nep-bec New Economics Papers
on Business Economics
Issue of 2007‒06‒02
fourteen papers chosen by
Christian Calmes
University of Quebec in Ottawa

  1. Performance Pay and Wage Inequality By Thomas Lemieux; W. Bentley MacLeod; Daniel Parent
  2. Does International Outsourcing Depress Union Wages? By Sebastian Braun; Juliane Scheffel
  3. International Financial Integration and Entrepreneurial Firm Activity By Laura Alfaro; Andrew Charlton
  4. Intangible Capital, Corporate Valuation and Asset Pricing By Jean-Pierre Danthine; Xiangrong JIN
  5. Entrepreneurs: Jacks of all Trades or Hobos? By Thomas Astebro; Peter Thompson
  6. Corporate Governance and Firm Value in Mexico By Alberto Chong; Florencio López-de-Silanes
  7. Explaining Women's Success: Technological Change and the Skill Content of Women's Work By Sandra E. Black; Alexandra Spitz-Oener
  8. Robust Incentives By Reich, S.
  9. Limited Liability and the Trade-off between Risk and Incentives By Matthias Kräkel
  10. Outsourcing when Investments are Specific and Complementary By Alla Lileeva; Johannes Van Biesebroeck
  11. The Role of Technological Complexity and Absorptive Capacity in Internalization Decision By Arti
  12. International Financial Remoteness and Macroeconomic Volatility By Rose, Andrew K; Spiegel, Mark
  13. Practice Makes Perfect: On Professional Standards By Sällström Matthews, S.E.
  14. Learning by Investing: Evidence from Venture Capital By Sorensen, Morten

  1. By: Thomas Lemieux; W. Bentley MacLeod; Daniel Parent
    Abstract: We document that an increasing fraction of jobs in the U.S. labor market explicitly pay workers for their performance using bonuses, commissions, or piece-rates. We find that compensation in performance-pay jobs is more closely tied to both observed (by the econometrician) and unobserved productive characteristics of workers. Moreover, the growing incidence of performance-pay can explain 24 percent of the growth in the variance of male wages between the late 1970s and the early 1990s, and accounts for nearly all of the top-end growth in wage dispersion(above the 80th percentile).
    JEL: J31 J33
    Date: 2007–05
  2. By: Sebastian Braun; Juliane Scheffel
    Abstract: In this paper, we provide first empirical evidence on the effect of outsourcing on union wages using linked employer-employee data for Germany. We find that low skilled workers experience a decline in the union wage premium when working in industries with high outsourcing intensities. The finding applies to both firm- and sector-level agreements. Hence, outsourcing appears to deteriorate the bargaining position of unions. Outsourcing is not found to have a negative effect on the wages of low skilled employees not covered by collective bargaining agreements. While wages of medium skilled workers are largely unaffected by outsourcing, high skilled workers see their wages rise in industries with a high level of outsourcing. There is no interaction between coverage and outsourcing for these skill groups.
    Keywords: Collective Bargaining; International Outsourcing; Union Wages
    JEL: F16 J51 L24
    Date: 2007–05
  3. By: Laura Alfaro; Andrew Charlton
    Abstract: We explore the relation between international financial integration and the level of entrepreneurial activity in a country. We use a unique firm level data set of approximately 24 million firms in nearly 100 countries in 2004 and 1999, which enables us to present both cross-country and industry level evidence. We establish robust cross-country correlations between increased international financial integration and the activity of entrepreneurs using various proxies for entrepreneurial activity such as entry, size, and skewness of the firm-size distribution and de jure and de facto measures of international capital integration. We then explore causal channels through which foreign capital may encourage entrepreneurship. We find evidence that entrepreneurial activity in industries which are more reliant on external finance is disproportionately affected by international financial integration, suggesting that foreign capital may improve access to capital either directly or through improved domestic financial intermediation. Second we find that entrepreneurial activity is higher in industries which have a large share of foreign firms or in vertically linked industries.
    JEL: F21 F23 F34 G15 G18 L26 O19
    Date: 2007–05
  4. By: Jean-Pierre Danthine (University of Lausanne, Swiss Finance Institute and CEPR); Xiangrong JIN (Hong Kong Monetary Authority)
    Abstract: Recent studies have found unmeasured intangible capital to be large and important. In this paper we observe that by nature intangible capital is also very different from physical capital. We find it plausible to argue that the accumulation process for intangible capital differs significantly from the process by which physical capital accumulates. We study the implications of this hypothesis for rational firm valuation and asset pricing using a two-sector general equilibrium model. Our main finding is that the properties of firm valuation and stock prices are very dependent on the assumed accumulation process for intangible capital. If one entertains the possibility that intangible investments translates into capital stochastically, we find that plausible levels of macroeconomic volatility are compatible with highly variable corporate valuations, P/E ratios and stock returns.
    Keywords: Intangible capital, corporate valuation, stock return volatility
    JEL: D24 D50 G12
    Date: 2006–09
  5. By: Thomas Astebro (Rotman School of Management, University of Toronto); Peter Thompson (Department of Economics, Florida International University)
    Abstract: Human capital investment theory suggests that entrepreneurs should be generalists, while those who work for others should be specialists; it also predicts higher incomes for entrepreneurs with generalist skills. An alternative view predicts that those with greater taste for variety are more likely to become entrepreneurs and that entrepreneurs will see their incomes decrease with greater skill variety. Data from a survey of 830 independent inventors and 300 individuals from the general population confirm that inventor-entrepreneurs typically have a more varied labor market experience. However, the more varied their experience, the lower their household income. The results support the interpretation that both choice of entrepreneurship and investment in generalist skills are driven by a taste for variety.
    Keywords: Entrepreneurship, employment choice, skill, jack-of-all-trades, taste for variety.
    JEL: J24 L26
    Date: 2007–05
  6. By: Alberto Chong (Inter-American Development Bank); Florencio López-de-Silanes (Ecole Normal Superieur, University of Amsterdam and National Bureau of Economic Research)
    Abstract: The objective of this paper is twofold. On one hand, we undertake an analysis of the recent evolution of capital markets and their effect on the availability of external financing in Mexico in the last two decades. On the other hand, based on a newly assembled firm-level data set on corporate governance and firm performance, we show that better firm-level corporate governance practices are linked to higher valuations, better performance and more dividends disbursed to investors. These results hold after controlling for endogeneity. Overall, the evidence shows that the Mexican legal environment poses serious problems for access to capital.
    Date: 2006–07
  7. By: Sandra E. Black; Alexandra Spitz-Oener
    Abstract: The closing of the gender wage gap is an ongoing phenomenon in industrialized countries. However, research has been limited in its ability to understand the causes of these changes, due in part to an inability to directly compare the work of women to that of men. In this study, we use a new approach for analyzing changes in the gender pay gap that uses direct measures of job tasks and gives a comprehensive characterization of how work for men and women has changed in recent decades. Using data from West Germany, we find that women have witnessed relative increases in non-routine analytic tasks and non-routine interactive tasks, which are associated with higher skill levels. The most notable difference between the genders is, however, the pronounced relative decline in routine task inputs among women with little change for men. These relative task changes explain a substantial fraction of the closing of the gender wage gap. Our evidence suggests that these task changes are driven, at least in part, by technological change. We also show that these task changes are related to the recent polarization of employment between low and high skilled occupations that we observed in the 1990s.
    JEL: J01 J16 J2 J31
    Date: 2007–05
  8. By: Reich, S.
    Abstract: In this paper we consider a moral hazard problem, in which the agent after receiving his wage contract but before undertaking the costly effort can borrow on his future wage earnings. The game between the agent and potential lenders is modelled as an in.nite stochastic game with an exogenous stopping probability. We show that the principal cannot design a wage scheme that is robust to hedging by the agent. In particular, we show that, if the exogenous stopping probability is non zero, the principal's wage offer will be followed by several rounds of borrowing by the agent. This is compared to the recontracting-proofness equilibria which most of the literature has concentrated on, assuming that this stopping probability is zero. Furthermore, we show that the equilibrium of the model with a strictly positive stopping probability does not converge to the equilibrium of the model in which it is zero. We also .nd that the principal.s profit is lower, the maximum wage payment can be higher and effort is lower.
    Date: 2007–05
  9. By: Matthias Kräkel
    Abstract: everal empirical findings have challenged the traditional trade-off between risk and incentives. By combining risk aversion and limited liability in a standard principal-agent model the empirical puzzle on the positive relationship between risk and incentives can be explained.
    Keywords: limited liability; piece rates; risk aversion
    JEL: D01 D82 J3 M5
  10. By: Alla Lileeva; Johannes Van Biesebroeck
    Abstract: Using the universe of large Canadian manufacturing firms in 1988 and 1996, we investigate to what extent firms' outsourcing decision can be explained by a simple property rights model. A novel aspect of the data is the availability of component level information on outputs as well as inputs which permits the construction of a very detailed measure of vertical integration. Moreover, we construct five different measures of technological intensity to proxy for investments that are likely to be specific to a buyer-seller relationship. Our main findings are that (i) greater specificity makes outsourcing less likely; (ii) complementarities between the investments of the buyer and the seller are also associated with less outsourcing; (iii) only when we focus on the range of transactions with low complementarities do we find support for several nuanced predictions of the property rights model.
    Keywords: Property rights theory, complementarity, asset specificity, vertical integration
    JEL: L14 D23
    Date: 2007–05–22
  11. By: Arti (Delhi School of Economics)
    Abstract: Technology transfer costs have a profound influence on the firm’s entry mode into a production sharing relationship. To explore this nexus, we associate technological complexity of the off-shored input with the organizational mode of international production sharing by extending the Antràs (2005) model. We modify the Antràs model by proposing that the low-tech input, as qualified within the model, cannot be produced in the low wage south without costly technology transfer. The cost of technology transfer in turn depends on three factors, which are the technological complexity of this input, the absorptive capacity of the host country and the wages of the host country. Our model refines the results obtained in Antràs (2005). We find that 1. For high-tech goods, intra-firm transfer is preferred vis-à-vis outsourcing only for intermediate range of technological complexity of the off-shored input 2. On the other hand, for low-tech goods, where the likelihood of outsourcing is higher in Antràs, intra-firm offshore contract is still possible for low range of technological complexity. Our model has policy suggestions for host countries which aspire to maximize their benefits from the exploding global production phenomenon. As the wage gap between the source and the host country falls, cost considerations for offshoring disappear. New sources of comparative advantage should therefore be created in the host country by subsidizing technology investment and higher education to build higher absorptive capacity.
    Keywords: Outsourcing, Foreign Direct Investment, Technology Transfer, Absorptive Capacity.
    JEL: D23 F12 F23 L22 L33
    Date: 2007–05
  12. By: Rose, Andrew K; Spiegel, Mark
    Abstract: This paper shows that proximity to major international financial centers seems to reduce business cycle volatility. In particular, we show that countries that are further from major locations of international financial activity systematically experience more volatile growth rates in both output and consumption, even after accounting for domestic financial depth, political institutions, and other controls. Our results are relatively robust in the sense that more financially remote countries are more volatile, though the results are not always statistically significant. The comparative strength of this finding is in contrast to the more ambiguous evidence found in the literature.
    Keywords: business cycle; capital; cross-section; data; distance; empirical; proximity
    JEL: E32 F32
    Date: 2007–05
  13. By: Sällström Matthews, S.E.
    Abstract: Practising is a matter of increasing the reliability of ones skills rather than relying on a tool or a strike of genius to get it right. Once perfection has been achieved the individual will aim for higher quality since the effort is more likely to be worthwhile. Furthermore because the returns to achieving perfection are higher the harder it is to achieve, the perfectionist equilibrium only arises in situations where genius is rare and reliability is low. From this follows that as tools improve, even though perfection then has become easier to achieve, professional standards may nonetheless decline. This mechanism is captured in an oligopoly model, where the failure rate and the quality are endogenously determined.
    Keywords: human capital, skill, technological change, quality, standards, learning, cultural economics, imperfect competition, patent race.
    JEL: D2 D43 L13 L15 J24
    Date: 2007–05
  14. By: Sorensen, Morten (University of Chicago GSB)
    Abstract: To understand the investment behavior of venture capital (VC) investors, this paper estimates a dynamic model of learning. Behavior reflecting both learning from past investments (exploitation) and anticipated future learning (exploration) are found to be prevalent, and the model's additional predictions about success rates and investment speeds are confirmed empirically. Learning is important, since it can create informational frictions, and it has potential implications for VCs' investments and organizations. VCs are found to internalize the value of learning, and this may help promote exploration beyond the levels sustained in standard capital markets, which is socially valuable.
    Keywords: Venture capital; Learning; Multi-armed bandit model
    JEL: D49 D83 G31
    Date: 2007–05–15

This nep-bec issue is ©2007 by Christian Calmes. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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