nep-bec New Economics Papers
on Business Economics
Issue of 2007‒06‒11
25 papers chosen by
Christian Calmes
University of Quebec in Ottawa

  1. Confidence Management: On Interpersonal Comparisons in Teams By Benoît S.Y. Crutzen; Otto H. Swank; Bauke Visser
  2. Competing in Organizations: Firm Heterogeneity and International Trade By Marin, Dalia; Verdier, Thierry
  4. Outsourcing and Volatility By Paul R. Bergin; Robert C. Feenstra; Gordon H. Hanson
  5. Understanding the M&A boom in Japan: What drives Japanese M&A? By ARIKAWA Yasuhiro; MIYAJIMA Hideaki
  6. Mixed Oligopoly under Demand Uncertainty By Anam, Mahmudul; Basher, Syed A.; Chiang, Shin-Hwan
  7. Variance analysis and linear contracts in agencies with distorted performance measures By J”rg Budde
  8. Industry characteristics and anti-competitive behavior: Evidence from the EU By Gual, Jordi; Mas, Nuria
  9. Betas and the Business Cycle: An Analysis Based on Real-Time Data By Pierdzioch, Christian; Kizys, Renatas
  10. Dynamic Gains from U.S. Services Offshoring: A Critical View By William Milberg, Melissa Mahoney, Markus Schneider, and Rudiger von Arnim
  11. The Effect of Globalization on Union Bargaining and Price-Cost Margins of Firms By Filip Abraham; Jozef Konings; Stijn Vanormelingen
  12. Enterprise-related training and poaching externalities By Alexandre Léné
  13. Bank Consolidation and Soft Information Acquisition in Small Business Lending By OGURA Yoshiaki; UCHIDA Hirofumi
  14. Imperfect Commitment and the Revelation Principle: the Multi-Agent Case with Transferable Utility By Evans, R.; Reich, S.
  15. Real business cycle dynamics under first-order risk aversion By Jim Dolmas
  16. Private Monitoring with Infinite Histories By Christopher Phelan; Andrzej Skrzypacz
  17. Bertrand-Edgeworth equilibrium with a large number of firms By Roy Chowdhury, Prabal
  18. Endogenous growth, decline in social capital and expansion of market activities By Bartolini, Stefano; Bonatti, Luigi
  19. Cross-Country Evidence on Output Growth Volatility: Nonstationary Variance and GARCH Models By WenShwo Fang; Stephen M. Miller; ChunShen Lee
  20. Estimating Probabilities of Default With Support Vector Machines By Wolfgang Härdle; Rouslan Moro; Dorothea Schäfer
  21. Optimizing the Managerial Decision in Energetic Industry By Dura, Codruta; Isac, Claudia
  22. Resistance to change. Exploring the convergence of institutions, organizations and the mind toward a common phenomenon By Patalano, Roberta
  23. Incentives for Process Innovation in a Collusive Duopoly By Christoph Engel
  24. Investment Spikes: New Facts and a General Equilibrium Exploration By Francois Gourio; Anil K Kashyap
  25. Exclusionary contracts, entry, and communication By Gerlach, Heiko

  1. By: Benoît S.Y. Crutzen (Erasmus Universiteit Rotterdam); Otto H. Swank (Erasmus Universiteit Rotterdam); Bauke Visser (Erasmus Universiteit Rotterdam)
    Abstract: Organization differ in the degree to which they differentiate employees by ability. We analyse how the effect of differentiation on employee morale may explain this variation. By comparing employees using ordinary talk, a manager boosts the self-image of some, but hurts that of others. Whether the net effect is positive for the organization depends on the degree of synergy between employees and on the shape of their objective function. An implication for relative performance pay is that it yields a double dividend or constitutes a double-edged sword.
    Keywords: Comparisons; Confidence; Teams; Cheap talk
    JEL: D82 L23 J31
    Date: 2007–05–30
  2. By: Marin, Dalia; Verdier, Thierry
    Abstract: This paper develops a theory which investigates how firms’ choice of corporate organization is affecting firm performance and the nature of competition in international markets. We develop a model in which firms’ organisational choices determine heterogeneity across firms in size and productivity in the same industry. We then incorporate these organisational choices in a Krugman cum Melitz and Ottaviano model of international trade. We show that the toughness of competition in a market depends on who - headquarters or middle managers - have power in firms. Furthermore, we propose two new margins of trade adjustments: the monitoring margin and the organizational margin. International trade may or may not lead to an increase in aggregate productivity of an industry depending on which of these margins dominate. Trade may trigger firms to opt for organizations which encourage the creation of new ideas and which are less well adapt to price and cost competition.
    Keywords: international trade with endogenous firm organizations and endogenous toughness of competition; firm heterogeneity; power struggle in the firm
    JEL: F12 F14 L22 D23
    Date: 2007–05
  3. By: Ramón Faulí-Oller (Universidad de Alicante); Marc Escrihuela (Universidad de Alicante)
    Abstract: It is well known that the profitability of horizontal mergers with quantity competition is scarce. However, in an asymmetric Stackelberg market we obtain that some mergers are profitable. Our main result is that mergers among followers become profitable when the followers are inefficient enough. In this case, leaders reduce their output when followers merge and this reduction renders the merger profitable. This merger increases price and welfare is reduced.
    Keywords: Mergers; Asymmetries; Stackelberg.
    JEL: L13 L40 L41
    Date: 2007–05
  4. By: Paul R. Bergin; Robert C. Feenstra; Gordon H. Hanson
    Abstract: While outsourcing of production from the U.S. to Mexico has been hailed in Mexico as a valuable engine of growth, recently there have been misgivings regarding its fickleness and volatility. This paper is among the first in the trade literature to study the second moment properties of outsourcing. We begin by documenting a new stylized fact: the maquiladora outsourcing industries in Mexico experience fluctuations in value added that are roughly twice as volatile as the corresponding industries in the U.S. A difference-in-difference method is extended to second moments to verify the statistical significance of this finding. We then develop a stochastic model of outsourcing with heterogeneous firms that can explain this volatility. The model employs two novel mechanisms: an extensive margin in outsourcing which responds endogenously to transmit shocks internationally, and translog preferences which modulate firm entry.
    JEL: F1 F4
    Date: 2007–06
  5. By: ARIKAWA Yasuhiro; MIYAJIMA Hideaki
    Abstract: In this paper, we examine the causes of the first merger boom since the late 1990s in Japan. Using industry-level data, we show that mergers and acquisitions (M&As) are driven mainly by economic shocks. While industries with higher growth opportunities are likely to have more M&A activity, industries facing negative fundamental shocks, such as rapid sales declines, also experience larger M&A deals. These results suggest that the recent merger wave in Japan is mainly explained by the neoclassical model. At the firm level, we find that the bidder is the firm with the higher growth opportunity, and the target is the one with the lower growth opportunity. This means that Japanese firms improved their efficiency through merger activity since the 1990s. Lastly, we find that internal funds for the acquiring firm play a very important role in bidding activity, while a high probability of being targeted for M&A is associated with high leverage.
    Date: 2007–06
  6. By: Anam, Mahmudul; Basher, Syed A.; Chiang, Shin-Hwan
    Abstract: In this paper we introduce product demand uncertainty in a mixed oligopoly model and reexamine the nature of sub-game perfect Nash equilibrium (SPNE) when firms decide in the first stage whether to lead or follow in the subsequent quantity-setting game. In the non-stochastic setting, Pal (1998) demonstrated that when the public firm competes with a domestic private firm, multiple equilibria exist but the efficient equilibrium outcome is for the public firm to follow. Matsumura (2003a) proved that when the public firm's rival is a foreign private firm, leadership of the public firm is both efficient as well as SPN equilibrium. Our stochastic model shows that when the leader must commit to output before the resolution of uncertainty, multiple SPNE is possible. Whether the equilibrium outcome is public or private leadership hinges upon the degree of privatization and market volatility. More importantly, Pareto-inefficient simultaneous production is a likely SPNE. Our results are driven by the fact that the resolution of uncertainty enhances the profits of the follower firm in a manner that is well known in real option theory.
    Keywords: Mixed oligopoly; Partial privatization; Demand Uncertainty.
    JEL: L13 D8 C72
    Date: 2007–06–08
  7. By: J”rg Budde (J”rg Budde, Department of Economics, University of Bonn, Adenauerallee 24-42, D-53113 Bonn; phone: +49-228-739247,
    Keywords: This paper investigates the role of variance analysis procedures in aligning objectives under the condition of distorted performance measurement. A riskneutral agency with linear contracts is analyzed, whereby the agent receives postcontract, pre-decision information on his productivity. If the performance measure is informative with respect to the agent?s marginal product concerning the principal?s objective, variance investigation can alleviate effort misallocation. These results carry over to a participative budgeting situation, but in this case the variance investigation procedures are less demanding.
    Date: 2007–04
  8. By: Gual, Jordi (IESE Business School); Mas, Nuria (IESE Business School)
    Abstract: In the EU, competition policy is based on three main pillars: antitrust, merger control and monitoring state aid. Our analysis focuses on antitrust policy. In this context, the Commission is concerned about restrictive agreements and practices that imply an abuse of market power. The objective of this paper is to analyze what are the main criteria used by the Commission when deciding on anti-competitive practices. In particular, our goal is to determine whether and to what extent the Commission takes into account economic analysis when deciding whether anti-competitive behavior has taken place. There is a very extensive industrial organization literature which provides the theoretical and empirical background that associates industry features with the likelihood of practices that restrict competition. However, the literature evaluating the competition authority's decisions is much scarcer and has focused mainly on the analysis of merger policy. Our paper contributes to fill this gap in the literature. We examine almost 2,000 cases submitted to the Commission for consideration from January 1999 to February 2004 with the aim of determining which industry characteristics led the Commission to decide against an investigated firm on antitrust grounds.
    Keywords: Competition policy; Antitrust; European Commission; Mergers;
    Date: 2007–03–09
  9. By: Pierdzioch, Christian; Kizys, Renatas
    Abstract: Our results shed light on the link between the betas of portfolios formed on market capitalization and book-to-market value and the U.S. business cycle. We derived our results by estimating a state-space model that captures the idea that both the portfolio betas and the business cycle are measured with error. We measured the business cycle using real-time and revised data. Our results indicate that the sensitivity of portfolio betas to the business cycle is significant and large when the book-to-market value is high and estimates are based on real-time data. Equity market investors should use real-time data when assessing the business-cycle sensitive risks of investments into portfolios with a high book-to-market value.
    Keywords: State-space model; Portfolio betas; Real-time data; Business Cycle; United States
    JEL: E32 C32 G12 E44
    Date: 2007–05–06
  10. By: William Milberg, Melissa Mahoney, Markus Schneider, and Rudiger von Arnim (New School for Social Research, New York, NY)
    Keywords: offshoring; economic growth;
    Date: 2007–02–02
  11. By: Filip Abraham; Jozef Konings; Stijn Vanormelingen
    Abstract: In recent years, Europe has witnessed an accelerated process of economic integration. Trade barriers were removed, the euro was introduced and ten new member states have joined the European Union. This paper analyzes how this process of increased economic integration has affected labor and product markets. To this end, we use a panel of Belgian manufacturing firms to estimate price-cost margins and union bargaining power and show how various measures of globalization affect them. Our findings can be summarized as follows: On average, firms set prices about 30% above marginal costs, but there is substantial variation across sectors, with the lowest mark-up around 19% and the highest around 52%. In addition, we find evidence that unions bargain over both wages and employment. We estimate an index of bargaining power, which reflects the fraction of profits that is passed on to workers into higher wages. Depending on the sector, this fraction varies between 6% and 18% and it increases with the markups of firms. Finally, we find that globalization puts pressure on both markups and union bargaining power, especially when there is increased competition from the low wage countries. This suggests that increased globalization is associated with a moderation of wage claims in unionized countries, which should be associated with positive effects on employment.
    Keywords: Mark-ups, Trade Unions, International Trade
    JEL: F16 J50 L13
    Date: 2007
  12. By: Alexandre Léné (CLERSE - Centre lillois d'études et de recherches sociologiques et économiques - [CNRS : UMR8019] - [Université des Sciences et Technologie de Lille - Lille I])
    Abstract: Labour poaching is a potential problem in work-linked training systems. Once trained, young people can be poached by rival firms, which threatened the training firm's investment. A distinction is made between two types of workforce poaching. It is shown that it may be rational for some firms to train young people, even if they then lose part of their workforce. However, this situation is not socially optimal: it does not exclude underinvestment or skilled labour shortages. This may justify government intervention. However, the introduction of subsidies can have perverse effects.
    Keywords: training ; skills; poaching ; labour
    Date: 2007–05–30
  13. By: OGURA Yoshiaki; UCHIDA Hirofumi
    Abstract: We empirically examine the impact of bank consolidation on bankers' acquisition of soft information about borrowers. Using a dataset of small businesses, we found that bank mergers have a negative impact on soft information acquisition by small banks while those by large banks that have less interest in acquiring soft information irrespective of mergers have no impact. Detailed analyses of the post-merger organizational restructuring show that the measures of an increase in organizational complexity have a negative and significant impact on soft information acquisition by small banks, while the measures of cost-cut do not have any significant impact on soft information acquisition. This result implies that the increase in organizational complexity by bank mergers hindered soft information acquisition, which is consistent with Stein's prediction [2002, J. Fin.] on the comparative advantage of simple and flat organizations in acquiring and processing soft information.
    Date: 2007–06
  14. By: Evans, R.; Reich, S.
    Abstract: Bester and Strausz (2000) showed that the revelation principle of Bester and Strausz (2001) does not apply in a setting of many agents and no commitment. In their counterexample only one agent has private information. We show that if the parties can make ex ante transfers the revelation principle does extend to this setting. However, we show that it does not extend to a setting in which more than one agent has private information.
    Keywords: Revelation Principle, Commitment, Asymmetric Information
    JEL: D23
    Date: 2007–05
  15. By: Jim Dolmas
    Abstract: This paper incorporates preferences that display first-order risk aversion (FORA) into a standard real business cycle model. Although FORA preferences represent a sharp departure from the expected utility/constant relative risk aversion (EU/CRRA) preferences common in the business cycle literature, the change has only a negligible e¤ect on the model s second moment implications. In fact, for what I argue is an empirically reasonable "ballpark" calibration of the FORA preferences, the moment implications are essentially identical to those under EU/CRRA, while the welfare cost of aggregate fluctuations in the model is substantially larger.
    Keywords: Business cycles
    Date: 2007
  16. By: Christopher Phelan; Andrzej Skrzypacz
    Date: 2007–06–02
  17. By: Roy Chowdhury, Prabal
    Abstract: We examine a model of price competition with strictly convex costs where the firms simultaneously decide on both price and quantity, are free to supply less than the quantity demanded, and there is discrete pricing. If firms are symmetric then, for a large class of residual demand functions, there is a unique equilibrium in pure strategies whenever, for a fixed grid size, the number of firms is sufficiently large. Moreover, this equilibrium price is within a grid-unit of the competitive price. The results go through to a large extent when the firms are asymmetric, or they are symmetric but play a two stage game and the tie-breaking rule is `weakly manipulable'.
    Keywords: Bertrand equilibrium; Edgeworth paradox; tie-breaking rule; rationing rule; folk theorem of perfect competition.
    JEL: D41 D43 L13
    Date: 2007–04
  18. By: Bartolini, Stefano; Bonatti, Luigi
    Abstract: We model in an endogenous growth set-up the hypotheses that the expansion of market activities weakens social capital formation, and that firms can invest in formal mechanisms of control and enforcement to substitute for social capital (trust, work ethics, honesty). The model shows that the economy tends to grow faster when it is relatively poorer in social capital and that perpetual growth can be consistent with the progressive erosion of social capital. These results may help reconciling Putnam’s claim that social capital has declined in the U.S. with the satisfactory growth performance of the U.S. economy over the same period.
    Keywords: Generalized trust; externalities; marketization; social assets
    JEL: Q20 O41 O13 Z13
    Date: 2007–05
  19. By: WenShwo Fang (Feng Chia University); Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas); ChunShen Lee (Feng Chia University)
    Abstract: This paper revisits the issue of conditional volatility in real GDP growth rates for Canada, Japan, the United Kingdom, and the United States. Previous studies find high persistence in the volatility. This paper shows that this finding largely reflects a nonstationary variance. Output growth in the four countries became noticeably less volatile over the past few decades. In this paper, we employ the modified ICSS algorithm to detect structural change in the unconditional variance of output growth. One structural break exists in each of the four countries. We then use generalized autoregressive conditional heteroskedasticity (GARCH) specifications modeling output growth and its volatility with and without the break in volatility. The evidence shows that the time-varying variance falls sharply in Canada, Japan, and the U.K. and disappears in the U.S., excess kurtosis vanishes in Canada, Japan, and the U.S. and drops substantially in the U.K., once we incorporate the break in the variance equation of output for the four countries. That is, the integrated GARCH (IGARCH) effect proves spurious and the GARCH model demonstrates misspecification, if researchers neglect a nonstationary unconditional variance.
    Keywords: Nonstationary variance, the Great Moderation, real GDP growth and volatility, modified ICSS algorithm, IGARCH effect
    JEL: C32 E32 O40
    Date: 2007–04
  20. By: Wolfgang Härdle; Rouslan Moro; Dorothea Schäfer
    Abstract: This paper proposes a rating methodology that is based on a non-linear classification method, the support vector machine, and a non-parametric technique for mapping rating scores into probabilities of default. We give an introduction to underlying statistical models and represent the results of testing our approach on German Bundesbank data. In particular we discuss the selection of variables and give a comparison with more traditional approaches such as discriminant analysis and the logit regression. The results demonstrate that the SVM has clear advantages over these methods for all variables tested.
    Keywords: Bankruptcy, Company rating, Default probability, Support vector machines.
    JEL: C14 G33 C45
    Date: 2007–06
  21. By: Dura, Codruta; Isac, Claudia
    Abstract: Making a decision is a complex process which must be based upon a method that is able to establish the optimum criteria in choosing an alternative, in evaluating the main effects of implementing the decision which was taken and in estimating the risks involved. The optimizing methods and techniques fall into several groups. Thus, judging by the number of criteria that was taken into consideration when making decisions, the optimization methods and techniques can be identified as uni-criterial decisions and multi-criterial decisions; considering the objective condition state which affects the problem that needs decisional solution, there can be decisional methods and techniques used in optimizing decisions in conditions of certainty, decisional methods and techniques used in optimizing decisions in conditions of uncertainty and decisional methods and techniques used in optimizing decisions in risky conditions. The continuous improvement of the decisional subsystem - an important component of the firm’s management - represents a necessity under the circumstances that the latest decades reveal a development of the decisional elements, both in the theoretic-methodological field and in the application field. The decisional methods and techniques must be found in the managers’ decisional processes at different hierarchical levels (individual managers or group managers), so that a high scientific materialization level of the methods should be ensured.
    Keywords: decision; variant; optimizing methods and techniques; decisional tree; certainty; uncertainty; risk
    JEL: C61 M10 M21
    Date: 2007–05–15
  22. By: Patalano, Roberta
    Abstract: Resistance to change is not a new concept in economic literature (Coch and French 1948, Boulding 1956). However, in the last few decades it has acquired specific connotations and meanings that deserve attention. The first aim of the paper is to analyze how the concept has evolved since its introduction by Lewin (1946) and how it has diversified. Having acknowledged that resistance characterizes institutions, organizations and the mind, we suggest that the convergence toward such phenomenon is not surprising. Indeed, it may be explained by taking the bounds that affect the cognitive and emotional counterparts of economic behavior into account. We finally reinterpret resistance to change as a heuristic that helps manage the natural tendency of human beings to fear, uncertainty and its expected effects.
    Keywords: Change - cognitive economics - heuristic - emotions - resistance
    JEL: B59 D83 D81
    Date: 2007–05
  23. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: Two suppliers of a homogenous good know that, in the second period, they will be able to collude. Gains from collusion are split according to the Nash bargaining solution. In the first period, either of them is able to invest into process innovation. Innovation changes the status quo pay-off, and thereby affects the distribution of the gains from collusion. The resulting innovation incentive is strictly smaller than in the competitive case.
    Keywords: Duopoly, Collusion, Innovation Incentives
    JEL: D43 K21 L13 O31
    Date: 2007–05
  24. By: Francois Gourio; Anil K Kashyap
    Abstract: Using plant-level data from Chile and the U.S. we show that investment spikes are highly pro-cyclical, so much so that changes in the number of establishments undergoing investment spikes (the "extensive margin") account for the bulk of variation in aggregate investment. The number of establishments undergoing investment spikes also has independent predictive power for aggregate investment, even controlling for past investment and sales. We re-calibrate the Thomas (2002) model (that includes fixed costs of investing) so that it assigns a prominent role to extensive adjustment. The recalibrated model has different properties than the standard RBC model for some shocks.
    JEL: E22 E32
    Date: 2007–06
  25. By: Gerlach, Heiko (University of Auckland)
    Abstract: I examine the incentives of firms to communicate entry into an industry where the incumbent writes exclusionary, long-term contracts with consumers. The entrant's information provision affects the optimal contract proposal by the incumbent and leads to communication incentives that are highly non-linear in the size of the innovation. Entry with small and medium-to-large innovations is announced whereas small-to-medium and large innovations are not communicated. It is demonstrated that this equilibrium communication behavior maximizes ex ante total welfare by reducing the anti-competitive impact of excessively exclusive contracts. By contrast, consumers always prefer more communication and the incumbent's equilibrium contract maximizes ex ante consumer surplus.
    Keywords: Long-term contracts; communication; contractual switching costs; exclusionary conduct;
    JEL: D86 L12 L41
    Date: 2007–05–15

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