nep-bec New Economics Papers
on Business Economics
Issue of 2007‒08‒27
nineteen papers chosen by
Christian Calmes
University of Quebec in Ottawa

  1. Does profit sharing increase training by reducing turnover? By John S Heywood; Colin Green
  2. Merger Policy, Entry, and Entrepreneurship By Robin Mason; Helen Weeds
  3. Bounded Rationality and Incomplete Contracts By TIROLE, Jean
  4. Executive compensation: a new view from a long-term perspective, 1936-2005 By Carola Frydman; Raven E. Saks
  5. Employment contracts and effort: why do temporary workers take less absence? By Steve Bradley; Colin Green; Gareth Leeves
  6. A New Look at Offshoring and Inequality: Specialization Versus Competition By Ekholm, Karolina; Ulltveit-Moe, Karen-Helene
  7. Behavioral industrial organization, firm strategy, and consumer economics By Azar, Ofer H.
  8. Cyclical Behavior of Debt and Equity Using a Panel of Canadian Firms By Francis Covas; Wouter J. Den Haan
  9. Contractual Enforcement and Strategic Incompleteness By DESSI, Roberta
  10. Exploiting Sequential Learning to Estimate Establishment-Level Productivity Dynamics and Decision Rules By David Greenstreet
  11. Not Dutch Disease, It's China Syndrome By Macdonald, Ryan
  12. Temptation and Self-Control: Some Evidence and Applications By Kevin X.D. Huang; Zheng Liu; John Q. Zhu
  13. Innovation, firm dynamics, and international trade By Andrew Atkeson; Ariel Burstein
  14. The Kinked Demand Curve with a Conjectural Hitch - A Micro Explanation of Stagflation and Job-less Recovery By Michael Bradfield
  15. Entry Strategies, Welfare Analysis and Firms’ Behaviors By Wang Xun; Luo Ting
  16. Entrepreneurship and firm formation across countries By Quesada, Juan Manuel; Guillen, Mauro F.; Amit, Raphael; Klapper, Leora
  17. On The Fastest Vickrey Algorithm By Grigorieva Elena; Herings P. Jean-Jacques; Müller Rudolf; Vermeulen Dries
  18. Overconfidence and Consumption over the Life Cycle By Frank Caliendo; Kevin X.D. Huang
  19. Labor reallocation over the business cycle: new evidence from internal migration By Raven E. Saks; Abigail Wozniak

  1. By: John S Heywood; Colin Green
    Abstract: We test the theoretical prediction that profit sharing reduces worker separations and by doing so increases the incidence of training. Using individual level UK data, we confirm that profit sharing is a robust determinant of lower separation rates and of greater training incidence. Critically, we cannot confirm the predicted link between separations and training. Instead, the evidence supports alternative theories suggesting a direct link between profit sharing and training. Our results suggest that profit sharing changes employer-worker relations in a way that leads to greater formal and informal investment in worker skills but that this is independent of its influence on reducing separations.
    Keywords: Profit shares, Performance pay, training, turnover
    Date: 2007
  2. By: Robin Mason; Helen Weeds
    Abstract: We assess the impact of merger policy on entry and entrepreneurship. Facing uncertainty about its prospects and foreseeing that it may wish to quit should profitability prove poor, a rational entrant considers possible exit routes. Horizontal merger reduces competition subsequently, lowering welfare in the short run, but also provides a valuable exit route. By facilitating exit and thus raising the value of entry, more lenient merger policy may stimulate entry sufficiently that welfare is increased overall. We calculate the optimal merger policy in the form of a low, but positive, profitability threshold below which a merger is permitted despite its adverse impact on post-merger competition. This may be viewed as an extension of the "failing firm defence" to include ailing, low profitability firms as well as imminently failing ones. The implications of strategic firm behaviour for the optimal policy are examined, and merger policy is compared with an entry subsidy.
    Date: 2007–08–17
  3. By: TIROLE, Jean
    JEL: D23 D82 L22 D86
    Date: 2007–05
  4. By: Carola Frydman; Raven E. Saks
    Abstract: We analyze the long-run trends in executive compensation using a new panel dataset of top executives in large firms from 1936 to 2005. In sharp contrast to the well-known steep upward trajectory of pay of the past 30 years, the median real value of compensation was remarkably flat from the late 1940s to the mid-1970s, highlighting a weak relationship between compensation and aggregate firm size. While this correlation has changed considerably over the century, the cross-sectional relationship between pay and firm size has remained stable. Another surprising finding is that the sensitivity of changes in an executive's wealth to firm performance was not inconsequentially small for most of our sample period. Thus, recent years were not the first time when compensation arrangements served to align managerial incentives with those of shareholders. Overall, these trends pose a challenge to several common explanations for the recent surge in executive pay.
    Date: 2007
  5. By: Steve Bradley; Colin Green; Gareth Leeves
    Abstract: There is growing evidence that the nature of employment contracts, in particular the degree of employment protection, affects worker effort. Using personnel data drawn from a large public sector labour force, we investigate whether, and through which channels, temporary employment contracts influence worker absence. Specifically, we focus on the role of risk of job loss and the availability of opportunities for conversion to permanent contracts. We demonstrate that a large proportion (68% to 69%) of the temporary-to-permanent absence differential can be explained by observable and unobservable individual and workplace characteristics. However, some contract specific effect on absenteeism cannot be accounted for. Risk of job loss and promotion opportunities have significant and separate effects on temporary workers' absence.
    Keywords: Absenteeism, Effort, Temporary Contracts
    Date: 2007
  6. By: Ekholm, Karolina; Ulltveit-Moe, Karen-Helene
    Abstract: The received wisdom is that a rising skill premium accompanied by a simultaneous rise in skill intensity characterises relative wages and the employment structure in US manufacturing. However, we present evidence to show that recent developments in the USA do not conform to this pattern, and that the evolution of relative wages over the last three decades has in fact been bell-shaped. We argue that this bell-shaped evolution of wage inequality can be linked to globalization and a rise in offshoring. To analyse the relationship between globalization, offshoring and relative wages, we have developed a general equilibrium model of trade and offshoring. This reveals that globalization and offshoring have two opposing effects on relative wages: greater vertical specialization increases wage inequality, while greater international competition increases wage equality. The result is a bell-shaped relationship between wage inequality and offshoring when globalization is driven by falling trade costs for goods. However, it can also be seen that if the globalization process continues as a result of the reduced costs of fragmentation, a U-shaped relationship emerges. Consistent with recent observations, our analysis suggests that fears related to offshoring and inequality may prove unjustified in the short term although the long-term effects may be quite different.
    Keywords: globalization; offshoring; trade; wage inequality
    JEL: F12 F15 J31 O33
    Date: 2007–07
  7. By: Azar, Ofer H.
    Abstract: The field of behavioral economics is one of the fastest-growing fields in economics in recent years. Not long ago this was a small field, but over the last decade or so, the field gained more recognition, and today it seems clear that psychological motivations and biases affect economic behavior in many important ways. Insights from psychology were incorporated in several areas of economics. This paper offers a short review of the application of behavioral economics to industrial organization, which can be denoted “behavioral industrial organization,” and on the relationship between behavioral industrial organization, firm strategy, and consumer economics.
    Keywords: industrial organization; behavioral economics; strategy; firm strategy; business strategy; economic psychology; behavioral industrial organization; consumer behavior; consumer economics
    JEL: D40 L10 M20 A12 M30 D10
    Date: 2006
  8. By: Francis Covas; Wouter J. Den Haan
    Abstract: We document the cyclical behavior of debt, equity, and retained earnings for different firm categories using firm-level Canadian data. There is evidence of both procyclical equity and debt issuance for all firm categories but the timing differs. In particular, there is strong evidence that equity issuance increases in anticipation of an expansion. During this phase, some substitution between debt and equity takes place. After the expansion has reached its peak, equity issuance starts to decrease and during this phase there is strong evidence of procyclical debt issuance and some substitution out of equity seems to take place. Retained earnings is procyclical except for small firms.
    Keywords: Business fluctuations and cycles
    JEL: E32 G32
    Date: 2007
  9. By: DESSI, Roberta
    JEL: D82 G24 L22 D86
    Date: 2007–06
  10. By: David Greenstreet
    Abstract: This paper develops a sequential learning estimator of production functions and productivity dynamics for unbalanced establishment panels. Extending an idea from the literature on dynamic industry models, establishments are uncertain about their own idiosyncratic productivities and update productivity beliefs using information revealed by their production experience. The estimator relies on the structure of this iterative learning process and thereby avoids placing any restriction on establishment strategic behavior. Consequently, the estimator is suitable for comparative studies of the behavioral sources of technological change across all types of industry. Estimation of productivity dynamics and of behavioral decision rules are separated into recursive stages. Using sequential learning estimates of productivity beliefs from the first stage, decision rules for exit, investment, and innovation effort can be estimated in a second stage. A test application with four Chilean industries confirms that the estimator produces plausible estimates with small standard errors. Decision rule estimates show that productivity beliefs affect investment and exit hazards in the expected direction.
    Keywords: Microeconomic Productivity Dynamics, Unbalanced Panels, Sequential Learning, Exit Hazard, Investment Rates, Chilean Manufacturing.
    JEL: D24 L25 C23 D83 L60
    Date: 2007
  11. By: Macdonald, Ryan
    Abstract: This paper empirically investigates how the Canadian economy has evolved following the rise in commodity prices and appreciation of the Canadian dollar that began in 2003. The adjustment in the manufacturing industry has garnered the greatest attention because it has borne the brunt of job losses. However, the adjustment of the manufacturing industry has not been straightforward. Rather, a complex reallocation has been taking place within manufacturing that has been predominantly due to the integration of emerging nations into the global economy. The increased commodity prices and falling manufactured prices caused by this integration have affected durable and non-durable manufacturing industries differently. Non-durable manufacturers have tended to see their competitiveness eroded and their output has tended to fall. Durable manufacturers, on the other hand, have increased output in response to the resource boom and increased demand in general. The result has been stable manufacturing output overall, accompanied by a re-orientation of manufacturing output away from non-durables and toward durables. The appreciated dollar and higher commodity prices have also led to a more widespread industrial reallocation in Canada. The higher commodity prices have started a resource boom, particularly in Alberta. The boom has led to rising resource industry employment, while manufacturing employment declined, and to rising service-sector employment. It has contributed to inter-provincial migration, and has greatly increased the purchasing power of Canadian incomes as terms of trade have improved.
    Keywords: International trade, Labour, Manufacturing,
    Date: 2007–08–16
  12. By: Kevin X.D. Huang (Department of Economics, Vanderbilt University); Zheng Liu (Department of Economics, Emory University); John Q. Zhu (Department of Economics, Emory University)
    Abstract: This paper studies the empirical relevance of temptation and self-control using household-level data from the Consumer Expenditure Survey. We construct an infinite-horizon consumption-savings model that allows, but does not require, temptation and self-control in preferences. To distinguish temptation preferences from others, we exploit individual-level heterogeneities in our data set, and we rely on an implication of the theory that a more tempted individual should be more likely to hold commitment assets. In the presence of temptation, the cross-sectional distribution of the wealth-consumption ratio, in addition to that of consumption growth, becomes a determinant of the asset-pricing kernel, and the importance of this additional pricing factor depends on the strength of temptation. The empirical estimates that we obtain provide statistical evidence supporting the presence of temptation. Based on our estimates, we explore some quantitative implications of this class of preferences for capital accumulation in a neoclassical growth model and the welfare cost of the business cycle.
    Keywords: Temptation, self-control, limited participation, growth, welfare <br><br>
    JEL: D91 E21 G12
    Date: 2007–08
  13. By: Andrew Atkeson; Ariel Burstein
    Abstract: We present a general equilibrium model of the decisions of firms to innovate and to engage in international trade. We use the model to analyze the impact of a reduction in international trade costs on firms' process and product innovative activity. We first show analytically that if all firms export with equal intensity, then a reduction in international trade costs has no impact at all, in steady-state, on firms' investments in process innovation. We then show that if only a subset of firms export, a decline in marginal trade costs raises process innovation in exporting firms relative to that of non-exporting firms. This reallocation of process innovation reinforces existing patterns of comparative advantage, and leads to an amplified response of trade volumes and output over time. In a quantitative version of the model, we show that the increase in process innovation is largely offset by a decline in product innovation. We find that, even if process innovation is very elastic and leads to a large dynamic response of trade, output, consumption, and the firm size distribution, the dynamic welfare gains are very similar to those in a model with inelastic process innovation.
    JEL: F1 L11 L16 O3
    Date: 2007–08
  14. By: Michael Bradfield (Department of Economics, Dalhousie University)
    Keywords: kinked demand; stagflation; jobless recovery; competitiveness
    Date: 2007–04–23
  15. By: Wang Xun; Luo Ting
    Abstract: Before serving a new market, a multinational enterprise (MNE) has several entry strategies, which include foreign direct investment (FDI), joint venture (JV) and exclusive licensing (EL). Entry cost, market size of the host country, and the discount rate are the main determinants when the MNE chooses its optimal entry strategy. At a certain level of ownership share that the MNE holds, JV will generate the highest social welfare. If firms can choose between competition and collusion, at different levels of the discount rate under FDI and EL, collusive and cheating behavior will happen.
    Keywords: Entry strategies, Multinational enterprise, Welfare, Collusion, Cheating
    JEL: D21 F23 I31 L11 L13
    Date: 2007–06
  16. By: Quesada, Juan Manuel; Guillen, Mauro F.; Amit, Raphael; Klapper, Leora
    Abstract: The World Bank Group Entrepreneurship Survey measures entrepreneurial activity around the world. The database includes cross-country, time-series data on the number of total and newly registered businesses for 84 countries. This paper finds significant relationships between entrepren eurial activity and indicators of economic and financial development and growth, the quality of the legal and regulatory environment, and governance. The analysis shows the importance of electronic registration procedures to encourage greater business registration. These results can guide effective policymaking and deliver new capabilities for identifying the impact of reforms.
    Keywords: E-Business,Competitiveness and Competition Policy,Business in Development,Business Environment,Banks & Banking Reform
    Date: 2007–08–01
  17. By: Grigorieva Elena; Herings P. Jean-Jacques; Müller Rudolf; Vermeulen Dries (METEOR)
    Abstract: We investigate the algorithmic performance of Vickrey-Clarke-Groves mechanisms in the single item case. We provide a formal definition of a Vickrey algorithm for this framework, and give a number of examples of Vickrey algorithms. We consider three performance criteria, one corresponding to a Pareto criterion, one corresponding to worst case analysis, and a third criterion related to first-order stochastic dominance. We show that Pareto optimal Vickrey algorithms do not exist and that worst case analysis is of no use in discriminating between Vickrey algorithms. For the case of two bidders, we show the bisection auction to be optimal according to the third criterion. The bisection auction istherefore optimal in a very strong sense.
    Keywords: operations research and management science;
    Date: 2007
  18. By: Frank Caliendo (Department of Economics, Colorado State University); Kevin X.D. Huang (Department of Economics, Vanderbilt University)
    Abstract: Overconfidence is a widely documented phenomenon. In this paper, we study the implications of consumer overconfidence in a life-cycle consumption/saving model. Our main analytical result is a necessary and sufficient condition under which any degree of overconfidence concerning the mean return on savings can produce a hump in the work-life consumption profile. This condition is almost always met in the data. We show by simulations that overconfidence concerning the variance of the return can have little effect on the long-run average behavior of consumption over the life cycle, and that our basic conclusion is fairly robust with various realistic modifications to the baseline model. We interpret the general applicability of our analytical framework and discuss our numerical results in the light of aggregate consumption data.
    Keywords: Overconfidence, consumption, life cycle, time inconsistency, hump shape, elasticity of intertemporal substitution <br><br>
    JEL: D91 E21
    Date: 2007–08
  19. By: Raven E. Saks; Abigail Wozniak
    Abstract: This paper establishes the cyclical properties of a novel measure of worker reallocation: long-distance migration rates within the U.S. This internal migration offers a bird's eye view of worker reallocation in the economy, as long-distance migrants often change jobs or employment status. We examine gross migration patterns during the entire postwar era using historical reports of the Current Population Survey, and supplement this analysis with statistics compiled by the Internal Revenue Service on inter-state and inter-metropolitan population flows since 1975. We find that internal migration within the U.S. is strongly procyclical, even after accounting for variation in relative local economic conditions. This procyclicality is common across most major demographic and labor force groups, although it is strongest for younger workers. Our findings suggest that cyclical fluctuations in internal migration are driven by economy-wide changes in the net cost to worker reallocation with a major role for the job finding rate of young workers.
    Date: 2007

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