nep-bec New Economics Papers
on Business Economics
Issue of 2006‒12‒22
twenty-six papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Dynastic Management By Francesco Caselli; Nicola Gennaioli
  2. Corporate Hierarchies and the Size of Nations: Theory and Evidence By Marin, Dalia; Verdier, Thierry
  3. Individual Employee Voice: Renegotiation and Performance Management in Public Services By David Marsden
  4. Make-or-Buy Decisions in Patent Related Services By Wagner, Stefan
  5. What Do Independent Directors Know? Evidence from Their Trading By Enrichetta Ravina; Paola Sapienza
  6. Uncertainty and Investment Dynamics By Nick Bloom; Stephen Bond; John Van Reenen
  7. Work-Life Balance, Management Practices and Productivity By Nick Bloom; Tobias Kretschmer; John Van Reenen
  8. International Financial Integration and Entrepreneurship By Laura Alfaro; Andrew Charlton
  9. Pay for Performance Where Output is Hard to Measure: the Case of Performance Pay for School Teachers By Richard Belfield; David Marsden
  10. Contractual Frictions and Global Sourcing By Pol Antras; Elhanan Helpman
  11. Unemployment and Hours of Work: The North Atlantic Divide Revisited By Christopher A. Pissarides
  12. An R&D-Based Model of Multi-Sector Growth By Rachel Ngai; Roberto M. Samaniego
  13. Why Have Business Cycle Fluctuations Become Less Volatile? (with Andres Arias and Lee E. Ohanian) By Gary D. Hansen
  14. On the Welfare Costs of Consumption Uncertainty By Robert J. Barro
  15. Trends in Hours and Economic Growth By Rachel Ngai; Christopher A. Pissarides
  16. Co-Opetition and Prelaunch in Standard-Setting for Developing Technologies By Tobias Kretschmer; Katrin Muehlfeld
  17. Selection Wages: An Illustration By Schlicht, Ekkehart
  18. Unions, Job Reductions and Job Security Guarantees: the Experience of British Employees By Alex Bryson; Michael White
  19. Stress Testing the Corporate Loans Portfolio of the Canadian Banking Sector By Miroslav Misina; David Tessier; Shubhasis Dey
  20. Human Resources, theLabour Market andEconomic Performance By Romesh Vaitilingam
  21. Can Housing Collateral Explain Long-Run Swings in Asset Returns? By Hanno Lustig; Stijn Van Nieuwerburgh
  22. How Large Is the Housing Wealth Effect? A New Approach By Christopher D. Carroll; Misuzu Otsuka; Jirka Slacalek
  23. Strategic Patenting and Software Innovation By Michael Noel; Mark Schankerman
  24. Capital Markets, Ownership and Distance By Wendy Carlin; Andrew Charlton; Colin Mayer
  25. On the Macroeconomics of Asset Shortages By Ricardo J. Caballero
  26. Prices and Market Shares in a Menu Cost Model (November 2006, with Ariel Burstein) By Christian Hellwig

  1. By: Francesco Caselli; Nicola Gennaioli
    Abstract: The most striking difference in corporate-governance arrangements between rich and poorcountries is that the latter rely much more heavily on the dynastic family firm, whereownership and control are passed on from one generation to the other. We argue that if theheir to the family firm has no talent for managerial decision making, dynastic management isa failure of meritocracy that reduces a firm's Total Factor Productivity. We present a simplemodel that studies the macreconomic causes and consequences of dynastic management. Inour model, the incidence of dynastic management depends, among other factors, on theimperfections of contractual enforcement. A plausible calibration suggests that, via dynasticmanagement, poor contract enforcement may be a substantial contributor to observed crosscountrydifferences in aggregate Total Factor Productivity.
    Keywords: Meritocracy, Family firms, Financial Development, TFP
    JEL: E1 E2 G1 G3 O1 O4
    Date: 2006–08
  2. By: Marin, Dalia; Verdier, Thierry
    Abstract: Corporate organization varies within a country and across countries with country size. The paper starts by establishing some facts about corporate organization based on unique data of 660 Austrian and German corporations. The larger country (Germany) has larger firms with flatter more decentral corporate hierarchies compared to the smaller country (Austria). Firms in the larger country change their organization less fast than firms in the smaller country. Over time firms have been introducing less hierarchical organizations by delegating power to lower levels of the corporation. We develop a theory which explains these facts and which links these features to the trade environment that countries and firms face. We introduce firms with internal hierarchies in a Krugman (1980) model of trade. We show that international trade and the toughness of competition in international markets induce a power struggle in firms which eventually leads to decentralized corporate hierarchies. We offer econometric evidence which is consistent with the models predictions.
    Keywords: international trade with endogenous firm organizations; trade and corporate organization in similar countries; power struggle in the firm; corporate organization in Austria and Germany; empirical test of the theory of the firm
    JEL: F12 F14 L22 D23
    Date: 2006–12
  3. By: David Marsden
    Abstract: Periodically, the 'zone of acceptance' within which management may use its authority to direct employees' work needs to be adapted to the changing needs of organisations. This article focuses especially on the non-codified elements of employees' work, such as those commonly the subject of 'psychological contracts', and considers the role of individual employee voice in the process of adaptation, and how it relates to more familiar forms of collective employee voice. It is argued that the process can be analysed as a form of integrative bargaining, and applies the framework from Walton and McKersie. Employee voice enters into this process by virtue of consideration of the respective goals and preferences of both parties. The element of employee voice may be very weak when new work goals and priorities are imposed unilaterally by management, and they may be strong when full consideration is given to the changing needs of both parties. Two examples from work on performance management in the public services are used to illustrate these processes. The article concludes with a discussion of the ways in which collective employee voice may help to reinforce individual level integrative negotiation. The article seeks to contribute to the recent work on why employers choose employee voice mechanisms by broadening the range of policies that should be taken into account, and in particular looking at the potential of performance management as one such form.
    Keywords: employee voice, performance management, renegotiation of employment contracts, psychological contracts
    JEL: M5 J5
    Date: 2006–10
  4. By: Wagner, Stefan
    Abstract: Among the most prominent theoretical frameworks dealing with the economic underlyings of firms make-or-buy decisions are Transaction Cost Economics (TCE) and the Resourced Based View (RBV). Relying on panel data covering 107 European firms over eight years I test predictions from both TCE and RBV with regard to the outsourcing of patent related services simultaneously. Modelling the share of outsourced patent applications in a Negative Binomial Panel Regression Model I find joint explanatory power of both approaches. My findings support previous literature arguing for an integration of TCE and RBV to a comprehensive theoretical framework of firms make-or-buy decisions.
    Keywords: outsourcing; patent attorney; make-or-buy; negative binomial panel regression
    JEL: L24 L22
    Date: 2006
  5. By: Enrichetta Ravina; Paola Sapienza
    Abstract: We compare the trading performance of independent directors and other officers of the firm. We find that independent directors earn positive and substantial abnormal returns when they purchase their company stock, and that the difference with the same firm's officers is relatively small at most horizons. The results are robust to controlling for firm fixed effects and to using a variety of alternative specifications. Executive officers and independent directors make higher returns in firms with weaker governance and the gap between these two groups widens in such firms. Independent directors who sit in audit committees earn higher return than other independent directors at the same firm. Finally, independent directors earn significantly higher returns than the market when they sell the company stock in a window before bad news and around a restatement announcement.
    JEL: G34 G38
    Date: 2006–12
  6. By: Nick Bloom; Stephen Bond; John Van Reenen
    Abstract: This paper shows that, with (partial) irreversibility, higher uncertainty reduces the impacteffect of demand shocks on investment. Uncertainty increases real option values makingfirms more cautious when investing or disinvesting. This is confirmed both numerically for amodel with a rich mix of adjustment costs, time-varying uncertainty, and aggregation overinvestment decisions and time, and also empirically for a panel of manufacturing firms.These cautionary effects of uncertainty are large - going from the lower quartile to the upperquartile of the uncertainty distribution typically halves the first year investment response todemand shocks. This implies the responsiveness of firms to any given policy stimulus may bemuch lower in periods of high uncertainty, such as after major shocks like OPEC I and 9/11.
    Keywords: Investment, uncertainty, real options, panel data
    JEL: D92 E22 D8 C23
    Date: 2006–08
  7. By: Nick Bloom; Tobias Kretschmer; John Van Reenen
    Abstract: Do "Anglo-Saxon" management practices generate higher productivity only at the expense of lousywork-life balance (WLB) for workers? Many critics of "neo-libéralisme sauvage" have argued thatincreased competition from globalisation is damaging employees' quality of life. Others have arguedthe opposite that improving work-life balance is actually a competitive tool that companies can useto raise productivity. We try to shed some empirical light on these issues using an innovative surveytool to collect new data on management and work-life balance practices from 732 medium sizedmanufacturing firms in the US, France, Germany and the UK. First, we show that our measure ofwork-life balance is a useful summary of a range of policies in the firm - family-friendly policies,flexible working, shorter hours, more holidays, subsidised childcare, etc. We show that this worklifebalance measure is significantly associated with better management. Firms in environments thatare more competitive and/or who are more productive, however, do not have significantly worsework-life balance for their workers. These findings are inconsistent with the view that competition,globalisation and "Anglo-Saxon" management practices are intrinsically bad for the work-lifebalance of workers. On the other hand, neither are these findings supportive of the optimistic "winwin"view that work-life balance improves productivity in its own right. Rather we find support for a"hybrid" theory that work-life balance is a choice for managers that is compatible with low or highproductivity.
    Keywords: Work-Life Balance, Management Practices, Productivity, family-friendly workplaces, competition
    Date: 2006–01
  8. By: Laura Alfaro; Andrew Charlton
    Abstract: We explore the relation between international financial integration and the level ofentrepreneurial activity in a country. Using a unique data set of approximately 24 million firmsin nearly 100 countries in 1999 and 2004, we find suggestive evidence that internationalfinancial integration has been associated with higher levels of entrepreneurial activity. Ourresults are robust to using various proxies for entrepreneurial activity such as entry, size, andskewness of the firm-size distribution; controlling for level of economic development,regulation, institutional constraints, and other variables that might affect the businessenvironment; and using different empirical specifications. We further explore various channelsthrough which international financial integration can affect entrepreneurship (a foreign directinvestment channel and a capital/credit availability channel) and provide consistent evidence tosupport our results.
    Keywords: international financial integration, capital mobility, entrepreneurship, firm entry,capital controls, foreign direct investment
    JEL: F21 F23 F35 G15 G18 O19
    Date: 2006–10
  9. By: Richard Belfield; David Marsden
    Abstract: The introduction of performance-related pay with Performance Management in the state school sector of England and Wales represents a considerable change in the school management system. After 2000, all teachers were subject to annual goal setting performance reviews. Experienced teachers were offered an extended pay scale based on performance instead of seniority, and to gain access to the new upper pay scale, teachers had to go through a 'threshold assessment' based on their professional skills and performance. This paper reports the results of a panel survey of classroom and head teachers which started in 2000 just before implementation of the new system, and then after one and after four years of operation. We find that both classroom and head teacher views have changed considerably over time, from initial general skepticism and opposition towards a more positive view, especially among head teachers by 2004. We argue that the adoption of an integrative bargaining approach to performance reviews explains why a growing minority of schools have achieved improved goal setting, and improved pupil attainments as they have implemented performancemanagement. Pay for performance has been one of the measures of organizational support that headteachers could bring to induce changes in teachers' classroom priorities. We argue that the teachers' case shows that a wider range of performance incentives than previously thought can be offered to employees in such occupations, provided that goal setting and performance measurement are approached as a form of negotiation instead of top-down.
    Keywords: Education, teachers, performance related pay, public sector, compensation, industrial relations
    JEL: I2 J33 J45 M52
    Date: 2006–08
  10. By: Pol Antras; Elhanan Helpman
    Abstract: We generalize the Antras and Helpman (2004) model of the international organization of production in order to accommodate varying degrees of contractual frictions. In particular, we allow the degree of contractibility to vary across inputs and countries. A continuum of firms with heterogeneous productivities decide whether to integrate or outsource the production of intermediate inputs, and from which country to source them. Final-good producers and their suppliers make relationship-specific investments which are only partially contractible, both in an integrated firm and in an arm's-length relationship. We describe equilibria in which firms with different productivity levels choose different ownership structures and supplier locations, and then study the effects of changes in the quality of contractual institutions on the relative prevalence of these organizational forms. Better contracting institutions in the South raise the prevalence of offshoring, but may reduce the relative prevalence of FDI or foreign outsourcing. The impact on the composition of offshoring depends on whether the institutional improvement affects disproportionately the contractibility of a particular input. A key message of the paper is that improvements in the contractibility of inputs controlled by final-good producers have different effects than improvements in the contractibility of inputs controlled by suppliers.
    JEL: D23 F10 L23
    Date: 2006–12
  11. By: Christopher A. Pissarides
    Abstract: I examine the dynamic evolutions of unemployment, hours of work and the service sharesince the war in the United States and Europe. The theoretical model brings together allthree and emphasizes technological growth. Computations show that the very lowunemployment in Europe in the 1960s was due to the high productivity growth associatedwith technological catch-up. Productivity also played a role in the dynamics of hours buta full explanation for the fast rise of service employment and the big fall in aggregatehours needs further research. Taxation has played a role but results are mixed.
    Keywords: Unemployment, hours of work, service employment, structural change, laborproductivity taxation
    JEL: E24 J21 J22 J64 O14
    Date: 2006–10
  12. By: Rachel Ngai; Roberto M. Samaniego
    Abstract: We develop a multi-sector general equilibrium model in which productivity growth is drivenby the production of sector-specific knowledge. In the model, we find that long rundifferences in total factor productivity growth across sectors are independent of theparameters of the knowledge production function except for one, which we term the fertilityof knowledge. Differences in R&D intensity are also independent of most other parameters.The fertility of knowledge in the capital sector is central to the growth properties of the modeleconomy.
    Keywords: Endogenous technical change, multisector growth, fertility of knowledge, totalfactor productivity, R&D intensity, investment-specific technical change
    JEL: D24 D92 O31 O41
    Date: 2006–12
  13. By: Gary D. Hansen
  14. By: Robert J. Barro
    Abstract: Satisfactory calculations of the welfare cost of aggregate consumption uncertainty require a framework that replicates major features of asset prices and returns, such as the high equity premium and low risk-free rate. A Lucas-tree model with rare but large disasters is such a framework. In a baseline simulation, the welfare cost of disaster risk is large -- society would be willing to lower real GDP by about 20% each year to eliminate all disaster risk, including wars. In contrast, the welfare cost from usual economic fluctuations is much smaller, though still important -- corresponding to lowering GDP by around 1.5% each year.
    JEL: E21 E44 G12
    Date: 2006–12
  15. By: Rachel Ngai; Christopher A. Pissarides
    Abstract: We study long-run trends in market hours of work and employment shifts across economicsectors driven by uneven TFP growth in market and home production. We focus on thestructural transformation between agriculture, manufacturing and services and on themarketization of home production. The model can rationalize the observed falling or Ushapedpattern for aggregate hours, the shift from agriculture to services and balancedaggregate growth. We find support for the model's predictions in long-run US data.
    Keywords: hours of work, labour supply, structural transformation, home production,marketization, balanced growth
    JEL: J21 J22 O14 O41
    Date: 2006–08
  16. By: Tobias Kretschmer; Katrin Muehlfeld
    Abstract: Firms faced with the decision of whether to standardize or not prior to introducing a newnetwork technology face a tradeoff: Compatibility improves the technology's chances ofconsumer acceptance, but it also means having to share the resulting profits with othersponsors of the standard. In this paper, we show that even prior to market introduction of anew technology, the timing of decisions is important and that firms have to weigh up thecooperative and competitive elements of pre-market choices. We also show that the option toprecommit to a technology before it is fully developed (as has been the case with theCompact Disc) can be profitable for network technologies.
    Keywords: Standardization, compact disc, preemption, war-of- attrition
    JEL: L63 O32
    Date: 2006–08
  17. By: Schlicht, Ekkehart
    Abstract: Offering higher wages may enable firms to attract more applicants and screen them more carefully. If firms compete in this way in the labor market, "selection wages" emerge. This note illustrates this wage-setting mechanism. Selection wages may engender unconventional results, such as a pre-tax wage compression induced by the introduction of a progressive wage tax.
    Keywords: wage formation; efficiency wage; incentive wage; mobility; job-specific pay; wage-tax
    JEL: J31 J41 J62 J63
    Date: 2006–12
  18. By: Alex Bryson; Michael White
    Abstract: A national survey makes it possible to examine employees' awareness of net overallreductions in the size of the workforce along with their awareness of employer policies thatpromise 'no compulsory redundancies'. Differences are investigated between union and nonunionworkplaces, and between unionised workplaces with high membership density andthose with low-to-medium density. A union presence increases both job reductions and jobsecurity guarantees to employees, and high membership density has some additional effectsin the market sector, but not the public sector.
    Keywords: job cuts, trade unions, job guarantees
    JEL: J23 J45 J51 J63
    Date: 2006–08
  19. By: Miroslav Misina; David Tessier; Shubhasis Dey
    Abstract: Stress testing, at its most general level, is an investigation of the performance of an entity under abnormal operating conditions. The authors focus on one set of entities--the Canadian banking sector--and investigate losses in the loans portfolio of this sector as a function of changing circumstances in the different industries in which these loans reside. These circumstances are characterized by means of one summary measure--sectoral probabilities of default--and this measure is modelled as a function of macroeconomic variables. Using this model, the authors assess the interrelationship between the macroeconomic environment and sectoral defaults, and perform a series of stress tests under different scenarios that are thought to be most pertinent to Canada. The tools underlying the authors' analysis are general and can be applied to other countries, as well as to other macroeconomic scenarios.
    Keywords: Financial stability, Financial institutions
    JEL: C15 G21 G33
    Date: 2006
  20. By: Romesh Vaitilingam
    Date: 2006–09
  21. By: Hanno Lustig; Stijn Van Nieuwerburgh
    Abstract: To explain the low-frequency variation in US equity and debt returns in the 20th century, we solve an equilibrium model in which households face housing collateral constraints. An increase in the ratio of housing to human wealth loosens these borrowing constraintsthus allowing for more risk sharing. The rate of return that households require for holding equity decreases as a result. Feeding the historical time series of US housing collateral into the model replicates four features of long-run asset returns. (1) It produces a fifteen percent equity premium during the 1930s and a slow decline of the equity premium from eleven percent in the 1960s to four percent in 2003. (2) It generates large unexpected capital gains for equity holders, especially in the 1990s. (3) The risk-free rate and the housing collateral ratio are strongly positively correlated at low frequencies. (4) The model mimics the slow decline in the volatility of stock returns and the riskless interest rate.
    JEL: G12
    Date: 2006–12
  22. By: Christopher D. Carroll; Misuzu Otsuka; Jirka Slacalek
    Abstract: This paper presents a simple new method for estimating the size of 'wealth effects' on aggregate consumption. The method exploits the well-documented sluggishness of consumption growth (often interpreted as 'habits' in the asset pricing literature) to distinguish between short-run and long-run wealth effects. In U.S. data, we estimate that the immediate (next-quarter) marginal propensity to consume from a $1 change in housing wealth is about 2 cents, with a final long-run effect around 9 cents. Consistent with several recent studies, we find a housing wealth effect that is substantially larger than the stock wealth effect. We believe that our approach is preferable to the currently popular cointegration- based estimation methods, because neither theory nor evidence justifies faith in the existence of a stable cointegrating vector.
    JEL: C22 E21 E32
    Date: 2006–12
  23. By: Michael Noel; Mark Schankerman
    Abstract: Strategic patenting is widely believed to raise the costs of innovating, especially in industriescharacterised by cumulative innovation. This paper studies the effects of strategic patentingon R&D, patenting and market value in the computer software industry. We focus on two keyaspects: patent portfolio size which affects bargaining power in patent disputes, and thefragmentation of patent rights (.patent thickets.) which increases the transaction costs ofenforcement. We develop a model that incorporates both effects, together with R&Dspillovers. Using panel data for the period 1980-99, we find evidence that both strategicpatenting and R&D spillovers strongly affect innovation and market value of software firms.
    Keywords: patents, anti-commons, patent thickets, R&D spillovers, market value
    JEL: L43 L86 O31 O32 O33 O34 O38
    Date: 2006–08
  24. By: Wendy Carlin; Andrew Charlton; Colin Mayer
    Abstract: This paper uses a new data-set to examine how internal capital markets and foreignownership affect investment. Our data allow us to compare investment behaviour of listedsubsidiaries with stand-alone firms while controlling for investment opportunities of parentand subsidiary firms. We evaluate how the size of ownership and the geographical proximityof majority owners to their subsidiaries affect firm investment efficiency. We find that theinvestment of subsidiaries is more sensitive to investment opportunities than that of standalonefirms and falls when investment opportunities of parent firms improve. This suggeststhat there are internal capital markets that reallocate funds towards units with betterinvestment opportunities. We find that investment allocation is most efficient where parentshave modest ownership stakes and are distant from their subsidiaries and when subsidiariesoperate in well developed financial markets. These results indicate that influence costsimposed by dominant parents may outweigh their potential informational benefits, especiallywhen subsidiaries are located in countries with weaker financial development.
    Keywords: Investment, Internal Capital Markets, Foreign Ownership
    JEL: F21 G31
    Date: 2006–08
  25. By: Ricardo J. Caballero
    Abstract: The world has a shortage of financial assets. Asset supply is having a hard time keeping up with the global demand for store of value and collateral by households, corporations, governments, insurance companies, and financial intermediaries more broadly. The equilibrium response of asset prices and valuations to these shortages has played a central role in global economic developments over the last twenty years. The so-called "global imbalances," the recurrent emergence of speculative bubbles (which recently have transited from emerging markets, to the dot-coms, to real estate, to gold...), the historically low real interest rates and associated "interest-rate conundrum," and even the widespread low inflation environment and deflationary episodes in parts of the world, all fall into place once one adopts this asset shortage perspective.
    JEL: E3 E4 E5 F3 F41
    Date: 2006–12
  26. By: Christian Hellwig

This nep-bec issue is ©2006 by Christian Calmes. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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