nep-bec New Economics Papers
on Business Economics
Issue of 2007‒01‒13
twenty-six papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Why Has CEO Pay Increased So Much? By Xavier Gabaix; Augustin Landier
  2. Paying to Make a Difference: Executive Compensation and Product Dynamics By Antonio Falato
  3. Organizing Offshoring: Middle Managers and Communication Costs By Pol Antras; Luis Garicano; Esteban Rossi-Hansberg
  4. Optimal Executive Compensation vs. Managerial Power: A Review of Lucian Bebchuk and Jesse Fried's "Pay without Performance: The Unfulfilled Promise of Executive Compensation" By Michael S. Weisbach
  5. Why Did U.S. Market Hours Boom in the 1990s? By Ellen R. McGrattan; Eduard C. Prescott
  6. Organizing for Synergies By Dessein, Wouter; Garicano, Luis; Gertner, Robert
  7. What Do Outside Directors Know? Evidence From Outsider Trading By Enrichetta Ravina; Paola Sapienza
  8. Reputation and Career Concerns By Leonardo Martinez
  9. Lucky Directors By Lucian A. Bebchuk; Yaniv Grinstein; Urs Peyer
  10. Can News About the Future Drive the Business Cycle? By Nir Jaimovich; Sergio Rebelo
  11. Firms' Heterogeneous Sensitivities to the Business Cycle, and the Cross-Section of Expected Returns By Francois Gourio
  12. Productivity Shocks and the Business Cycle: Reconciling Recent VAR Evidence By James Costain; Beatriz de-Blas-Perez
  13. The Young, the Old, and the Restless: Demographics and Business Cycle Volatility By Henry Siu; Nir Jaimovich
  14. Financial Frictions, Investment and Tobin's q By Guido Lorenzoni; Karl Walentin
  15. Liquidity and Capital Structure By Andrew Carverhill; Ron Anderson
  16. Leverage Choice and Credit Spread Dynamics when Managers Risk Shift By Murray Carlson; Ali Lazrak
  17. Employee Participation and Wages: An Empirical Investigation with Selectivity Correction By Tushar Kanti Nandi
  18. Wage Rigidity and Job Creation By Christian Haefke; Marcus Sonntag; Thijs van Rens
  19. Parametric and Semiparametric Estimation of the Adoption of Work Teams By Tushar Kanti Nandi
  20. On-the-Job Search and Labor Market Reallocation By Murat Tasci
  21. Credit Cycles and Macro Fundamentals By Siem Jan Koopman; Roman Kräussl; André Lucas; André Monteiro
  22. We Can Work It Out - The Globalisation of ICT-enabled Services By Desiree van Welsum; Xavier Reif
  23. Investment Options and the Business Cycle By Boyan Jovanovic
  24. Individual Wage Bargaining and Business Cycles By Monique Ebell
  25. Does a Platform Monopolist Want Competition? By Andras Niedermayer
  26. Credit Market Frictions with Costly Capital Reallocation as a Propagation Mechanism By Andre Kurmann; Nicolas Petrosky-Nadeau

  1. By: Xavier Gabaix (Massachusetts Institute of Technology); Augustin Landier
    Abstract: This paper develops a simple competitive model of CEO pay. It appears to explain much of the rise in CEO compensation in the US economy, without assuming managerial entrenchment, mishandling of options, or theft. CEOs have observable managerial talent and are matched to assets in a competitive assignment model. The marginal impact of a CEO's talent is assumed to increase with the value of the assets under his control. Under very general assumptions, using results from extreme value theory, the model determines the level of CEO pay across firms and over time, and the pay-sensitivity relations. We predict that the level of CEO compensation should increase one for one with the average market capitalization of large firms in the economy. Therefore, the eight-fold increase of CEO pay between 1980 and 2000 can be fully attributed to the increase in market capitalization of large US companies. The model predicts the cross-section Cobb-Douglass relation between pay and firm size and can be used to study other large changes at the top of the income distribution, and offers a benchmark for calibratable corporate finance
    Keywords: Executive compensation, wage distribution, Pareto distribution, wage inequality, assignment, incentives, pay performance sensitivity
    JEL: D2 D3 G34 J3
    Date: 2006–12–03
  2. By: Antonio Falato (Finance HEC Montréal)
    Abstract: This paper develops an agency model of executive compensation in dynamic industry equilibrium. Firms differ in the quality of their products, and managers can make a difference as higher effort brings about product improvement. I show that there is an inverse relationship between the magnitude of the performance-based component of optimal compensation contracts and the degree of product differentiation, as managerial effort is less likely to make a difference for firms with more differentiated products. Empirically, I find strong evidence of this inverse relation in the compensation of US executives. In particular, I find that pay-performance sensitivity depends negatively on industry- and firm-level measures of product differentiation, even after controlling for industry fixed effects and standard measures of product market competition. Moreover, industry leaders have weaker pay-performance sensitivity than laggards, even after controlling for firm size. My findings suggest that industry is an important determinant of executive compensation
    Keywords: Incentives, Optimal Contracts, Executive Compensation, Industry Dynamics
    JEL: G31 G34
    Date: 2006–12–03
  3. By: Pol Antras; Luis Garicano; Esteban Rossi-Hansberg
    Abstract: Why do firms decide to offshore certain parts of their production process? What qualifies certain countries as particularly attractive locations to offshore? In this paper we address these questions with a theory of international production hierarchies in which teams arise endogenously to make efficient use of agents' knowledge. Our theory highlights the role of host-country management skills (middle management) in bringing about the emergence of international offshoring. By shielding top management in the source country from routine problems faced by host country workers, the presence of middle managers improves the efficiency of the transmission of knowledge across countries. The model further delivers the prediction that the positive effect of middle skills on offshoring is weaker, the more advanced are communication technologies in the host country. We provide evidence consistent with this prediction
    Keywords: Offshoring, Organizations, FDI
    JEL: F1
    Date: 2006–12–03
  4. By: Michael S. Weisbach
    Abstract: This essay reviews Bebchuk and Fried's "Pay without Performance: The Unfulfilled Promise of Executive Compensation". Bebchuk and Fried criticize the standard view of executive compensation, in which executives negotiate contracts with shareholders that provide incentives that motivate them to maximize the shareholders' welfare. In contrast, Bebchuk and Fried argue that executive compensation is more consistent with executives who control their own boards, and who maximize their own compensation subject to an "outrage constraint". They provide a host of evidence consistent with this alternative viewpoint. The book can be evaluated from both a positive and a normative perspective. From a positive perspective, much of the evidence they present, especially about the camouflage and risk-taking aspects of executive compensation systems, is fairly persuasive. However, from a normative perspective, the book conveys the idea that policy changes can dramatically improve executive compensation systems and consequently overall corporate performance. It is unclear to me how effective in practice are potential reforms designed to achieve such changes likely to be.
    JEL: G3 J4 K22
    Date: 2006–12
  5. By: Ellen R. McGrattan; Eduard C. Prescott (Federal Reserve Bank of MInneapolis)
    Abstract: During the 1990s, market hours in the United States rose dramatically. The rise in hours occurred as gross domestic product (GDP) per hour was declining relative to its historical trend, an occurrence that makes this boom unique, at least for the postwar U.S. economy. We find that expensed plus sweat investment was large during this period and critical for understanding the movements in hours and productivity. Expensed investments are expenditures that increase future profits but, by national accounting rules, are treated as operating expenses rather than capital expenditures. Sweat investments are uncompensated hours in a business made with the expectation of realizing capital gains when the business goes public or is sold. Incorporating expensed and sweat equity into an otherwise standard business cycle model, we find that there was rapid technological progress during the 1990s, causing a boom in market hours and actual productivity.H
    Keywords: 1990 U.S. Hours Boom; Productivity
    JEL: E01 E32
    Date: 2006–12–03
  6. By: Dessein, Wouter; Garicano, Luis; Gertner, Robert
    Abstract: Multi-product firms create value by integrating functional activities such as manufacturing across business units. This integration often requires making functional managers responsible for implementing standardization, thereby limiting business-unit managers’ authority. Realizing synergies then involves a tradeoff between motivation and coordination. Motivating managers requires narrowly-focused incentives around their area of responsibility. Functional managers become biased toward excessive standardization and business-unit managers may misrepresent local market information to limit standardization. As a result, integration may be value-destroying when motivation is sufficiently important. Providing functional managers only with "dotted-line control" (where business-unit managers can block standardization) has limited ability to improve the tradeoff.
    Keywords: communication; coordination; incentives; incomplete contracts; merger implementation; organizational design; scope of the firm; task allocation
    JEL: D2 D8 L2
    Date: 2006–12
  7. By: Enrichetta Ravina (Finance Stern NYU); Paola Sapienza
    Abstract: Sarbanes-Oxley and other regulatory reform have advocated to put more outsiders on the board. The rationale of this measure is that outsiders are more independent, while a potential drawback is that they might not know enough about the firm to be effective monitors. Having information about the firm is a necassary condition to be an effective monitor. This paper investigates whether outside directors have information about the firm and its conditions. Using a comprehensive sample of executives' and board of directors' transactions from 1986 to 2003 in U.S. companies, we compare the trading profits of three types of individuals: (i) insiders (executives of the firm), (ii) non executive directors who are large blockholders, and (iii) directors who are neither employees of the firm, nor large blockholders (outside directors). Insiders and outside directors earn higher abnormal returns than the market. Insiders generally perform better than outsiders in purchases transactions. These results suggest that outside directors do have substantial inside information about the firm, even though they know less than the executives. We also find that in better governed firms the difference in performance between outsiders' and insiders' returns is lower, suggesting that firms with better governance structure may have better mechanism in place that allows outsiders to receive more information
    Keywords: Empirical Corporate Governance; Monitoring; Insider Trading
    JEL: G34
    Date: 2006–12–03
  8. By: Leonardo Martinez
    Abstract: This paper studies Holmstrom's [1999] seminal model of career concerns, but considers that a small change in the beliefs about the agent's future productivity may imply a large change in his compensation---because, for example, the agent may be fired or promoted. This allows us to study how the agent's effort decision depends on his current reputation---with reputation we refer to the beliefs about the agent's future productivity. We shall show that the market's and the agent's problems can be written recursively. We find that the relationship between the agent's decisions and his current reputation is typically nonmonotonic: equilibrium effort is hump-shaped over reputation. Furthermore, equilibrium effort may be higher if there is less dispersion in the distribution of abilities; it may be higher later in the agent's career; and it may be higher than the efficient effort level
    Keywords: career concerns, reputation, agency, learning, dynamic games, promotions, firing
    JEL: C73 D72 D82
    Date: 2006–12–03
  9. By: Lucian A. Bebchuk; Yaniv Grinstein; Urs Peyer
    Abstract: While prior empirical work and much public attention have focused on the opportunistic timing of executives' grants, we provide in this paper evidence that outside directors' option grants have also been favorably timed to an extent that cannot be fully explained by sheer luck. Examining events in which public firms granted options to outside directors during 1996-2005, we find that 9% were "lucky grant events" falling on days with a stock price equal to a monthly low. We estimate that about 800 lucky grant events owed their status to opportunistic timing, and that about 460 firms and 1400 outside directors were associated with grant events produced by such timing. There is evidence that the opportunistic timing of director grant events has been to a substantial extent the product of backdating and not merely spring-loading based on private information. We find that directors' luck has been correlated with executives' luck. Furthermore, grant events were more likely to be lucky when the firm had more entrenching provisions protecting insiders from the risk of removal, as well as when the board did not have a majority of independent directors.
    JEL: D23 G32 G38 J33 J44 K22 M14
    Date: 2006–12
  10. By: Nir Jaimovich (Economics UCSD); Sergio Rebelo
    Abstract: In this paper we propose a model that generates an 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 income effect on the labor supply. These preferences nest, as special cases, the two classes of utility functions most widely used in the business cycle literature. Even though our model abstracts from negative productivity shocks, it generates recessions that resemble those in the post-war U.S. economy. Recessions are caused not by contemporaneous negative shocks but by lackluster news about the future TFP or investment-specific technical change
    Keywords: News, Future Shocks, Business Cycle
    JEL: E3
    Date: 2006–12–03
  11. By: Francois Gourio
    Abstract: In this paper, I propose and test a simple technology-based theory of firms' sensitivities to aggregate shocks. I show that when the elasticity of substitution between capital and labor is below unity, low profitability firms are more sensitive to aggregate shocks, i.e. to the business cycle. Since the wage is smoother than productivity, revenues are more procyclical than costs, making profits, the residual procyclical. Firms with low profitability are more procyclical since the residual is smaller and the amplification greater. I study the asset pricing implications of this technology and find that it can explain the riskiness of small and “value†firms (Fama and French 1996). These firms are less profitable and are thus more procyclical. I find empirically that the cross-section of expected returns is well explained by differences in sensitivities of firms’ earnings to GDP growth, or by differences in profitability. The model yields rich empirical implications by linking a firm’s real behavior (the elasticity of output, employment and profits to an aggregate shock) to its financial characteristics (the firm's betas and its average return). I next embed my partial equilibrium model in a full DSGE model to conduct a GE analysis. Empirically I show that firms with low margins are indeed more sensitive to the business cycle in their employment, sales or profits
    Keywords: Cross-section of returns, book-to-market, value premium, productivity heterogeneity
    JEL: E44 G12
    Date: 2006–12–03
  12. By: James Costain (Economics Universidad Carlos III de Madrid); Beatriz de-Blas-Perez
    Abstract: Gali (1999) used a VAR with productivity and hours worked to argue that technology shocks are negatively correlated with labor and are unimportant for the business cycle. More recently, Beaudry and Portier (2003) studied a VAR in productivity and stock prices. Remarkably, they found that the component which has a permanent impact on productivity is almost identical to that which has no immediate impact on productivity. Moreover, either of these components explains most business cycle variation. Like Gali's results, these observations are inconsistent with early RBC models, but on the other hand they contradict Gali's claim that technology shocks are unimportant for cycles. In this paper, we study trivariate VARs in productivity, hours worked, and stock prices to see how these apparently contradictory results can be reconciled. We find one VAR specification that qualitatively and quantitatively matches the findings of Gali (so that long-run technology shocks drive hours down), and a second specification that matches the main findings of Beaudry and Portier (so that long-run technology shocks increase hours, are similar to the short-run shock to stock prices, and play a major role in generating business cycles). Surprisingly, the difference between these two specifications has nothing to do with estimating in levels or in differences, or with running VARs or VECMs, or with the ordering of variables. The only difference between the two specifications lies in which productivity variable is used: labor productivity (to generate results like Gali's) or TFP (to generate results like those of Beaudry and Portier). Both the original Beaudry and Portier estimations, as well as our findings on the productivity specification, add to the evidence that Gali's findings are not robust. Apparently the cyclical role of technology shocks is only picked up when a sufficiently cyclical productivity series is used in the estimation.
    Keywords: Technology shocks, business cycles, news shocks
    JEL: E32
    Date: 2006–12–03
  13. By: Henry Siu (Department of Economics University of British Columbia); Nir Jaimovich
    Abstract: In this paper we investigate the consequences of demographic change for business cycle analysis. We find that changes in the age composition of the labor force account for a significant fraction of the variation in business cycle volatility observed in the US and other G7 economies. During the postwar period, these countries have experienced dramatic demographic change, though details regarding extent and timing differ from place to place. Using panel data methods, we exploit this variation to show that the age composition of the workforce has a large and statistically significant effect on cyclical volatility. We conclude by relating these findings to the recent decline in US business cycle volatility. Through simple quantitative accounting exercises, we find that demographic change accounts for a significant part of this moderation
    Keywords: business cycles
    JEL: E20
    Date: 2006–12–03
  14. By: Guido Lorenzoni; Karl Walentin (Research Division Sveriges Riksbank (Bank of Sweden))
    Abstract: We develop a model of investment with financial constraints and use it to investigate the relation between investment and Tobin’s q. A firm is financed partly by insiders, who control its assets, and partly by outside investors. When insiders’ wealth is scarce, they earn a rate of return higher than the market rate of return, i.e. insiders earn a quasi-rent on invested capital. This rent is priced into the value of the firm, so Tobin’s q is driven by two forces: changes in the value of invested capital, and changes in the value of the insiders’ future rents. The second effect weakens the correlation between q and investment. We calibrate the model and show that, thanks to this effect, the model can generate realistic correlations between investment, q and cash flow
    Keywords: Financial constraints, Tobin's q, limited enforcement, investment, optimal capital structure
    JEL: E22 E30 E44 E51
    Date: 2006–12–03
  15. By: Andrew Carverhill; Ron Anderson
    Abstract: This paper solves for a firm's optimal cash holding policy within a continuous time, contingent claims framework that has been extended to incorporate most of the significant contracting frictions that have been identified in the corporate finance literature. Under the optimal policy the firm targets a level of cash holding that is a non-monotonic function of business conditions and an increasing function of the amount of long-term debt outstanding. By allowing firms to either issue equity or to borrow short-term, we show how share issue and dividends on the one hand and cash accumulation and bank borrowing on the other are all mutually interlinked. We calibrate the model and show that it matches closely a wide range of empirical benchmarks including cash holdings, leverage, equity volatility, yield spreads, default probabilities and recovery rates. Furthermore, we show the predicted dynamics of cash and leverage are in line with the empirical literature. Despite the presence of significant contracting frictions we show that the model exhibits a near irrelevance of long-term capital structure property. Furthermore, the optimal policy exhibits a state-dependent hierarchy among financing alternatives that is consistent with recent explorations of pecking order theory. We calculate the agency costs generated by the confliict of interest between shareholders and creditors regarding the firm's liquidity policy and show that bond covenants that establish an earnings restriction on dividend payments may be value increasing.
    Date: 2006–12
  16. By: Murray Carlson (Commerce and Business Administration University of British Columbia); Ali Lazrak
    Abstract: We develop a structural model of the leverage choices of risk-averse managers who are compensated with cash and stock. We further characterize credit spread dynamics over the life of the debt. Managers optimally balance the tax benefits of debt with the utility cost that results from their ex-post asset substitution choices. Our model predicts the existence of a U-shaped relationship between the cash component of pay and leverage levels: when cash compensation is low, safe debt with a high face value is issued and when cash compensation is high, risky debt with a high face value is issued. At moderate levels of the cash-to-stock value ratio low leverage is chosen but credit spreads can be significant and again relate to compensation terms. The model illustrates the quantitative importance of including agency costs in the tradeoff theory of capital structure
    Keywords: Credit Spreads, Capital Structure, Agency Costs of Debt
    JEL: G32
    Date: 2006–12–03
  17. By: Tushar Kanti Nandi
    Abstract: This paper analyzes the relationship between employee participation in work teams, profit sharing and consultation between employees and management, and wages. It uses matched employeeestablishment data from the British economy. It takes explicit account of selectivity that arises from self-selection of employees into their preferred establishments and selective adoption of participatory practices by employers. The estimates indicate wage premium for the employees who work in establishments with participatory practices. The selectivity appears to be an important factor in the relationship between employee participation and wages. The estimates without selectivity correction suggest a lower wage premium than that suggested by selectivity corrected estimates. The selectivity corrected estimates show that employees in establishment with any one, two or all of the participatory practices earn a wage premium of 18%, 32.7% and 55.1%, respectively. The estimates of the interaction model of participation and education indicate that an extra year of education earns lower wage premium in establishments with participatory practices than in establishments with no participatory practice. This finding suggests that the equalizing effect of employee participation can reduce wage inequality between high and low educated employees
    Keywords: Work teams; Profit sharing; Employee participation; Selectivity; Wage
    JEL: C21 C25 J31 J24 J41 J53 L22
    Date: 2006–07
  18. By: Christian Haefke; Marcus Sonntag; Thijs van Rens
    Abstract: Shimer (2005) and Hall (2005) have documented the failure of standard labor market search models to match business cycle fluctuations in employment and unemployment. They argue that it is likely that wages are not adjusted as regularly as suggested by the model, which would explain why employment is more volatile than the model predicts. We explore whether this explanation is consistent with the data. The main insight is that the relevant wage data for the search model are not aggregate wages, but wages of newly hired workers. Preliminary results show that wages for those workers are much more volatile than aggregate wages, suggesting that other (real) frictions might be more important than wage stickiness
    Keywords: search model, cyclical properties, wage rigidities, volatility, wages
    JEL: E32 J30
    Date: 2006–12–03
  19. By: Tushar Kanti Nandi
    Abstract: This paper is concerned about the adoption of work teams and the factors that facilitate team adoption. It focuses on four factors - trade union, technological change, training of the workforce and shared mode of compensation. Both parametric and semiparametric estimation methods are used to estimate the association of these factors with team adoption. A nonparametric confidence band test is used to test the parametric specification of probit model. The test rejects the distributional assumption of the parametric probit model. The semiparametric estimates show that trade union density is not associated with team adoption while prodit sharing, new technology and training provisions for more employees facilitate the adoption of work teams
    Keywords: Work Teams; Probit; Confidence Band; Semiparametric
    JEL: C14 C25 D23 J53
    Date: 2006–07
  20. By: Murat Tasci
    Abstract: This paper studies amplification of productivity shocks in labor markets through on-the-job-search. There is incomplete information about the quality of the employee-firm match which provides persistence in employment relationships and the rationale for on-the-job search. Amplification arises because productivity changes not only affect firms' probability of contacting unemployed workers but also of contacting already employed workers. Since higher productivity raises the value of all matches, even low quality matches become productive enough to survive in expansions. Therefore the measure of workers in low quality matches is greater when productivity is high, implying a higher probability of switching to another match. In other words, firms are more likely to meet employed workers in expansions and those they meet are more likely to accept firm's job offer because they are more likely to be employed in a low quality match. This introduces strongly procyclical labor market reallocation through procyclical job-to-job transitions. Simulations with a productivity process that is consistent with average labor productivity in the U.S. show that standard deviations for unemployment, vacancies and market tightness (vacancy-unemployment ratio) match the U.S. data. The model also reconciles the presence of endogenous separation with the negative correlation of unemployment and vacancies over business cycle frequencies (i.e. it is consistent with the Beveridge curve)
    Keywords: On-the-Job Search; Amplification; Business Cycles; Job-to-Job Flows
    JEL: E24 E32 J41
    Date: 2006–12–03
  21. By: Siem Jan Koopman (Vrije Universiteit Amsterdam and Tinbergen Institute Amsterdam); Roman Kräussl (Vrije Universiteit Amsterdam and CFS); André Lucas (Vrije Universiteit Amsterdam and Tinbergen Institute Amsterdam); André Monteiro (Vrije Universiteit Amsterdam and Tinbergen Institute Amsterdam)
    Abstract: We study the relation between the credit cycle and macro economic fundamentals in an intensity based framework. Using rating transition and default data of U.S. corporates from Standard and Poor’s over the period 1980–2005 we directly estimate the credit cycle from the micro rating data. We relate this cycle to the business cycle, bank lending conditions, and financial market variables. In line with earlier studies, these variables appear to explain part of the credit cycle. As our main contribution, we test for the correct dynamic specification of these models. In all cases, the hypothesis of correct dynamic specification is strongly rejected. Moreover, accounting for dynamic mis-specification, many of the variables thought to explain the credit cycle, turn out to be insignificant. The main exceptions are GDP growth, and to some extent stock returns and stock return volatilities. Their economic significance appears low, however. This raises the puzzle of what macro-economic fundamentals explain default and rating dynamics.
    Keywords: Credit Cycles, Business Cycles, Bank Lending Conditions, Unobserved Component Models, Intensity Models, Monte Carlo Likelihood
    JEL: G11 G21
    Date: 2007–01–02
  22. By: Desiree van Welsum; Xavier Reif
    Abstract: This paper examines the relationship between the share of employment potentially affected by offshoring and economic and structural factors, including trade in business services and foreign direct investment (FDI), using simple descriptive regressions for a panel of OECD economies between 1996 and 2003. It tests whether there are differences in the factors driving the shares of potentially offshorable "non-clerical" and clerical occupations in total employment. The results show a positive statistical association between the share of both "non-clerical" and clerical occupations potentially affected by offshoring and exports of business services, and a negative association with imports of business services. However, the results also show important differences between different types of occupations as they behave differently over time, and are affected differently by variables included in the model. In particular, net outward manufacturing FDI, ICT investment, and the relative size of the services sector all have a positive association with the share of potentially offshorable "non-clerical" occupations, but are negative with clerical occupations. Union density has a positive statistical association with clerical occupations but negative with "non-clerical" occupations. These results have important implications for policy, as they clearly suggest that different factors are driving the performance of different occupational groups.
    JEL: F1 F16 F2 J24 J62
    Date: 2006–12
  23. By: Boyan Jovanovic (Economics New York University)
    Abstract: A firm has investment options that it may use up immediately, or store for future use. A patent, e.g., is an option to implement an idea via a product or process innovation. Other investment options are protected by secrecy. An investment option is a profit opportunity that requires an investment to implement. Because investment options are scarce, Tobin’s q is always above unity. When the stock of these options rises, the value of stock market falls, a result that exactly invalidates the use of the stock market as a positive indicator of the stock of intangibles. Finally, the stock market alone ensures that equilibrium is efficient
    Keywords: Volatility, Tobin's q
    JEL: E32
    Date: 2006–12–03
  24. By: Monique Ebell
    Abstract: This paper examines the business cycle properties of business cycle models with search frictions and wage bargaining which rely not only on labor, but also on capital in the production function. In the presence of capital, the choice of bargaining framework matters, even under perfect competition and constant returns to scale. In particular, under individual bargaining, the welfare theorems do not hold, due to a hold-up effect in capital and a hiring externality, so that solving a planner's problem is not sufficient. I examine the business cycle properties of the decentralized model with individual bargaining under alternative calibration strategies
    Keywords: Business Cycles, Wage Bargaining, Search Frictions, Capital
    JEL: E3 J2 J3
    Date: 2006–12–03
  25. By: Andras Niedermayer
    Abstract: We consider a software vendor first selling a monopoly platform and then an application running on this platform. He may face competition by an entrant in the applications market. The platform monopolist can benefit from competition for three reasons. First, his profits from the platform increase. Second, competition serves as a credible commitment to lower prices for applications. Third, higher expected product diversity may lead to higher demand for his application. Results carry over to non-software platforms and, partially, to upstream and downstream firms. The model also explains why Microsoft Office is priced significantly higher than Microsoft's operating system.
    Keywords: Platforms; entry; complementary goods; price commitment; product diversity; Microsoft; vertical integration; two-sided markets
    JEL: D41 D43 L13 L86
    Date: 2006–12
  26. By: Andre Kurmann (Economics UQAM); Nicolas Petrosky-Nadeau
    Abstract: Empirical evidence suggests that capital separation is an important phenomenon over and beyond depreciation and that reallocation is a costly and time-consuming process. In addition, both separation and reallocation rates display substantial variation over the business cycle. We build a dynamic general equilibrium model where capital separation occurs endogenously because of credit constraints and capital (re)allocation is costly due to search frictions and capital specificity. Compared to the frictionless counterpart but also compared to models of financial frictions without costly capital reallocation, our model matches surprisingly well the persistence in U.S. output growth. Furthermore, our model implies that productive capital stocks vary more than reported in the data, which has the potential to substantially reduce the volatility of technology shocks inferred from the Solow residual
    Keywords: Credit Market Frictions, Capital Reallocation, Investment, Business Cycles, Output Growth Persistence
    JEL: E22 E32
    Date: 2006–12–03

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