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on Business Economics |
| By: | Kevin J. Murphy (USC); Jan Zabojnik (Queen's University) |
| Abstract: | This paper reconciles two pronounced trends in U.S. corporate governance: the increase in pay levels for top executives, and the increasing prevalence of appointing CEOs through external hiring rather than internal promotions. We propose that these trends reflect a shift in the relative importance of "managerial ability" (transferable across companies) and "firm-specific human capital" (valuable only within the organization). We show that if the supply of workers in the corporate sector is relatively elastic, an increase in the relative importance of managerial ability leads to fewer promotions, more external hires, and an increase in equilibrium average wages for CEOs. We test our model using CEO pay and turnover data from 1970 to 2000. We show that CEO compensation is higher for CEOs hired from outside their firm, and for CEOs in industries where outside hiring is prevalent. |
| Keywords: | CEO pay, CEO turnover, General skills, Firms specific skills |
| JEL: | J24 J31 J63 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1110&r=bec |
| By: | Hvide, Hans Krogh; Kristiansen, Eirik Gaard |
| Abstract: | We study how complementarities and intellectual property rights affect the management of knowledge workers. The main results relay when a firm will wish to sue workers that leave with innovative ideas, and the effects of complementary assets on wages and on worker initiative. We argue that firms strongly protected by property rights may not sue leaving workers in order to motivate effort, while firms weakly protected by complementary assets must sue in order to obtain positive profits. Firms with more complementary assets pay higher wages (and have lower turnover), but such higher pay has a detrimental effect on worker initiative. Our analysis suggests that strengthened property rights protection reduces turnover costs but weakens worker initiative. |
| Keywords: | Entrepreneurship; Innovation; IPR; Litigation; Personnel economics; R&D; Start-ups |
| JEL: | E00 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6039&r=bec |
| By: | Newman, Andrew |
| Abstract: | In the 'Knightia'” theory of entrepreneurship, entrepreneurs provide insurance to workers by paying fixed wages and bear all the risk of production. This paper endogenizes entrepreneurial risk by allowing for optimal insurance contracts as well as the occupational self-selection. Moral hazard prevents full insurance; increases in an agent’s wealth then entail increases in risk borne. Thus, even under decreasing risk aversion, there are robust instances in which workers are wealthier than entrepreneurs. This empirically implausible result suggests that risk-based explanations for entrepreneurship are inadequate. |
| Keywords: | moral hazard; occupational choice; principal-agent model |
| JEL: | D2 D8 L2 O16 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6021&r=bec |
| By: | Robert Dur (Erasmus Universiteit Rotterdam); Hein Roelfsema (Utrecht University) |
| Abstract: | We study the relation between formal incentives and social exchange in organizations where employees work for several managers and reciprocate to a manager's attention with higher effort. To this end we develop a common agency model with two-sided moral hazard. We show that when effort is contractible and attention is not, the first-best can be achieved through bonus pay for both managers and employees. When neither effort nor attention are contractible, an 'attention race' arises, as each manager tries to sway the employee's effort his way. While this may result in too much social exchange, the attention race may also be a blessing because it alleviates managers' moral-hazard problem in attention provision. Lastly, we derive the implications of these contract imperfections for optimal organizational design. |
| Keywords: | social exchange; reciprocity; incentive contracts; common agency; organizational design |
| JEL: | D86 J41 M50 M54 M55 |
| Date: | 2006–12–19 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20060111&r=bec |
| By: | Ravina, Enrichetta; Sapienza, Paola |
| 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. |
| Keywords: | Boards of directors; Corporate governance; Independent Directors |
| JEL: | G34 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6046&r=bec |
| By: | Francois-Éric Racicot (Département des sciences administratives, Université du Québec (Outaouais) et LRSP); Raymond Théoret (Département de stratégie des affaires, Université du Québec (Montréal)) |
| Abstract: | Markets makers quote many option categories in terms of implicit volatility. In doing so, they can reactivate the Black and Scholes model which assumes that the volatility of an option underlying is constant while it is highly variable. First of all, this article, whose purpose is very empirical, presents a simulation of stochastic volatility programmed in Visual Basic (Excel) whose aim is to compute the price of an European option written on a zero coupon bond. We compare this computed price with this one resulting from Black analytical solution and we also show how to compute an interest rate forecast with the help of the simulation model. Then we write many Visual Basic and Matlab programs for the purpose of computing the implicit volatility surface, a three-dimensional surface which can be plotted by using graphical capacities of Excel and Matlab. It remains that the concept of implicit volatility is very criticised because it is computed with the exercise price of an option and not with the price of the underlying, as it should be. Therefore, there are biases in the estimation of the «greeks» computed with implicit volatility. |
| Keywords: | Financial engineering, Monte Carlo simulation, stochastic volatility, implicit volatility. |
| JEL: | G12 G13 G33 |
| Date: | 2007–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:pqs:wpaper:012007&r=bec |
| By: | Pástor, Lubos; Taylor, Lucian; Veronesi, Pietro |
| Abstract: | We develop a model in which an entrepreneur learns about the average profitability of a private firm before deciding whether to take the firm public. In this decision, the entrepreneur trades off diversification benefits of going public against benefits of private control. The model predicts that firm profitability should decline after the IPO, on average, and that this decline should be larger for firms with more volatile profitability and firms with less uncertain average profitability. These predictions are supported empirically in a sample of 7,183 IPOs in the U.S. between 1975 and 2004. |
| Keywords: | Diversification; IPO; Learning |
| JEL: | G1 G3 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6061&r=bec |
| By: | Jaap H. Abbring (Vrije Universiteit Amsterdam); Jeffrey R. Campbell (Federal Reserve Bank of Chicago, and NBER) |
| Abstract: | This paper extends the static analysis of oligopoly structure into an infinite-horizon setting with sunk costs and demand uncertainty. The observation that exit rates decline with firm age motivates the assumption of last-in first-out dynamics: An entrant expects to produce no longer than any incumbent. This selects an essentially unique Markov-perfect equilibrium. With mild restrictions on the demand shocks, a sequence of thresholds describes firms' equilibrium entry and survival decisions. Bresnahan and Reiss's (1993)empirical analysis of oligopolists' entry and exit assumes that such thresholds govern the evolution of the number of competitors. Our analysis provides an infinite-horizon game-theoretic foundation for that structure. |
| Keywords: | Sunk costs; Demand uncertainty; Markov-Perfect equilibrium; LIFO |
| JEL: | L13 |
| Date: | 2006–12–19 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20060110&r=bec |
| By: | Anderson, Ronald W; Carverhill, Andrew |
| 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 conflict 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. |
| Keywords: | capital structure; dynamic corporate finance; liquidity |
| JEL: | G30 G32 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6044&r=bec |
| By: | Constantine Manasakis (Department of Economics, University of Crete, Greece); Evangelos Mitrokostas (Department of Economics, University of Crete); Emmanuel Petrakis (Department of Economics, University of Crete, Greece) |
| Abstract: | This paper studies firms owners' incentives to engage in Corporate Social Responsibility (CSR) activities in an oligopolistic market, in a strategic delegation and vertical product differentiation context. Firms' owners have the opportunity to hire "socially responsible" managers and delegate to them CSR effort and market competition decisions. In equilibrium, both owners employ socially responsible managers. The strategic behavior of owners to hire socially responsible managers increases both output and profits. The societal consequences of Corporate Social Responsibility are also discussed. |
| Keywords: | Oligopoly; Vertical Product Differentiation; Corporate Social Responsibility; Strategic Managerial D |
| JEL: | L15 L22 M14 |
| Date: | 2006–06–10 |
| URL: | http://d.repec.org/n?u=RePEc:crt:wpaper:0707&r=bec |
| By: | Michael Kuhn (University of Rostock, Department of Economics and Social Sciences, and MPIDR) |
| Abstract: | We consider resource allocation within an organisation and show how delegation bears on moral hazard and adverse selection when agents have a preference for autonomy. Agents may care about autonomy for reasons of job-satisfaction, status or greater reputation when performing well under autonomy. Separating allocations (overall budget and degree of delegation) are characterised depending on the preference for autonomy. As the latter increases, the degree of delegation assigned to productive and unproductive agents converges. If agents' preferences for monetary rewards are weak, the principal will not employ financial transfers. Pooling then arises under a strong preference for autonomy. |
| Keywords: | adverse selection, capital budgeting, delegation, intrinsic motivation, moral hazard |
| JEL: | D82 G31 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ros:wpaper:69&r=bec |
| By: | Louis J. Maccini; Adrian Pagan (National Centre for Econometric Research) |
| Abstract: | The paper looks at the role of inventories in U.S. business cycles and fluctuations. It concentrates upon the goods producing sector and constructs a model that features both input and output inventories. A range of shocks are present in the model, including sales, technology and inventory cost shocks. It is found that the presence of inventories does not change the average business cycle characteristics in the U.S. very much. The model is also used to examine whether new techniques for inventory control might have been an important contributing factor to the decline in the volatility of US GDP growth. It is found that these would have had little impact upon the level of volatility. |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:qut:auncer:2006-4&r=bec |
| By: | Antras, Pol; Helpman, Elhanan |
| Abstract: | We generalize the Antràs 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. |
| Keywords: | contractual frictions; FDI; sourcing; trade |
| JEL: | D23 F10 L23 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6033&r=bec |
| By: | Matthias S. Hertweck |
| Abstract: | This paper modifies the standard Mortensen-Pissarides job matching model in order to explain the cyclical behavior of vacancies and unemployment. The modifications include strategic wage bargaining (Hall and Milgrom, 2006) and convex labor adjustment costs. The results reveal that our model replicates the cyclical behavior of both variables remarkably well. First, we show that strategic wage bargaining increases the volatility of vacancies and unemployment enormously. Second, the introduction of convex labor adjustment costs makes both variables much more persistent. Third, our analysis indicates that both modifications are complementary in generating volatile and persistent labor market variables. |
| Keywords: | Business Cycles, Matching, Strategic Bargaining |
| JEL: | E24 E32 J41 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2006/42&r=bec |
| By: | Constantine Manasakis (Department of Economics, University of Crete, Greece); Evangelos Mitrokostas (Department of Economics, University of Crete); Emmanuel Petrakis (Department of Economics, University of Crete, Greece) |
| Abstract: | This paper studies the endogenous structure of incentive contracts that firms' owners offer to their managers, when these contracts are linear combinations either of own profits and own revenues, or of own profits and competitor's profits or, finally, of own profits and own market share. In equilibrium, each owner has a dominant strategy to reward his manager with a contract combining own profits and competitor's profits. Contrary to the received literature, the case where there is no ex-ante commitment over any type of contract that each owner offers to his manager is also examined. In equilibrium, each type of contract is an owner's best response to the competing owner's choice. |
| Keywords: | Oligopoly; Managerial delegation; Endogenous contracts |
| JEL: | D43 L21 |
| Date: | 2007–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:crt:wpaper:0706&r=bec |
| By: | Pedro Rey-Biel |
| Abstract: | We study optimal contracts in a simple model where employees are averse to inequity as modelled by Fehr and Schmidt (1999). A "selfish" employer can profitably exploit such preferences among its employees by offering contracts which create inequity off-equilibrium and thus, they would leave employees feeling envy or guilt when they do not meet the employer's demands. Such contracts resemble team and relative performance contracts, and thus we derive conditions under which it may be beneficial to form work teams of employees with distributional concerns who were previously working individually. Similar results are obtained for status-seeking and efficiency concerns preferences. |
| Keywords: | Inequity aversion, team incentives, behavioral contract theory |
| JEL: | C72 D23 D63 M12 |
| Date: | 2007–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:aub:autbar:677.07&r=bec |
| By: | Bester, Helmut; Krahmer, Daniel |
| 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; Limited liability; Moral hazard; Principal-agent problem |
| JEL: | D82 D86 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6042&r=bec |
| By: | Constantine Manasakis (Department of Economics, University of Crete, Greece); Emmanuel Petrakis (Department of Economics, University of Crete, Greece) |
| Abstract: | This paper investigates the impact of alternative unionization structures on firms' incentives to spend on cost-reducing R&D activities as well as to form a Research Joint Venture, in the presence of R&D spillovers. We show that, in contrast to the "hold up" argument, if firms invest non-cooperatively and spillovers are low, R&D investments are higher when an industry-wide union sets a uniform wage rate than under firm-level unions. In contrast, investments are always higher under firm-level unions in the case of RJVs. Firms' incentives to form an RJV are non-monotonic in the degree of centralization of the wage-setting, with the incentives being stronger under an industry-wide union if and only if spillovers are low enough. Finally, centralized wage-setting as well as high unemployment benefits may hinder the formation of costly RJVs and their potential welfare benefits. |
| Keywords: | Unions, Oligopoly, Cost-reducing Innovations, Research Joint Ventures, Spillovers |
| JEL: | J51 L13 O31 |
| Date: | 2007–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:crt:wpaper:0705&r=bec |
| By: | Floris Heukelom (Universiteit van Amsterdam) |
| Abstract: | This paper provides an overview of the work of Herbert Simon and his ideas about rational decision making. By his own standards, Simon is an economist who works in the tradition of Adam Smith and Alfred Marshall. The central theme in Simon’s research is how human beings organize themselves in different structures of distributed decision making in order to achieve a degree of rationality that is higher than which can be attained by the individual. In this realm his main preoccupation are hierarchic organizations such as the business firm and the computer. Simon sharply contrasts his views with the EUT, the dominant view on rational decision making in economics and other social sciences. |
| Keywords: | Herbert Simon; decision making; Expected Utility Theory; hierarchic organizations |
| JEL: | A12 D01 D21 |
| Date: | 2007–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20070005&r=bec |
| By: | Manuel Artis (Faculty of Economics, University of Barcelona.); Raul Ramos (Faculty of Economics, University of Barcelona.); Jordi Suriñach (Faculty of Economics, University of Barcelona.) |
| Abstract: | Using microdata, we analyse the determinants of firm relocation and conventional outsourcing decisions as a way to reduce employment. The results for a sample of 32 countries show the relevance of factors not considered previously in the literature. Firms that are below average in quality or innovation have a higher propensity to externalise part of their production through outsourcing, while lower relative profitability and longer time to market for new products each imply a higher probability of relocation. |
| Keywords: | Job losses, outsourcing and relocation |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:ira:wpaper:200601&r=bec |
| By: | Anthony M. Marino (USC); John G. Matsusaka (USC); Jan Zabojnik (Queen's University) |
| Abstract: | This paper presents a theory of the allocation of authority in an organization in which centralization is limited by the agent's ability to disobey the principal. We show that workers are given more authority when they are costly to replace or do not mind looking for another job, even if they have no better information than the principal. The allocation of authority thus depends on external market conditions as well as the information and agency problems emphasized in the literature. Evidence from a national survey of organizations shows that worker autonomy is related to separation costs as the theory predicts. |
| Keywords: | Delegation, Authority, Separation Costs, Optimal employment contracts |
| JEL: | J63 M5 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1109&r=bec |
| By: | Den Haan, Wouter; Kaltenbrunner, Georg |
| Abstract: | Positive news about future productivity growth causes a contraction in most neoclassical business cycle models, which is counterfactual. We show that a business cycle model that incorporates the standard matching framework can generate an expansion. Although the wealth effect of an increase in expected productivity induces workers to reduce their labour supply, the matching friction has the opposite effect leaving labour supply roughly unaffected. Employment increases because the matching friction also induces firms to post more vacancies. This translates into additional resources, which makes it possible for both consumption and investment to increase in response to positive news about future productivity growth before the actual increase in productivity materializes. |
| Keywords: | labour force participation; Pigou cycles; productivity growth |
| JEL: | E24 E32 J41 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6063&r=bec |
| By: | Albert Banal-Estañol (Department of Economics, City University, London); Paul Heidhues; Rainer Nitsche; Jo Seldeslacht |
| Abstract: | Merger activity is intense during economic booms and subdued during recessions. This paper provides a non-financial explanation for this observable pattern. We construct a model in which the target—by setting the takeover price—screens the acquirer on his (expected) ability to realize synergy gains when merging. In an economic boom, it is less profitable to sort out relatively “bad fit” acquirers, leading to a hike in merger activity. Although positive economic shocks produce expected gains at the time of merging, these mergers turn out to be less efficient in the long term—a finding that is broadly consistent with the existing empirical evidence. Furthermore, again because of the absence of boom-time screening, the more efficient acquirers earn higher merger profits during “merger waves” than outside of waves, which is also in line with empirical evidence. |
| Keywords: | Mergers, Merger Waves, Screening |
| JEL: | D21 D80 L11 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:cty:dpaper:0607&r=bec |
| By: | Buch, Claudia M.; Döpke, Jörg; Strotmann, Harald |
| Abstract: | From a theoretical point of view, greater trade openness affects firm-level volatility by changing the exposure and the reaction of firms to macroeconomic shocks. The net effect is ambiguous, though. This paper provides firm-level evidence on the link between openness and volatility. Using two novel datasets on German firms, we analyze the evolution of firm-level output volatility and the link between volatility and trade openness. We find that firm-level output volatility displays patterns similar to those found in aggregated data for Germany. Also, smaller firms and firms that grow faster are more volatile. Increased trade openness tends to lower volatility. |
| Keywords: | firm-level volatility, trade openness |
| JEL: | E32 F41 G15 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:5168&r=bec |
| By: | Lex Borghans; Bas ter Weel; Bruce A. Weinberg |
| Abstract: | This paper develops a framework to understand the role of interpersonal interactions in the labor market including task assignment and wages. Effective interpersonal interactions involve caring, to establish cooperation, and at the same time directness, to communicate in an unambiguous way. The ability to perform these tasks varies with personality and the importance of these tasks varies across jobs. An assignment model shows that people are most productive in jobs that match their style and earn less when they have to shift to other jobs. An oversupply of one attribute relative to the other reduces wages for people who are better with the attribute in greater supply. We present evidence that youth sociability affects job assignment in adulthood. The returns to interpersonal interactions are consistent with the assignment model. |
| JEL: | J21 J24 J31 J41 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12846&r=bec |
| By: | DeVaro, Jed; Waldman, Michael |
| Abstract: | An extensive theoretical literature has developed that investigates the role of promotions as a signal of worker ability. There have been no tests, however, of the empirical validity of this idea. In this paper we develop the theory in a manner that allows us to generate testable predictions, and then investigate the validity of these predictions using a longitudinal data set that contains detailed information concerning the internal-labor-market history of a medium sized firm in the financial services industry. Our results support the notion that signaling is both a statistically significant and economically significant factor in promotion decisions. The paper also contributes to the extensive literature on the role of education as a labor-market signal. |
| Keywords: | signaling theory; promotions; asymmetric information |
| JEL: | J3 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:1550&r=bec |
| By: | Emiliano Santoro |
| Abstract: | We fit the asymmetric Subbotin distribution introduced by Bottazzi and Secchi (2003) on UK and US data on quoted companies, in order to detect sources of asymmetries in the transmission of aggregate shocks, and cyclical patterns of higher moments of the firms’ rate of growth distribution over the business cycle. We support the evidence provided by Higson et al. (2002, 2004) of a negative correlation between the rate of growth of GDP and the standard deviation and skewness of the distribu- tion. Kurtosis exhibits a procyclical pattern. Furthermore, we provide an explanation of the emergence of these stylised facts based on the evidence that the left tail of the distribution is more responsive to macroeconomic fluctuations than its right counterpart. The evidence points to financial factors as one of the main drivers of the observed pattern. |
| Keywords: | Subbotin Distribution, Corporate Growth, Business Cycle, Financial Fragility |
| JEL: | C16 E32 G30 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpde:0606&r=bec |
| By: | Aubhik Khan; Julia Thomas |
| Abstract: | We study a model of lumpy investment wherein establishments face persistent shocks to common and plant-specific productivity, and nonconvex adjustment costs lead them to pursue generalized (S,s) investment rules. We allow persistent heterogeneity in both capital and total factor productivity alongside low-level investments exempt from adjustment costs to develop the first model consistent with available evidence on establishment-level investment rates. Examining the implications of lumpy investment for aggregate dynamics in this setting, we find that they remain substantial when factor supply considerations are ignored, but are quantitatively irrelevant in general equilibrium. The substantial implications of general equilibrium extend beyond the dynamics of aggregate series. While the presence of idiosyncratic shocks makes the time-averaged distribution of plant-level investment rates largely invariant to market-clearing movements in real wages and interest rates, we show that the dynamics of plants' investments differ sharply in their presence. Thus, model-based estimations of capital adjustment costs involving panel data may be quite sensitive to the assumption about equilibrium. Our analysis also offers new insights about how nonconvex adjustment costs influence investment at the plant. When establishments face idiosyncratic productivity shocks consistent with existing estimates, we find that nonconvex costs do not cause lumpy investments, but act to eliminate them. |
| JEL: | E22 E32 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12845&r=bec |
| By: | Nobuaki Yamashita |
| Abstract: | This paper examines the hypothesis that industries engaged in international fragmentation of production experience greater skill upgrading using a panel dataset of Japanese manufacturing over the period 1980-2000. The novelty of the study comes from the use of an index newly constructed using data on trade in parts and components to measure inter-industry variations in the degree of international vertical specialization (fragmentation intensity of trade). It also employs a methodology designed to embody peculiarities of Japan's fragmentation trade pattern. While the findings of existing studies are inconclusive, we find that the expansion of fragmentation trade with developing East Asian countries has had a significant impact on the skills composition of Japanese manufacturing employment. By contrast, trade with high income countries seems to have had a skill downgrading effect. |
| Keywords: | International Fragmentation of Production, Skill Upgrading, Japanese Manufacturing |
| JEL: | F14 F16 J31 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:hst:hstdps:d06-202&r=bec |