nep-bec New Economics Papers
on Business Economics
Issue of 2007‒01‒14
twenty-two papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. The Measurement of Firm Ownership and its Effect on Managerial Pay By Wolfgang Eggert; Alfons Weichenrieder; Jeremy S.S. Edwards
  2. Financial Structure, Managerial Compensation and Monitoring By Vittoria Cerasi; Sonja Daltung
  3. Market Conditions and Worker Training: How Does it Affect and Whom? By Sumon Majumdar
  4. Work-Related Perks, Agency Problems, and Optimal Incentive Contracts By Anthony Marino; Jan Zabojnik
  5. Job mobility and careers in firms By Suman Ghosh
  6. A Rent Extraction View of Employee Discounts and Benefits By Anthony Marino; Jan Zabojnik
  7. Small Business Performance in Urban Tourism By Irene Daskalopoulou; Anastasia Petrou
  8. Mergers, Litigation and Efficiency By Oliver Gürtler; Matthias Kräkel
  9. Industry Learning Environments and the Heterogeneity of Firm Performance By Natarajan Balasubramanian; Marvin Lieberman
  11. Can’t Buy Me Rights! —The Contractual Structure of Asymmetrical Inter-firm Collaborations By Carolin Häussler
  12. Home-Based Business: Exploring the Place Attachment of Entrepreneurs By Amanda Mackloet; Veronique A.J.M. Schutjens; Piet Korteweg
  13. Product Market Competition and Agency Costs By Baggs, Jennifer; de Bettignies, Jean-Etienne
  14. Relational Contracts and Inequity Aversion By Jenny Kragl; Julia Schmid
  15. Technological Change and Outsourcing: Competing or Complementary Explanations for the Rising Demand for Skills during the 1980s? By Anton Tchipev
  16. Firm characteristics, labor sorting, and wages By Alcala, Francisco; Hernandez, Pedro J.
  17. Hierarchy and Opportunism in Teams By Eline van der Heijden; Jan Potters; Martin Sefton
  18. Standard Promotion Practices Versus Up-Or-Out Contracts By Suman Ghosh; Michael Waldman
  19. The Role of Logistics' Information and Communication Technologies in Promoting Competitive Advantages of the Firm By Garrido Azevedo, Susana; Ferreira, João; Leitão, João
  20. Efficiency Implications of Corporate Diversification: Evidence from Micro Data By Ekaterina Emm; Jayant Kale
  21. Duration of Business Cycles By Everts, Martin
  22. Delegation and Incentives By Daniel Krähmer; Helmut Bester

  1. By: Wolfgang Eggert (University of Paderborn & CESifo); Alfons Weichenrieder (Goethe University Frankfurt & CESifo); Jeremy S.S. Edwards (University of Cambridge & CESifo)
    Abstract: This paper uses German evidence to address two questions about corporate governance. The effects of ownership on corporate governance have received much recent attention, but very little of this has been devoted to the appropriate way to measure firm ownership. The results of this paper show that the conclusions reached about the effects of ownership on corporate governance can depend critically on the particular ownership measure used, and that the widely-used weakest-link principle is wholly unsatisfactory as a means of dealing with the issues raised by pyramid ownership structures. The paper also shows that greater ownership concentration typically weakens the link between managerial pay and firm profitability. This is inconsistent with the hypothesis, emphasised in the recent literature on the USA, that large owners are a complement to, rather than a substitute for, such a link.
    Keywords: Firm Ownership, Managerial Pay
    Date: 2006–07
  2. By: Vittoria Cerasi; Sonja Daltung
    Abstract: When a firm has external debt and monitoring by shareholders is essential, managerial bonuses are shown to be an optimal solution. A small managerial bonus linked to firm's performance not only reduces moral hazard between managers and shareholders, but also between creditors and monitoring shareholders. A negative relation between corporate bond yields and managerial bonuses can be predicted. Furthermore, the model shows how higher managerial pay-performance sensitivity goes hand in hand with greater company leverage and lower company diversification. These predictions find some support in the empirical literature.
    Keywords: managerial compensation; financial structure; monitoring; diversification.
    JEL: G32 M12
    Date: 2006–11
  3. By: Sumon Majumdar (Queen's University)
    Abstract: This paper analyses the impact of labor market conditions on a firm's incentive to train its workers. In an equilibrium model of the labor market in which firms use both untrained and in-house trained workers, we show that the incidence of training increases with the tightness of the labor market. In a multi-sector framework, the usual threat of hold-up by a trained worker is more severe for workers who change their sector of work; during downturns, this serves to bias firms' incentives in imparting training away from such workers and towards workers already in the firm and those new workers coming from the same sector. Evidence from the NLSY confirms both predictions --- the incidence and duration of company-sponsored training is adversely affected by higher unemployment rates; furthermore, this negative effect is much stronger for workers who change industries as compared to those who do not.
    Keywords: firm-sponsored training, labor market tightness, hold up, unemployment rate
    JEL: J24 J31 J41
    Date: 2006–03
  4. By: Anthony Marino (USC); Jan Zabojnik (Queen's University)
    Abstract: This paper examines the effects of work-related perks, such as corporate jets and limousines, nice offices, secretarial staff, etc., on the optimal incentive contract. In a linear contracting framework, perks characterized by complementarities between production and consumption improve the trade-off between incentives and insurance that determines the optimal contract for a risk-averse agent. We show that (i) the perk may be offered even if its direct consumption and productivity benefits are offset by its cost; (ii) the perk will be offered for free; (iii) agents in more uncertain production environments will receive more perks; (iv) senior executives should receive both more perks and stronger explicit incentives; and (v) better corporate governance can lead firms to award their CEOs more perks. Our analysis also offers insights into the firms’decisions about how much autonomy they should grant to their employees and about optimal perk provision when managers and workers are organized in teams.
    Keywords: Job Perks, Agency Problems, Optimal Incentive Contracts
    JEL: J3 M5
    Date: 2006–10
  5. By: Suman Ghosh (Department of Economics, College of Business, Florida Atlantic University)
    Abstract: This paper presents a theoretical model that combines employers learning about worker productivity, human capital acquisition, job-assignment and resolution of worker uncertainty regarding disutility of work from a job, to show how widely documented findings on both wage and promotion dynamics and turnover can be captured in a single set-up. Specifically we show how our model can capture results such as; probability of turnover decreases with labor market experience, wage changes during job changes is more in earlier periods, serial correlation in wages and probability of promotion increases in wages, amongst others.
    Keywords: Turnover, Internal labor markets, Human capital
    JEL: J41 J63 L22
    Date: 2004–11
  6. By: Anthony Marino (USC); Jan Zabojnik (Queen's University)
    Abstract: We offer a novel view of employee discounts and in kind compensation. In our theory, bundling perks and cash compensation allows a firm to extract information rents from employees who have private information about their preferences for the perk and about their outside opportunities. We show that in maximizing profit with heterogeneous workers, the firm creates different bundles of the perk and salary in response to different employee characteristics and marginal costs of the perk. Our key result is that strategic bundling can lead firms to provide perks even in the absence of any cost advantage over the outside market and to deviate from the standard marginal cost pricing rule. We study how this deviation depends upon the set of feasible contracts, upon the perk's marginal cost, and upon the correlation between the agents' preferences for the good and their reservation utilities.
    Keywords: In Kind Compensation, Bundling, Optimal Employment Contracts
    JEL: J3 L2 D82
    Date: 2006–09
  7. By: Irene Daskalopoulou; Anastasia Petrou
    Abstract: Research findings indicate that the successful performance of small businesses is an important determinant of regional development. Successful business performance is affected by a number of firm-specific factors including human and social capital. Although, small and medium firms comprise the vast majority of the tourism production system, research on small business performance in tourism is rather limited. Drawing on recent advances and empirical evidence from enterpreneurship and small business literature we control first, for the role of human and social capital and second, for the role of owners'/managers' perceptions of place attractiveness over small business performance. We hypothesise that such perceptions should have specific effects on tourism business performance. Analysis is based on cross-sectional data gathered from face-to-face interviews with small tourism businesses owners/managers in Patras, Greece.
    Date: 2006–08
  8. By: Oliver Gürtler (Department of Economics, BWL II, University of Bonn, Adenauerallee 24-42, D-53113 Bonn, Germany. tel: +49-228-739214, fax: +49-228-739210.; Matthias Kräkel (Department of Economics, BWL II, University of Bonn, Adenauerallee 24-42, D-53113 Bonn, Germany. tel: +49-228-739211, fax: +49-228-739210.
    Abstract: We consider antitrust enforcement within the adversarial model used by the United States. We show that, under the adversarial system, the Antitrust Authority may try to prohibit mergers also in those cases in which litigation is inefficient. Even if market concentration and technological disadvantages lead to a significant welfare reduction after merger, from society’s perspective the agency’s lawsuit may be inefficient. We can show that these inefficiencies may be aggravated if the takeover is hostile.
    Keywords: hostile takeover; litigation contest, merger
    JEL: D43 K21 L40
    Date: 2006–12
  9. By: Natarajan Balasubramanian; Marvin Lieberman
    Abstract: This paper characterizes inter-industry heterogeneity in rates of learning-by-doing and examines how industry learning rates are connected with firm performance. Using data from the Census Bureau and Compustat, we measure the industry learning rate as the coefficient on cumulative output in a production function. We find that learning rates vary considerably among industries and are higher in industries with greater R&D, advertising, and capital intensity. More importantly, we find that higher rates of learning are associated with wider dispersion of Tobin’s q and profitability among firms in the industry. Together, these findings suggest that learning intensity represents an important characteristic of the industry environment.
    Keywords: Learning, Firm Heterogeneity, RBV, Productivity
    Date: 2006–12
  10. By: Anita Anand (University of Toronto); Frank Milne (Queen's University); Lynnette Purda (Queen's University)
    Abstract: We model firms’ incentives to voluntarily adopt corporate governance mechanisms and hypothesize that management’s ability to extract private benefits, the need for external funds, and the ease with which a firm’s assets may be monitored are important determinants of the level of governance. Using hand-collected data, we test these hypotheses and examine firms’ propensity to adopt recommended but not required governance standards from their home and neighboring country’s jurisdictions. We document that a significant level of voluntary adoption occurs and that this level has been both increasing over time and declining in variability across firms. Governance mechanisms are least likely to be voluntarily implemented when management controls a significant portion of common stock votes or a majority owner exists. In contrast, voluntary adoption increases when the firm faces significant investment opportunities and employs large levels of expenditures which are difficult to monitor such as research and development expenses.
    Keywords: Corporate Governance, Empirial Finance
    JEL: G34
    Date: 2006–11
  11. By: Carolin Häussler (Institute for Innovation Research, Technology Management, and Entrepreneurship, Ludwig-Maximilian University of Munich, Kaulbachstr. 45, 80539 Munich, Germany.
    Abstract: The efficient allocation of control rights in inter-firm collaborations is a widely emphasized issue. In this paper, I empirically identify control rights and the allocation of these rights using a unique survey data set on collaborations between biotechnology and pharmaceutical firms. Fifteen control rights are identified to make up the structure of deals with five rights being the items of contention in deal mak-ing (ownership of patents, production, further development of the technology, the right to manage the collaboration, and the right to market universally). I find that the assignment of control rights is re-lated to the bargaining position of firms and incentive issues. Hence, goliaths –pharmaceutical incum-bents – subrogate critical rights to the new ventures when the final outcome of the project is depending on the venture’s effort.
    Keywords: contracts, performance, inter-firm collaboration, biotechnology
    JEL: D23 L24 G30 M13 O32
    Date: 2006–12
  12. By: Amanda Mackloet; Veronique A.J.M. Schutjens; Piet Korteweg
    Abstract: Entrepreneurship is crucial to a vital and thriving economy, even on the neighbourhood level. This fits into current urban planning policy in the Netherlands, which aims at combining housing and economic functions within neighborhoods. Since an increasing number of entrepreneurs start from home, this calls for insight in the combination of work and home. However, there is limited knowledge about the specific role of the dwelling in the decision to start a firm from home and to stay put. This explorative paper focuses on the use of the dwelling as location of a firm, both in the start-up phase and beyond in the firm life course, and its explanations. Our research questions are: what determines the decision to start a firm within the dwelling of the entrepreneur and its duration in time, and how does this relate to the propensity and decision to move? In our empirical analyses a combination of quantitative and qualitative research methods is used. We analyzed data from 130 questionnaires send out in April 2005 to young entrepreneurs who owned a firm in two Dutch urban neighborhoods. These questionnaires were followed by in-depth interviews with 10 entrepreneurs. We have found that most home based businesses did start from home and are strongly tied to the dwelling - and therefore the neighbourhood. Both firms with past growth in number of personnel and firms with growth aspirations do want to move relatively often. With respect to firm relocation and the personal propensity to move, housing characteristics as adapted dwellings, and owner-occupied, single family and large houses are important. With respect to future home-based business, to most firms breaking the work-home combination is not a realistic option. Household characteristics and more specifically the care of small children keeps entrepreneurs home-based. Also entrepreneurs who work almost full-time are relatively strong attached to their home, which may point to an explicit -and maybe also longlasting- choice for home-basedness. Economic policy should therefore foster start-ups within urban neighbourhoods, as many of them seem to be firmly anchored locally by attachment to their home.
    Date: 2006–08
  13. By: Baggs, Jennifer; de Bettignies, Jean-Etienne
    Abstract: We model the effects of product market competition on agency costs, and develop two main empirical predictions. First, competition, by reducing agency costs, unambiguously increases the importance firms place on quality improvements. This leads to higher powered incentives, and in turn to increased effort and quality. Second, these effects are increasing in the severity of agency problems, and should be stronger in large, hierarchical corporations (where agency problems are more severe) than in entrepreneurial firms. We test the predictions of our model using a unique dataset with both firm and employee characteristics.
    Keywords: Labour, Employers, Salaries and wages, Work arrangements
    Date: 2006–12–04
  14. By: Jenny Kragl; Julia Schmid
    Abstract: We study the effects of envy on the feasibility of relational contracts in a standard moral hazard setup with two agents. Performance is evaluated via an observable, but non-contractible signal which reflects the agent´s individual contribution to firm value. Both agents exhibit disadvantageous inequity aversion. In contrast to the literature, we find that inequity aversion may be beneficial: In the presence of envy, for a certain range of interest rates relational contracts may be more profitable. Furthermore, for some interest rates reputational equilibria exist only with inequity averse agents.
    Keywords: Principal-Agent, Relational Contract, Inequity Aversion, Envy
    JEL: D63 D82 M52 M54
    Date: 2006–12
  15. By: Anton Tchipev (Istituto di Ricerche Economiche (IRE), Facoltà di Scienze Economiche, Università della Svizzera Italiana)
    Abstract: This paper combines two of the popular approaches used in the trade versus technology debate: the factor content approach and the cost-share regression across manufacturing industries. The resulting method allows to decompose skill upgrading at the industry level into a component attributed to outsourcing and a residual. Surprisingly, computer investment explains the component attributed to outsourcing better than the residual suggesting that technological change may have contributed to higher disintegration of production already during the 1980s.
    Keywords: wage inequality, technological change, intermediate products, outsourcing, factor content
    JEL: F16 J31
    Date: 2006–12–18
  16. By: Alcala, Francisco; Hernandez, Pedro J.
    Abstract: We analyze in a simple model the consequences of efficiency heterogeneity at the firm level for the sorting of workers with different skills into firms with different characteristics. We show that more efficient firms tend to produce higher quality output in equilibrium, which then translates into higher relative demand of education and unmeasured skills. The model provides an integrated explanation within a competitive framework for the observed correlations between several establishment characteristics (size, employees’ average education, capital/labor ratio, and remoteness of selling markets) and average wages. We test the implications of the model using Spanish employer-employee matched data that allow to simultaneously control for establishment and worker characteristics. We find that average education in the establishment is increasing in the remoteness of its main market. Establishment’s size, remoteness of main market, and co-workers’ average education have significant, robust and quantitatively important positive joint effects on wages. The national-market orientation effects (with respect to local-market orientation) on labor composition and wages are at least as important as the international-market effects (with respect to national-market orientation). All wage premia are non-decreasing on worker education and most of them are strictly increasing, suggesting that unmeasured skills are relatively more important for high-education workers.
    Keywords: Quality Competition; Exporting Firms; Unobservable Skills; Wages.
    JEL: J24 J31
    Date: 2005–10
  17. By: Eline van der Heijden (Department of Economics, Tilburg University); Jan Potters (Department of Economics, Tilburg University); Martin Sefton (School of Economics, University of Nottingham)
    Abstract: We use an experiment to compare two institutions for allocating the proceeds of team production. Under revenue-sharing, each team member receives an equal share of team output; under leader-determined shares, a team leader has the power to implement her own allocation. Both arrangements are vulnerable to opportunistic incentives: under revenue-sharing team members have an incentive to free-ride, while under leader-determined shares leaders have an incentive to seize team output. We find that most leaders forego the temptation to appropriate team output and manage to curtail free-riding. As a result, compared to revenue-sharing, the presence of a team leader results in a significant improvement in team performance.
    Keywords: leadership, team production, experiment
    JEL: C9 D2 L2
    Date: 2006–09
  18. By: Suman Ghosh (Department of Economics, College of Business, Florida Atlantic University); Michael Waldman (Johnson Graduate School of Management, Cornell University)
    Abstract: In most firms a worker in any period is either promoted, left in the same job, or fired (demotions are typically rare), and there is no specific date by which a promotion needs to occur. In other employment situations, however, up-or-out contracts are common, i.e., if a worker is not promoted by a certain date the worker must leave the firm. This paper develops a theory that explains why and when each of these practices is employed. Our theory is based on asymmetric learning in labor markets and incentives associated with the prospect of future promotion. Our main result is that firms employ up-orout contracts when firm-specific human capital is low while they employ standard promotion practices when it is high. We also find that, if firms can commit to a wage floor for promoted workers and effort provision is important, then up-or-out contracts are employed when low-level and high-level jobs are similar. We believe these results are of interest because they are consistent with many of the settings in which up-or-out is typically observed such as law firms and academic institutions.
    Date: 2006–07
  19. By: Garrido Azevedo, Susana; Ferreira, João; Leitão, João
    Abstract: With the rapid growth of technologies, our economic society and life are changing significantly in the 21th century. The way to capture their competitive advantage has become the most important issue for enterprises in the rapidly changing and uncertain business environments. Many researches have pointed out that the adoption of technology is the most important tool for enterprises to keep their competitive advantage. The survival of an enterprise in the age of knowledge-based economy depends on how to improve their technological capability. In this sense, firms should develop adequate methodologies, in order to adopt, in a successful way, new technologies in the logistics field, and also to integrate logistics into the corporate strategy for becoming even more competitive. Growing number of firms are under pressure from their partners to change their traditional management style, both operationally and organizationally, replacing them with integrated systems that help increase the speed and fluidity of physical and information flows. In order to reach this kind of integration they are investing on new Information and Communication Technologies (ICT). In this paper we consider that the ICT are the devices or infrastructures to make more efficient the communications of business information among organizations (Dawe, 1994). Being so, the present paper aims: (i) to highlight the importance of ICT on logistics; and (ii) to understand the impact of ICT on the firms’ competitiveness. In this paper a conceptual model for the adoption of Logistics’ ICT is presented, by taking into consideration four determinant factors: individual, organizational, technological or innovation, and environmental. The interaction established between the referred determinant factors may be identified through the computation of the predominant factor, by using a selected set of adequate indicators and a simple geometry methodology. These procedures may provide the identification of the sources of firms’ competitive advantages that adopt Logistics’ ICT. The Logistics’ ICT analysed in this paper are grouped into four types, such as, the identification, the data communications and the data acquisition technologies. With regard to the identification technologies, firms may appeal to barcoding, Radio Frequency Identification (RFID). The barcoding (Chapman et al., 2003; Ellram et al., 1999), and RFID (Kumar et al., 2006; Twist, 2005; Choy et al., 2007), are identification technologies that facilitate logistics information collection and exchange. Nowadays, as regards the data acquisition technologies, the firms usually deal with a large amount of goods and data which means that data collection and exchange are critical for logistics information management and control. Good quality in data acquisition can help firms deliver customers' goods more accurately and efficiently. To attain this goal firms could appeal to some data acquisition technologies in logistics field, such as the optical scanning, the electronic pen notepads, (Lin, 2006), the voice recognition and the robotics (Dawe, 1994).
    Keywords: ICT; Logistics; Competitive Advantages; Strategy.
    JEL: M0 M11
    Date: 2007–01–06
  20. By: Ekaterina Emm; Jayant Kale
    Abstract: In this study, we contribute to the ongoing research on the rationales for corporate diversification. Using plant-level data from the U.S. Census Bureau, we examine whether combining several lines of business in one entity leads to increased productive efficiency. Studying the direct effect of diversification on efficiency allows us to discern between two major theories of corporate diversification: the synergy hypothesis and the agency cost hypothesis. To measure productive efficiency, we employ a non-parametric approach—a test based on Varian’s Weak Axiom of Profit Maximization (WAPM). This method has several advantages over other conventional measures of productive efficiency. Most importantly, it allows one to perform the efficiency test without relying on assumptions about the functional form of the underlying production function. To the best of our knowledge, this study is the first application of the WAPM test to a large sample of non-financial firms. The study provides evidence that business segments of diversified firms are more efficient compared to single-segment firms in the same industry. This finding suggests that the existence of the so-called ‘diversification discount’ cannot be explained by efficiency differences between multi-segment and focused firms. Furthermore, more efficient segments tend to be vertically integrated with others segments in the same firm and to have been added through acquisitions rather than grown internally. Overall, the results of this study indicate that corporate diversification is value-enhancing, and that it is not necessarily driven by managers’ pursuit of their private benefits.
    Keywords: Restructuring, Diversification, Efficiency
    JEL: D2 D92 G34
    Date: 2006–11
  21. By: Everts, Martin
    Abstract: In this paper the Bry and Boschan (1971) procedure is modified such that it can be applied to quarterly data in order to recalculate the maximum duration of business cycles. In this way it can be shown that the maximum duration of business cycles constitutes 42 quarters in the United States of America and 49 quarters in the United Kingdom. The large difference to the maximum duration of Burns and Mitchell (1946) makes clear that caution is advisable with the application of the filters by Baxter and King (1999) and Christiano and Fitzgerald (2003). If one chooses the maximum duration too low (high), the amplitude of the medium-term business cycles is underestimated (overestimated) and the variability of the growth rate of the long-term trend is overestimated (underestimated).
    Keywords: Duration; Business Cycles; Dating Turning Points; Non-Parametric Procedure; Minimum Duration; Maximum Duration; Band-Pass Filter
    JEL: E32 E37
    Date: 2006–04
  22. By: Daniel Krähmer (Free University Berlin, Department of Economics, Boltzmannstr. 20, D-14195 Berlin, Germany.; Helmut Bester (Free University Berlin, Department of Economics, Boltzmannstr. 20, D-14195 Berlin, Germany.
    Abstract: This paper analyses the relation between authority and incentives. It extends the standard principal-agent model by a project selection stage in which the principal can either delegate the choice of project to the agent or keep the authority. The agent's subsequent choice of effort depends both on monetary incentives and the selected project. We find that the consideration of effort incentives makes the principal less likely to delegate the authority over projects to the agent. In fact, if the agent is protected by limited liability, delegation is never optimal.
    Keywords: authority, delegation, incentives, moral hazard, principal-agent problem, limited liability
    JEL: D82 D86
    Date: 2006–11

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