nep-bec New Economics Papers
on Business Economics
Issue of 2007‒06‒23
twenty-one papers chosen by
Christian Calmes
University of Quebec in Ottawa

  1. Competing in Organizations: Firm Heterogeneity and International Trade By Marin, Dalia; Verdier, Thierry
  2. Understanding the puzzling effects of technology shocks By Pengfei Wang; Yi Wen
  3. The entrepreneurial decision: Theories, determinants and constraints. By Daniela Grieco
  4. Inventories and business cycle volatility: an analysis based on ISAE survey data By Marco Malgarini
  5. Spin-offs and the market for ideas By Satyajit Chatterjee; Esteban Rossi-Hansberg
  6. Entry and the accumulation of capital: a two state-variable extension to the Ramsey model By Brito, Paulo; Dixon, Huw
  7. Investment and firm dynamics By D'Erasmo, Pablo
  8. Foreign direct investment and firm level productivity - A panel data analysis By Gachino, Geoffrey
  9. Are Women Asking for Low Wages? Gender Differences in Wage Bargaining Strategies and Ensuing Bargaining Success By Säve-Söderbergh, Jenny
  10. Whatever happened to the business cycle? a Bayesian analysis of jobless recoveries By Kristie M. Engemann; Michael T. Owyang
  11. Openness to Trade and Industry Cost Dispersion: Evidence from a Panel of Italian Firms By Del Gatto, Massimo; Ottaviano, Gianmarco I P; Pagnini, Marcello
  12. Default risk: Poisson mixture and the business cycle By Chiara Pederzoli
  13. The perils of globalization: offshoring and economic insecurity of the American worker By Richard G. Anderson; Charles S. Gascon
  14. Macroeconomic and Financial Soundness Indicators: An Empirical Investigation By Rita Babihuga
  15. Technology Shocks, Statistical Models, and The Great Moderation By Fuentes-Albero, Cristina
  16. Investment, replacement and scrapping in a vintage capital model with embodied technological change By Bitros, George; Hritonenko, Natali; Yatsenko, Yuri
  17. Power in the Multinational Corporation in Industry Equilibrium By Marin, Dalia; Verdier, Thierry
  18. Sectoral productivity in the United States: recent developments and the role of IT By Carol Corrado; Paul Lengermann; Eric J. Bartelsman; J. Joseph Beaulieu
  19. The age of reason: financial decisions over the lifecycle By Sumit Agarwal; John C. Driscoll; Xavier Gabaix; David Laibson
  20. Supply shocks, demand shocks, and labor market fluctuations By Helge Braun; Reinout De Bock; Riccardo DiCecio
  21. A state-level analysis of the great moderation By Michael T. Owyang; Jeremy M. Piger; Howard J. Wall

  1. 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: firm heterogeneity; international trade with endogenous firm organizations; productivity; theory of the firm; trade adjustment
    JEL: D23 F12 F14 L22
    Date: 2007–06
  2. By: Pengfei Wang; Yi Wen
    Abstract: Under aggregate technology shocks, both aggregate inputs and sectorial inputs decline initially and then rise permanently. However, under sector-specific technology shocks, sectorial inputs decline permanently. In addition, sectorial output is very responsive to aggregate technology shocks but not so to sector-specific technology shocks. We show that a flexible-price RBC model with firm entry and exit is consistent with these stylized facts.
    Keywords: Business cycles ; Equilibriuim (Economics)
    Date: 2007
  3. By: Daniela Grieco (CESPRI - Bocconi University, Milan, Italy.)
    Abstract: The pervasiveness of the entrepreneurial phenomenon attracts the attention on the determinants of the decision of becoming entrepreneur. As the entrepreneurial decision can be additionally conceived as firm entry, as a real business investment in the creation of a new business and as a career choice in favour of self-employment, the literature about entrepreneurship is integrated with industrial organization, financial economics and labour economics approaches to identify contextual and personal determinants. Finally, an analysis of the constraints that limit the entrepreneurial decision is carried out.
    Keywords: Entrepreneurial decision, Entry, Real investment, Self-employment.
    JEL: D21 D81 J23 G11
    Date: 2007–05
  4. By: Marco Malgarini (ISAE - Institute for Studies and Economic Analyses)
    Abstract: The paper looks at an often debated issue - the decline observed in business cycle volatility - from a rather original point of view represented by careful consideration of qualitative data deriving from Business Tendency Surveys. It first concentrates on the manufacturing sector, providing evidence that volatility slowdown is attributable to a break in the Data Generating Process rather than to a long trend decline. Moreover, it shows that lower variance of the ISAE Confidence Indicator is mostly explained by the behaviour of firms’ assessments of demand and inventories. In particular, inventories volatility has decreased, while volatility of production has instead increased with respect to that of demand. Both of these results are consistent with the claim that better inventories management should have a specific role in shaping the production decisions of the firms.
    Keywords: Inventories, business cycle, business cycle volatility
    JEL: E22 E32 D24
    Date: 2007–05
  5. By: Satyajit Chatterjee; Esteban Rossi-Hansberg
    Abstract: The authors propose a theory of firm dynamics in which workers have ideas for new projects that can be sold in a market to existing firms or implemented in new firms: spin-offs. Workers have private information about the quality of their ideas. Because of an adverse selection problem, workers can sell their ideas to existing firms only at a price that is not contingent on their information. The authors show that the option to spin off in the future is valuable so only workers with very good ideas decide to spin off and set up a new firm. Since entrepreneurs of existing firms pay a price for the ideas sold in the market that implies zero expected profits for them, firms’ project selection is independent of their size, which, under some assumptions, leads to scale-independent growth. The entry and growth process of firms in this economy leads to an invariant distribution that resembles the one in the U.S. economy.
    Date: 2007
  6. By: Brito, Paulo; Dixon, Huw (Cardiff Business School)
    Abstract: In this paper we consider the entry and exit of firms in a dynamic general equilibrium model with capital and a fixed labour supply. At the firm level, there is a fixed cost combined with increasing marginal cost, which gives a standard U-shaped cost curve with optimal firm size. Entry is determined by a free entry condition such that the costs of entry are equal to the present value of incumbent firms. As short run profits are a decreasing function of the number of firms, we add a new stability mechanism in addition to the diminishing returns to capital. Then equilibrium is saddle-point stable and the stable manifold is two-dimensional. Transitional dynamics can, under certain circumstances, be non-monotonic. We study the effects of productivity and fixed cost shocks on the aggregate activity, the number and the size of firms.
    Keywords: Entry; dynamics; Ramsey
    JEL: D92 C62 E32 O41
    Date: 2007–06
  7. By: D'Erasmo, Pablo
    Abstract: In this paper I ask whether a model of ¯rm capital accumulation with entry and exit calibrated to match the investment regularities of U.S. establishments is capable of generating the dependence of ¯rm dynamics on size and age. Firms face uncertainty in the form of idiosyncratic productivity shocks and are subject to non-convex capital adjustment costs. I solve for the stationary equilibrium to show that the model can account for the simultaneous dependence of industry dynamics on size (once we condition on age) and on age (once we condition on size).
    Keywords: firm dynamics; investment; financial constraints
    JEL: D21 G11 E22
    Date: 2006–03
  8. By: Gachino, Geoffrey (United Nations University, Maastricht Economic and social Research and training centre on Innovation and Technology)
    Abstract: This paper uses panel data to examine the effect of foreign presence on firm level productivity in the Kenyan manufacturing industry employing "traditional" and "recent" methodologies both based on production function framework. A detailed comparative behaviour between foreign and local indigenous firms showed that foreign firms dominated in virtually all the economic activities including productivity performance. Analysis of productivity determinants following traditional approach indicated a statistically significant role played by foreign presence on firm level total factor productivity thus, supporting spillover occurrence argument. However, results based on recent methodologies showed no effect of foreign presence on firm level total factor productivity hence failing to support spillover occurrence dictum. These results indicate that use of different methodologies even within the same theoretical framework can result in divergent findings. This notwithstanding, the paper further argues that use of productivity based methodologies largely masks the nature, actual processes and mechanisms through which spillovers occur. The paper therefore advocates for a "paradigm shift" in the spillover analysis techniques and recommends a broader approach with particular emphasis on technological innovations which takes into consideration learning, capability building and innovation.
    Keywords: International Economic Relations, Foreign Direct Investment, Technology Transfer, Total Factor Productivity, Technological Change, Innovations, Kenya
    JEL: O33 F21 C33 O16 D24 O55
    Date: 2007
  9. By: Säve-Söderbergh, Jenny (Swedish Institute for Social Research, Stockholm University)
    Abstract: Men and women’s labor market outcomes differ along pay, promotion and competitiveness. This paper contributes by uncovering results in a related unexplored field using unique data on individual wage bargaining. We find striking gender differences. Women, like men, also bargain, but they submit lower wage bids and are offered lower wages than men. The adjusted gender wage gap is lower with posted-wage jobs than with individual bargaining, although less is ascribable to the term associated with discrimination. Both women and men use self-promoting, or competitive bargaining strategies, but women self-promote at lower levels. Employers reward self-promotion but the larger the self-promotion, the larger is the gender gap in bargaining success. Women therefore lack the incentives to self-promote, which helps to explain the gender disparities.
    Keywords: Individual Wage Bargaining; Competitiveness; Bargaining strategies; Self-promoting Bargaining Strategies; Gender Wage Gap; and Discrimination.
    JEL: J16 J31 M51 M52
    Date: 2007–05–18
  10. By: Kristie M. Engemann; Michael T. Owyang
    Abstract: During the typical recovery from U.S. post-War period economic downturns, employment recovers to its pre-recession level within months of the output trough. However, during the last two recoveries, employment has taken up to two years to achieve its pre-recession benchmark. We propose a formal empirical model of business cycles with recovery periods to demonstrate that the last two recoveries have been statistically different from previous experiences. We find that this difference can be attributed to a shift in the speed of transition between business cycle regimes. Moreover, we find this shift results from both durable and non-durable manufacturing sectors losing their cyclical characteristics. We argue that this finding of acyclicality in post-1980 manufacturing sectors is consistent with previous hypotheses (e.g., improved inventory management) regarding the reduction in macroeconomic volatility over the same period. These results suggest a link between the two phenomena, which have heretofore been studied separately.
    Keywords: Business cycles ; Labor market
    Date: 2007
  11. By: Del Gatto, Massimo; Ottaviano, Gianmarco I P; Pagnini, Marcello
    Abstract: We use Italian firm-level data to investigate the impact of trade openness on the distribution of firms across marginal cost levels. In so doing, we implement a procedure that allows us to control not only for the standard transmission bias identified in firm-level TFP regressions but also for the omitted price bias due to imperfect competition. We find that more open industries are characterized by a smaller dispersion of costs across active firms. Moreover, in those industries the average cost is also smaller.
    Keywords: Cost dispersion; firm selection; firm-level data; openness to trade; total factor productivity
    JEL: F12 F15 R13
    Date: 2007–06
  12. By: Chiara Pederzoli
    Abstract: As emphasized by the introduction of Basel II, the macroeconomic factors strongly affect credit risk variables. In order to account for the business cycle in a forward-looking way, a macroeconomic forecast can be introduced in the estimation of credit risk variables. This work proposes to model the distribution of the default rate as a mixture distribution which accounts for a binary representation of the business cycle: the distribution changes according to the estimated probability of recession over the credit horizon considered.
    Keywords: default risk; Poisson mixture; business cycle
    JEL: G21 C1 E3
    Date: 2007–06
  13. By: Richard G. Anderson; Charles S. Gascon
    Abstract: According to polls from the 2006 congressional elections, globalization and economic insecurity were the primary concerns of many voters. These Americans apparently believe that they have fallen victim to liberal trade polices and that inexorable trends in globalization are destroying the American Dream. In this analysis, we use time series cross-section data from the General Social Survey (GSS) to examine the links among offshoring, labor market volatility, and the demand for social insurance. Unique among the GSS literature, our analysis includes a pseudo-panel model which permits including auxiliary state and regional macroeconomic information.
    Keywords: Globalization ; International economic integration
    Date: 2007
  14. By: Rita Babihuga
    Abstract: This paper analyzes the relationship between selected macroeconomic and financial soundness indicators (FSIs) using a newly assembled panel dataset of FSIs for 96 countries covering the period 1998-2005. The analysis covers key macroeconomic indicators and FSIs of capital adequacy, asset quality and profitability. The paper finds that FSIs fluctuate strongly with both the business cycle and the inflation rate. Short term interest rates and the real exchange rate also emerge as important determinants. There is also a considerable degree of heterogeneity in the relationship between macroeconomic indicators and FSIs across the sample of countries. Several country and industry specific characteristics including country income levels, financial depth, market concentration, and the quality of regulatory supervision are found to be significant in explaining this cross country heterogeneity.
    Date: 2007–05–10
  15. By: Fuentes-Albero, Cristina
    Abstract: In this paper we compare the cyclical features implied by an RBC model with two technology shocks under several statistical specifications for the stochastic processes governing technological change. We conclude that while a trend-stationary model accounts better for the observed volatilities, a difference-stationary model does a relatively better job of accounting for the correlation of the variables of interest with output. We also explore some counterfactuals to assess the ability of our model to replicate the volatility slowdown of the mid 1980s. First, we conclude that the stochastic growth model outperforms the deterministic growth model in accounting for the Great Moderation. Finally, we obtain that even though the neutral technology shock is the main driving force in the volatility slowdown, allowing for a larger financial flexibility in the form of a smaller volatility for the investment-specific innovation improves the ability of our model to account for the magnitude of the Great Moderation.
    Keywords: Business Cycle; Aggregate fluctuations; Technology Shocks; Unit Roots
    JEL: O30 E32 C32
    Date: 2007–06–01
  16. By: Bitros, George; Hritonenko, Natali; Yatsenko, Yuri
    Abstract: This paper analyzes and compares two alternative policies of determining the service life and replacement demand for vintage equipment under embodied technological change. The policies are the infinite-horizon replacement and the transitory replacement ending with scrapping. The corresponding vintage capital models are formulated in the dynamic optimization framework. These two approaches lead to different estimates of the duration of replacements and the impact of technological change on the equipment service life.
    Keywords: vintage capital equipment; embodied technological change; service life; replacement; scrapping
    JEL: O33 O16 E22
    Date: 2007–06
  17. By: Marin, Dalia; Verdier, Thierry
    Abstract: Recent theories of the multinational corporation introduce the property rights model of the firm and examine whether to integrate our outsource firm activities locally or to a foreign country. This paper focus instead on the internal organization of the multinational corporation by examining the power allocation between headquarters and subsidiaries. We provide a framework to analyse the interaction between the decision to serve the local market by exporting or FDI, market access and the optimal mode of organization of the multinational corporation. We find that subsidiary managers are given most autonomy in their decision how to run the firm at intermediate levels of local competition. We then provide comparative statistics for changes in fixed FDI entry costs and trade costs, information technology, the number of local competitors, and in the size of the local market.
    Keywords: foreign direct investment; international organization of production; power allocation in the firm
    JEL: D23 F1 F2
    Date: 2007–06
  18. By: Carol Corrado; Paul Lengermann; Eric J. Bartelsman; J. Joseph Beaulieu
    Abstract: This paper introduces new estimates of recent productivity developments in the United States, using an appropriate theoretical framework for aggregating industry MFP to sectors and the total economy. Our work sheds light on the sources of the continued strong performance of U.S. productivity since 2000. We find that the major sectoral players in the late 1990s pickup were not contributors to the more recent surge in productivity. Rather, striking gains in MFP in the finance and business service sector, a resurgence in MFP growth in the industrial sector, and an end to drops elsewhere more than account for the aggregate acceleration in productivity in recent years. Further, some evidence is found for a link between IT intensity and the recent productivity acceleration.
    Date: 2007
  19. By: Sumit Agarwal; John C. Driscoll; Xavier Gabaix; David Laibson
    Abstract: The sophistication of financial decisions varies with age: middle-aged adults borrow at lower interest rates and pay fewer fees compared to both younger and older adults. We document this pattern in ten financial markets. The measured effects cannot be explained by observed risk characteristics. The sophistication of financial choices peaks around age 53 in our cross-sectional data. Our results are consistent with the hypothesis that financial sophistication rises and then falls with age, although the patterns that we observe represent a mix of age effects and cohort effects.
    Date: 2007
  20. By: Helge Braun; Reinout De Bock; Riccardo DiCecio
    Abstract: We use structural vector autoregressions to analyze the responses of worker flows, job flows, vacancies, and hours to shocks. We identify demand and supply shocks by restricting the short-run responses of output and the price level. On the demand side we disentangle a monetary and non-monetary shock by restricting the response of the interest rate. The responses of labor market variables are similar across shocks: expansionary shocks increase job creation, the hiring rate, vacancies, and hours. They decrease job destruction and the separation rate. Supply shocks have more persistent effects than demand shocks. Demand and supply shocks are equally important in driving business cycle fluctuations of labor market variables. Our findings for demand shocks are robust to alternative identification schemes involving the response of labor productivity at different horizons and an alternative specification of the VAR. However, supply shocks identified by restricting productivity generate a higher fraction of responses inconsistent with standard search and matching models.
    Keywords: Labor market ; Business cycles
    Date: 2007
  21. By: Michael T. Owyang; Jeremy M. Piger; Howard J. Wall
    Abstract: A number of studies have documented a reduction in aggregate macroeconomic volatility beginning in the early 1980s. Using an empirical model of business cycles, we extend this line of research to state-level employment data and find significant heterogeneity in the timing and magnitude of the state-level volatility reductions. In fact, some states experience no statistically-important reductions in volatility. We then exploit this cross sectional heterogeneity to evaluate hypotheses about the origin of the aggregate volatility reduction. We show that states with relatively high concentrations in the durable-goods and extractive industries tended to experience later breaks. We interpret these results as contradictory to hypotheses that the Great Moderation could have been caused by improved inventory management or less-volatile shocks to energy and/or productivity. Instead, we find results that are more consistent with the view that the most significant contributor to the volatility reduction was improved monetary policy.
    Keywords: Macroeconomics ; Econometric models ; Monetary policy
    Date: 2007

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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.