracts, we show that the ex-post bargaining power of upstream and downstream parties at the production stage feeds back into innovation and growth. Our dynamic perspective reveals a tension between the static and dynamic effects of outsourcing. The reason is that firms make their organizational choices weighting the higher searching and contracting costs of outsourcing against the higher entry and foregone specialization costs of vertical integration. In so doing, they neglect the effects of their choices on innovation and growth. Hence, when outsourcing is selected, the static gains from specialized production may at times be associated with relevant dynamic losses for consumers.
    Keywords: complementary innovations; growth; incomplete contracts; organization of firms; outsourcing; welfare
    JEL: D91 L14 L23 O32
    Date: 2006–11
  5. By: Bernd Irlenbusch (London School of Economics and IZA Bonn); Gabriele K. Ruchala (University College London)
    Abstract: How to design compensation schemes to motivate team members appears to be one of the most challenging problems in the economic analysis of labour provision. We shed light on this issue by experimentally investigating team-based compensations with and without bonuses awarded to the highest contributors in teams. A purely team-based compensation scheme induces agents to voluntarily cooperate while introducing an additional relative reward increases effort and efficiency only when the bonus is substantial. In this case, however, the data suggests that tournament competition crowds out voluntary cooperation within a team.
    Keywords: teamwork, bonus pools, relative rewards, motivation crowding out, voluntary cooperation, personnel economics, experiments
    JEL: C72 C91 H41 J33 L23 M52
    Date: 2006–11
  6. By: Boris Hirsch (University of Erlangen-Nuremberg); Thorsten Schank (University of Erlangen-Nuremberg); Claus Schnabel (University of Erlangen-Nuremberg and IZA Bonn)
    Abstract: This paper investigates women's and men's labor supply to the firm within a structural approach based on a dynamic model of new monopsony. Using methods of survival analysis and a linked employer-employee dataset for Germany, we find that labor supply elasticities are small (0.9-2.4) and that women's labor supply to the firm is substantially less elastic than men's (which is the reverse of gender differences in labor supply usually found at the level of the market). One implication of these findings is that the gender pay gap could be the result of wage discrimination by profit-maximizing monopsonistic employers.
    Keywords: labor supply, monopsony, gender, discrimination
    JEL: J42 J60 J71
    Date: 2006–11
  7. By: Valerie Smeets (Universidad Carlos III de Madrid and CCP); Kathryn Ierulli (University of Chicago); Michael Gibbs (University of Chicago and IZA Bonn)
    Abstract: We examine the dynamics of post-merger organizational integration. Our basic question is whether there is evidence of conflict between employees from the two merging firms. Such conflict can arise for several reasons, including firm-specific human capital, corporate culture, power, or favoritism. We examine this issue using a sample of Danish mergers. Controlling for other effects, employees from the acquirer fare better than employees from the acquired firm, suggesting that they have greater power in the newly merged hierarchy. As a separate effect, the more that either firm dominates the other in terms of number of employees, the better do its employees fare compared to employees from the other firm. This suggests that majority / minority status is also important to assimilation of workers, much as in ethnic conflicts. Finally, greater overlap of pre-merger operations decreases turnover. This finding is inconsistent with the view that workers of the two firms substitute for each other, creating efficiencies from merger. However, that result and our other findings are consistent with the view that more similar workers (in terms of either firm- or industry-specific human capital) are easier to integrate post merger.
    Keywords: mergers, internal organization, conflicts
    JEL: M5 G34 J63 M14
    Date: 2006–11
  8. By: Lorenz Goette (University of Zurich, CEPR and IZA Bonn); David Huffman (IZA Bonn)
    Abstract: We use natural experiments – plausibly exogenous, anticipated increases in the piece rate – to study how effort responds to incentives. Our first finding, like some previous studies, lends little support to the view that incentives increase effort: raising the piece rate has zero effect on total daily effort. Previous studies have speculated that changes in motivation over the course of the workday, caused by the increase in the piece rate, may lead to this result, but have relied on data aggregated to the day. Our data allow us to look within the workday. We find that workers do respond to incentives within the day: they work significantly harder in early hours of work, but significantly less hard later on, with a net effect of zero on total daily effort. We consider different possible explanations for this behavior. The most parsimonious explanation is a model in the spirit of Loewenstein and O'Donoghue (2005), in which a cognitive system, assumed to behave like the standard economic model predicts, is in conflict with the affective system. We review evidence from psychology and neuroscience to argue that the affective system may be strongly influenced by within-day changes in earnings, relative to an earnings goal. The affective system cares less about income once the goal is surpassed, providing an explanation for a drop in effort later in the day, and for the findings of earlier studies.
    Keywords: labor supply, loss aversion, affect, intertemporal substitution
    JEL: J22 J33 D01 B49
    Date: 2006–10
  9. By: Prema-chandra Athukorala
    Abstract: This paper examines the role of multinational enterprises (MNEs) is the expansion of manufacturing exports from developing countries, in the light of the Asia experience. First a typology of MNE-export nexus is developed in the context changes in patterns of international production over the past two decades. The typology is then applied to empirical evidence from newly industrialized countries (NICs) and latecomer exporting countries in Asia. The evidence suggests that the share of MNEs in manufactured exports from all these countries has recorded a significant increase from about the mid 1970s and the entry of MNEs is virtually essential for the export success of latecomers.
    Keywords: multinational enterprises, manufacturing exports, Asia, newly industrialized countries
    Date: 2006–12
  10. By: Heather Rolfe; Jim Foreman; Tylee, A.
    Abstract: Mental health problems, including stress, account for a high proportion of sickness absence and result in loss of employment. The paper presents findings from a recent qualitative research study into employers’ policies and practices in relation to mental health and stress. A number of problems are identified in how employers perceive mental health, particularly in the distinction between ‘home’ and ‘work-based’problems and in how it is dealt with. These include managers’ skills in dealing with mental health issues and in the availability of help, such as counselling. The paper identifies a range of measures which would improve current practice. These are seen to have wider benefits in improving employee well-being more generally.
    Date: 2006–02
  11. By: Lubo Schmidt; Aleš ?Cerný and David Miles
    Abstract: Using a calibrated OLG model with several sources of uncertainty we find that the impact of ageing and of reform of social security upon the demand for housing and the level of owner occupation is substantial. The overall structure of household asset holdings - in particular the split between real and financial assets - is sensitive to demographics and to the generosity of state run, pay-as-you go pensions. The interaction between social security reform and housing market conditions is significant and suggests that any changes in pension rules will have substantial knock on effects on the housing market.
    Date: 2006–01
  12. By: Gärtner, Dennis; Schmutzler, Armin
    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: asymmetric information; efficient mechanisms; interdependent valuations; mechanism design; mergers
    JEL: D82 G34 L10
    Date: 2006–11
  13. By: Neary, J Peter; Thakaran, Joe
    Abstract: This paper endogenises the extent of intra-sectoral competition in a multi-sectoral model of oligopoly in general equilibrium. Firms choose capacity followed by prices. If the benefits of capacity investment in a given sector are below a threshold level, the sector exhibits Bertrand behaviour, otherwise it exhibits Cournot behaviour. By endogenising the threshold parameter in general equilibrium, we show how exogenous shocks alter the mix of sectors between 'more' and 'less' competitive, or Bertrand and Cournot. The model also has implications for the effects of trade liberalisation and technological change on the relative wages of skilled and unskilled workers.
    Keywords: Bertrand and Cournot competition; GOLE (General Oligoplistic Equilibrium); Kreps-Scheinkman; market integration
    JEL: F10 F12 L13
    Date: 2006–11
  14. By: Saint-Paul, Gilles
    Abstract: I study how savers allocate funds between boundedly rational firms which follow simple pricing rules. Firms need cash to pay their inputs in advance, and savers-shareholders allocate cash between them so as to maximize their rate of return. When the rate of return on each firm is observed, there are multiple equilibria, and some degree of monopoly power is sustained. However, the economy gets close to the Walrasian equilibrium when the availability of funds goes to infinity. Multiple equilibria also arise when there are ‘entrants’ with unobservable rates of return. In an equilibrium where entrants are not funded, savers invest in incumbents because those entrants which will divert customers from incumbents are likely to be excess underpricers.
    Keywords: bounded rationality; credit allocation; evolution; selection; winner's curse
    JEL: D4 D5 Z19
    Date: 2006–11
  15. By: Johann Burgstaller (Department of Economics, Johannes Kepler University Linz, Austria)
    Abstract: If and how the conduct of the banking sector contributes to the propagation of aggregate shocks has become a prominent empirical research question. This study explores what a cyclicality analysis of net interest margins and spreads, as well as profitability figures, can contribute to the discussion. By using time series data for the Austrian banking sector from 1987 to 2005, it is found that many of these measures fall in economic upturns. Net interest income from granting loans and taking deposits from non-banks, however, evolves procyclically and increases with rising interest rates. Combined with the observation that the margins’ countercyclical variations are rather small, it can be concluded that there is no striking evidence for a financial accelerator caused by the Austrian banking sector.
    Keywords: Bank interest margins; business cycles; financial accelerator; impulse response analysis
    JEL: E32 G21
    Date: 2006–07
  16. By: Anders Frederiksen (Hoover Institution, Stanford University, Aarhus School of Business and IZA Bonn); Elöd Takáts (Princeton University)
    Abstract: Firms offer highly complex contracts to their employees. These contracts contain a mix of incentives, such as fixed wages, bonus payments, promotion options, and layoff threats. In general, economists understand how incentives motivate employees but not why a particular mix should be used. In this paper we present a model in which the observed incentive mix is an optimal contract. In particular, we show that it can be optimal for firms to combine costefficient incentives such as promotions and bonuses with layoffs. The intuition is that layoffs play a dual role. First, they create incentives for the employees. Second, they contribute to sorting and selection. In the empirical part of the paper we test the model’s basic assumption about employee sorting and selection together with its broader predictions about employee careers. Using personnel records from a large international pharmaceutical company, we find that the model’s predictions are consistent with the data.
    Keywords: personnel economics, incentive mix, layoffs
    JEL: J30 J41 M50
    Date: 2006–11
  17. By: Moingeon, Bertrand; Quélin, Bertrand; Dalsace, Frédéric; Lumineau, Fabrice
    Abstract: Inter-organizational communities of practice (IOCoPs) are today an emergent research topic and studies in this area are still in an exploratory phase. Theoretical mechanisms are vaguely specified and empirical studies are incipient. For this reason, this paper firstly aims at presenting the specificities and stakes of such organizational forms, establishing reference points for further research in this field. We will introduce the main features of IOCoPs and explain why they do not represent a mere subcategory of CoPs, but a unit of analysis per se. In this paper, we will follow a thematic approach to indicate IOCoPs’ specificities and stakes. We will thus look at the IOCoPs’ actors (in part I), IOCoPs as original organizational forms (part II), then IOCoPs’ life cycle (part III). Finally, we will synthesize IOCoPs’ distinctive features and conclude with a discussion on key interests of IOCoPs for both practitioners and academics.
    Keywords: Community of practice; inter-organizational relationships; professional practice; expertise; knowledge management; learning; organizational boundaries; life-cycle
    JEL: D23
    Date: 2006–11–01
  18. By: Simon Kirby; Rebecca Riley
    Abstract: This paper examines the effect of information and communication technologies (ICT) on the return paid to two different types of skill: general skills, acquired through schooling and work experience, and job-specific skills, acquired by experience in a particular job. Using the UK Labour Force Survey we estimate skill returns in different industries over the period 1994-2001. We evaluate the marginal effect on these returns of the ICT intensity of industry capital and find that the shift towards ICT capital has been associated with a rise in the return to general skills and a reduction in the return to job-specific experience.
    Date: 2006–06
  19. By: Jakob Roland Munch (University of Copenhagen, CEBR and EPRU); Jan Rose Skaksen (Copenhagen Business School, CEBR and IZA Bonn)
    Abstract: This paper studies the link between a firm’s education level, export performance and wages of its workers. We argue that firms may escape intense competition in international markets by using high skilled workers to differentiate their products. This story is consistent with our empirical results. Using a very rich matched worker-firm longitudinal dataset we find that firms with high export intensities pay higher wages. However, an interaction term between export intensity and skill intensity has a positive impact on wages and it absorbs the direct effect of the export intensity. That is, we find an export wage premium, but it accrues to workers in firms with high skill intensities.
    Keywords: exports, wages, human capital, rent sharing, matched worker-firm data
    JEL: J30 F10 I20
    Date: 2006–10
  20. By: Carree, M.A.; Thurik, A.R. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: This paper investigates the impact of changes in the number of business owners on three measures of economic performance, viz. employment growth, GDP growth and labor productivity growth. Particular attention is devoted to the lag structure. The analysis is performed at the country level for 21 OECD countries. Our results confirm earlier evidence on three stages in the impact of entry on economic performance: an initial direct positive effect, followed by a negative effect due to exiting capacities and finally a stage of positive supply-side effects. The net effect is positive for employment and GDP growth. Changes in the number of business owners have no effect on labor productivity.
    Keywords: Business Ownership;Entrepreneurship;Economic Growth;Lag Structure;
    Date: 2006–11–28
  21. By: Alberto Bucci (Department of Economics, Business and Statistics, University of Milan); Carmelo Parello (Catholic University of Louvain)
    Abstract: The influence of the degree of competition in the goods market on growth is analyzed by developing an endogenous growth model with horizontal innovation. Product market competition is measured by (1- Lerner index) and depends on both the share of factor inputs in total income and on the elasticity of substitution across goods. We find that the shape of the relationship between competition and growth can change dramatically according to which proxy of competition is used. We interpret our results in terms of the interplay between the resource allocation and the profit incentive effects.
    Keywords: Innovation, Product Market Competition, Endogenous Growth, Scale Effects,
    Date: 2006–07–18
  22. By: Eckel, Carsten; Neary, J Peter
    Abstract: We present a new model of multi-product firms (MPFs) and flexible manufacturing and explore its implications in partial and general equilibrium. International trade integration affects the scale and scope of MPFs through a competition effect and a demand effect. We demonstrate how MPFs adjust in the presence of single-product firms and in heterogeneous industries. Our results are in line with recent empirical evidence and suggest that MPFs in conjunction with flexible manufacturing play an important role in the impact of international trade on product diversity.
    Keywords: flexible manufacturing; general oligoplistic equilibrium (GOLE); international trade; multi-product firms; product diversity
    JEL: F12 L13
    Date: 2006–11

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