nep-bec New Economics Papers
on Business Economics
Issue of 2007‒07‒20
eighteen papers chosen by
Christian Calmes
University of Quebec in Ottawa

  1. Employment Law and the Labor Market By Christine Jolls
  2. La "questione dimensionale" come problema organizzativo By A. Arrighetti; F. Traù
  3. The Effectiveness of Business Codes: A Critical Examination of Existing Studies and the Development of an Integrated Research Model By Kaptein, M.; Schwartz, M.
  4. Incomplete Markets, Heterogeneity and Macroeconomic Dynamics By Bruce Preston; Mauro Roca
  5. An Application of Extreme Value Theory to U.S. Movie Box Office Returns By Guang Bi; David E. Giles
  6. The Leader as Catalyst: On Leadership and the Mechanics of Institutional Change By Sumon Majumdar; Sharun Mukand
  7. Agency Conflicts, Investment, and Asset Pricing By Rui Albuquerque; Neng Wang
  8. The Influence of Temperature on Spike Probability in Day-Ahead Power Prices By Huisman, R.
  9. Risk Based Explanations of the Equity Premium By John Donaldson; Rajnish Mehra
  10. Stimulating Strategically Aligned Behaviour Among Employees By Riel, C.B.M. van; Berens, G.; Dijkstra, M.
  11. Wage Premia in Employment Clusters: Agglomeration Economies or Worker Heterogeneity? By Shihe Fu; Stephen L. Ross
  12. The Fundamentals of Commodity Futures Returns By Gary B. Gorton; Fumio Hayashi; K. Geert Rouwenhorst
  13. Returns to Apprenticeship Training in Austria: Evidence from Failed Firms By Fersterer, Josef; Pischke, Jörn-Steffen; Winter-Ebmer, Rudolf
  14. Investment, Consumption, and Hedging under Incomplete Markets By Jianjun Miao; Neng Wang
  15. Consumption Commitments and Employment Contracts, Fourth Version By Andrew Postlewaite; Larry Samuelson; Dan Silverman
  16. Do Private Equity Investors Take Firms Private for Different Reasons? By Fidrmuc, J.P.; Roosenboom, P.; Dijk, D.J.C. van
  17. Governance Matters VI: Aggregate and Individual Governance Indicators, 1996-2006 By Kaufmann, Da niel; Kraay, Aart; Mastruzzi, Massimo
  18. Decision-Making: A Neuroeconomic Perspective By Hardy-Vallee, Benoit

  1. By: Christine Jolls
    Abstract: Legal rules governing the employer-employee relationship are many and varied. Economic analysis has illuminated both the efficiency and the effects on employee welfare of such rules, as described in this paper. Topics addressed include workplace safety mandates, compensation systems for workplace injuries, privacy protection in the workplace, employee fringe benefits mandates, targeted mandates such as medical and family leave, wrongful discharge laws, unemployment insurance systems, minimum wage rules, and rules requiring that employees receive overtime pay. Both economic theory and empirical evidence are considered.
    JEL: J08 J18 J38 K00 K31 K32
    Date: 2007–07
  2. By: A. Arrighetti; F. Traù
    Keywords: Firm Size Structure, Firm Growth and Organisation, Medium-Sized Firms, Division of Labour, Markets vs. Hierarchies, Organisational Change
    JEL: D21 D23 L11 L22 L23
    Date: 2007
  3. By: Kaptein, M.; Schwartz, M. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: Business codes are a widely used management instrument. Research into the effectiveness of business codes has, however, produced conflicting results. The main reasons for the divergent findings are: varying definitions of key terms; deficiencies in the empirical data and methodologies used; and a lack of theory. In this paper, we propose an integrated research model and suggest directions for future research.
    Keywords: Business codes;Effectiveness;Organization;Ethics;
    Date: 2007–05–24
  4. By: Bruce Preston; Mauro Roca
    Abstract: This paper solves a real business cycle model with heterogeneous agents and uninsurable income risk using perturbation methods. A second order accurate characterization of agent's optimal decision rules is given, which renders the implications of aggregation for macroeconomic dynamics transparent. The role of cross-sectional holdings of capital in determining equilibrium dynamics can be directly assessed. Analysis discloses that an individual's optimal saving decisions are almost linear in their own capital stock giving rise to permanent income consumption behavior. This provides an explanation for the approximate aggregation properties of this model documented by Krusell and Smith (1998): the distribution of capital does not affect aggregate dynamics. While the variance-covariance properties of endogenous variables are almost entirely determined by first order dynamics, the second order dynamics, which capture properties of the wealth distribution, are nonetheless important for an individual's mean consumption and saving decisions and therefore the mean equilibrium capital stock. Policy evaluation exercises therefore need to take account of these higher order terms.
    JEL: C6 D52 E21 E32
    Date: 2007–07
  5. By: Guang Bi (Department of Economics, University of Victoria); David E. Giles (Department of Economics, University of Victoria)
    Abstract: In this paper we use extreme value theory to model the U.S. movie box-office returns, using weekly data for the period January 1982 to September 2006. The Peaks over Threshold method is used to fit the Generalized Pareto Distribution to the tails of the distributions of both positive weekly returns, and negative returns. Tail risk measures such as value-at-risk and expected shortfall are computed using likelihood and profile likelihood methods. These measures can be used as indicators for the film distributors in the preparation of movie prints, or as references for actual or potential investors in the movie industry.
    Keywords: Movie revenue, extreme values, generalized Pareto distribution, value at risk
    JEL: C16 C46 G1 Z1
  6. By: Sumon Majumdar (Queen's University); Sharun Mukand (Tufts University)
    Abstract: Individual leaders have been central to the transformation of organizations, political institutions and many instances of social and economic reform. In this paper we take a first step towards analyzing the role of leadership to ask: when and how does a leader engineer change? We show that while underlying structural conditions and institutions are important, there is an independent first-order role for individual agency in bringing about change and thus transforming the institutions. We emphasize the key nature of the symbiotic relationship between followers decisions' to willingly entrust their faith in the leader and the leader's initiative at leading them. This two-way interaction can endogenously give rise to threshold effects; slight differences in the leader's ability or the underlying structural conditions can dramatically improve the prospects for successful change. Given the centrality of this leader-follower relationship, we further explore conditions under which an individual may deliberately prefer to follow an ambitious leader with divergent interests rather than a benevolent one with congruent preferences. Thus by virtue of having followers, both `good' and `bad' leaders may be effective at bringing about change.
    Keywords: Leadership, Followers, Change
    JEL: P41 D72 D78 D83 O43
    Date: 2007–06
  7. By: Rui Albuquerque; Neng Wang
    Abstract: The separation of ownership and control allows controlling shareholders to pursue private benefits. We develop an analytically tractable dynamic stochastic general equilibrium model to study asset pricing and welfare implications of imperfect investor protection. Consistent with empirical evidence, the model predicts that countries with weaker investor protection have more incentives to overinvest, lower Tobin's q, higher return volatility, larger risk premium, and higher interest rate. Calibrating the model to the Korean economy reveals that perfecting investor protection increases the stock market's value by 22 percent, a gain for which outside shareholders are willing to pay 11 percent of their capital stock.
    JEL: E44 G1 G3 O4
    Date: 2007–07
  8. By: Huisman, R. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: It is well known that day-ahead prices in power markets exhibit spikes. These spikes are sudden increases in the day-ahead price that occur because power production is not flexible enough to respond to demand and/or supply shocks in the short term. This paper focuses on how temperature influences the probability on a spike. The paper shows that the difference between the actual and expected temperature significantly influences the probability on a spike and that the impact of temperature on spike probability depends on the season.
    Keywords: Day-ahead power price;Power production;Temperature;Spike probability;
    Date: 2007–06–08
  9. By: John Donaldson; Rajnish Mehra
    Abstract: This essay reviews the family of models that seek to provide aggregate risk based explanations for the empirically observed equity premium. Theories based on non-expected utility preference structures, limited financial market participation, model uncertainty and the small probability of enormous losses are detailed. We impose the additional requirements that candidate models yield consistent inter temporal portfolio choice and that a representative agent can be constructed which is independent of the underlying heterogeneous economy's initial wealth distribution. While many models are able to replicate a wide variety of financial statistics including the premium, few satisfy these latter criteria as well.
    JEL: D10 D11 D50 D52 D90 D91 E30 G00 G11 G12
    Date: 2007–07
  10. By: Riel, C.B.M. van; Berens, G.; Dijkstra, M. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: In recent years it has become increasingly important for companies to ensure strategically aligned behaviour, i.e., employee actions that are consistent with the company?s strategy. This study provides insights into the way companies can stimulate such behaviour through motivating and informing their employees, and by providing them with the necessary capabilities. The results of surveys conducted in three organisations suggest that motivating, informing, and providing the necessary capabilities are essential conditions for strategically aligned behaviour to occur; however, this only holds when a company has not sufficiently engaged in one or more of these practices in the past. For example, in the case that employees have already been sufficiently informed about the company?s strategy, it would be of greater benefit to then reduce efforts to inform them and increase efforts to motivate and develop capabilities.
    Keywords: Capability development;Employee behaviour;Information;Motivation;Strategic alignment;
    Date: 2007–05–10
  11. By: Shihe Fu (Southwestern University of Finance and Economics (China)); Stephen L. Ross (University of Connecticut)
    Abstract: The correlation between wage premia and concentrations of firm activity may arise due to agglomeration economies or workers sorting by unobserved productivity. A worker's residential location is used as a proxy for their unobservable productivity attributes in order to test whether estimated work location wage premia are robust to the inclusion of these controls. Further, in a locational equilibrium, identical workers must receive equivalent compensation so that after controlling for residential location (housing prices) and commutes workers must be paid the same wages and only wage premia arising from unobserved productivity differences should remain unexplained. The models in this paper are estimated using a sample of male workers residing in 33 large metropolitan areas drawn from the 5% Public Use Microdata Sample (PUMS) from the 2000 U.S. Decennial Census. We find that wages are higher when an individual works in a location that has more workers or a greater density of workers. These agglomeration effects are robust to the inclusion of residential location controls and disappear with the inclusion of commute time suggesting that the effects are not caused by unobserved differences in worker productivity. Extended model specifications suggest that wages increase with the education level of nearby workers and the concentration of workers in an individual's own industry or occupation.
    Keywords: Agglomeration, Wages, Sorting, Locational Equilibrium, Human Capital
    JEL: R13 R30 J24 J31
    Date: 2007–06
  12. By: Gary B. Gorton; Fumio Hayashi; K. Geert Rouwenhorst
    Abstract: Commodity futures risk premiums vary across commodities and over time depending on the level of physical inventories, as predicted by the Theory of Storage. Using a comprehensive dataset on 31 commodity futures and physical inventories between 1969 and 2006, we show that the convenience yield is a decreasing, non-linear relationship of inventories. Price measures, such as the futures basis, prior futures returns, and spot returns reflect the state of inventories and are informative about commodity futures risk premiums. The excess returns to Spot and Futures Momentum and Backwardation strategies stem in part from the selection of commodities when inventories are low. Positions of futures markets participants are correlated with prices and inventory signals, but we reject the Keynesian "hedging pressure" hypothesis that these positions are an important determinant of risk premiums.
    JEL: G1 G11 G12
    Date: 2007–07
  13. By: Fersterer, Josef; Pischke, Jörn-Steffen; Winter-Ebmer, Rudolf
    Abstract: Little is known about the payoffs to apprenticeship training in the German speaking countries for the participants. OLS estimates suggest that the returns are similar to those of other types of schooling. However, there is a lot of heterogeneity in the types of apprenticeships offered, and institutional descriptions suggest that there might be an important element of selection in who obtains an apprenticeship, and what type. In order to overcome the resulting ability bias we estimate returns to apprenticeship training for apprentices in failed firms in Austria. When a firm fails, current apprentices cannot complete their training in this firm. Because apprentices will be at different stages in their apprenticeship at that time, the failure of a firm will manipulate the length of the apprenticeship period completed for some apprentices. The time to the firm failure therefore serves as an instrument for the length of the apprenticeship completed both at the original firm and at other firms. We find instrumental variables returns which are similar or larger than the OLS returns in our sample, indicating relatively little selection.
    Keywords: ability bias; firm-based training; Human capital; returns to schooling
    JEL: J24 J31
    Date: 2007–07
  14. By: Jianjun Miao; Neng Wang
    Abstract: Entrepreneurs often face undiversifiable idiosyncratic risks from their business investments. We extend the standard real options approach to an incomplete markets environment and analyze the joint decisions of business investments, consumption/savings, and portfolio selection. For a lump-sum investment payoff and an agent with a sufficiently strong precautionary savings motive, an increase in volatility can accelerate investment, contrary to the standard real options analysis. When the agent can trade the market portfolio to partially hedge against investment risk, the systematic volatility is compensated via the standard CAPM argument, and the idiosyncratic volatility generates a private equity premium. Finally, when the investment payoff is a series of flows, the agent's idiosyncratic risk exposure alters both the implied option value and the implied project value, causing a reversal of the results in the lump-sum payoff case.
    JEL: E2 G11 G31
    Date: 2007–07
  15. By: Andrew Postlewaite (Department of Economics, University of Pennsylvania); Larry Samuelson (Department of Economics, University of Wisconsin and Yale University); Dan Silverman (Department of Economics, University of Michigan)
    Abstract: We examine an economy in which the cost of consuming some goods can be reduced by making commitments that reduce flexibility. We show that such consumption commitments can induce consumers with risk-neutral underlying utility functions to be risk averse over small variations in income, but sometimes to seek risk over large variations. As a result, optimal employment contracts will smooth wages conditional on being employed, but may incorporate a possibility of unemployment.
    Keywords: Unemployment, consumption commitments, optimal contracts
    JEL: D21 D31 D81
    Date: 2006–12–07
  16. By: Fidrmuc, J.P.; Roosenboom, P.; Dijk, D.J.C. van (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: In recent years, the going private market experienced a considerable boom in size and also became more interesting for private equity investors. This paper shows that the higher involvement of private equity investors affects the going private market as these investors approach firms with different characteristics relative to the traditional management buy-outs. Our results on a sample of 212 UK going private transactions completed in the period 1997-2003 suggest that private equity backed deals differ from management sponsored deals without any backing of private equity investors in four ways. First, even though both types of deals suffer from market undervaluation, the mis-pricing is larger for management sponsored deals. Second, it is only management sponsored deals that suffer low financial visibility as their stock?s analyst coverage and frequency of trading are low. Third, Jensen?s free cash flow hypothesis seems not to apply to private equity backed deals as they have shortage of cash, low debt levels, and pay high dividends. Finally, the two types of deals differ in ownership structure. Private equity backed deals seem to have higher ownership by financial institutions and their ownership is less concentrated.
    Keywords: Going Private Transactions;Corporate Governance;Private Equity;
    Date: 2007–05–10
  17. By: Kaufmann, Da niel; Kraay, Aart; Mastruzzi, Massimo
    Abstract: This paper reports on the latest update of the Worldwide Governance Indicators (WGI) research project covering 212 countries and territories and measuring six dimensions of governance between 1996 and 2006: voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law, and control of corruption. This latest set of aggregate indicators are based on hundreds of specific and disaggregated individual variables measuring various dimensions of governance taken from 33 data sources provided by 30 different organizations. The data reflect the views on governance of public sector, private sector, and nongovernmental organization experts, as well as thousands of citizen and firm survey respondents worldwide. The paper also explicitly reports the margins of error accompanying each country estimate. These reflect the inherent difficulties in measuring governance using any kind of data. It finds that even after taking margins of error into account, the WGI permit meaningful cross-country comparisons, as well as monitoring progress over time. In less than a decade, a substantial number of countries exhibit statistically significant improvements in at least one dimension of governance, while other countries exhibit deterioration in some dimensions. The decade-long aggregate indicators, together with the disaggregated individual indicators, are available in a newly-redesigned website at
    Keywords: Governance Indicators,Statistical & Mathematical Sciences,National Govern ance,Economic Policy, Institutions and Governance,Science Education
    Date: 2007–07–01
  18. By: Hardy-Vallee, Benoit
    Abstract: This article introduces and discusses from a philosophical point of view the nascent field of neuroeconomics, which is the study of neural mechanisms involved in decision-making and their economic significance. Following a survey of the ways in which decision-making is usually construed in philosophy, economics and psychology, I review many important findings in neuroeconomics to show that they suggest a revised picture of decision-making and ourselves as choosing agents. Finally, I outline a neuroeconomic account of irrationality.
    Keywords: neuroeconomics; decision-making; rationality; ultimatum; philosophy; psychology
    JEL: B50 D01
    Date: 2007–07

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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