nep-bec New Economics Papers
on Business Economics
Issue of 2007‒09‒24
eighteen papers chosen by
Christian Calmes
University of Quebec in Ottawa

  1. Performance Pay, Sorting, and Outsourcing By Fred Henneberger; Alfonso Sousa-Poza; Alexandre Ziegler
  2. Individual and Job-Based Determinants of Performance Appraisal: Evidence from Germany By Christian Grund; Dirk Sliwka
  3. Retained Earnings Dynamic, Internal Promotions and Walrasian Equilibrium By Beker, Pablo F
  4. What Is the Value of Entrepreneurship? A Review of Recent Research By C. Mirjam van Praag; Peter H. Versloot
  5. Limited Commitment Models of the Labour Market By Jonathan P Thomas; Tim Worrall
  6. Legitimacy of Control By Wendelin Schnedler; Radovan Vadovic
  7. Welfare Enhancing Mergers under Product Differentiation By Tina Kao & Flavio Menezes
  8. Starting Wages Respond to Employer’s Risk By Peter Berkhout; Joop Hartog
  9. Why Managers Hold Shares of Their Firms: An Empirical Analysis By Ulf von Lilienfeld-Toal; Stefan Ruenzi
  10. Capital Market and Business Cycle Volatility By Tharavanij, Piyapas
  11. Equal Sharing Rules in Partnerships By Bartling, Björn; von Siemens, Ferdinand
  12. Do Mergers of Potentially Dominant Firms foster Innovation? An Empirical Analysis for the Manufacturing Sector By Elena Cefis; Anna Sabidussi; Hans Schenk
  13. Task Scheduling and Moral Hazard By Mylovanov, Tymofiy; Schmitz, Patrick W.
  14. Market Selection and Payout Policy Under Majority Rule By Beker, Pablo F
  15. The Environmental Performance of Firms: The Role of Foreign Ownership, Training, and Experience By Matthew A Cole; Robert R J Elliott; Eric Strobl
  16. Capital Market, Severity of Business Cycle, and Probability of Economic Downturn By Tharavanij, Piyapas
  17. Contracts as Reference Points By Oliver Hart; John Moore
  18. The cyclicality of separation and job finding rates By Shigeru Fujita; Garey Ramey

  1. By: Fred Henneberger (University of St. Gallen); Alfonso Sousa-Poza (University of Hohenheim and IZA); Alexandre Ziegler (University of Lausanne)
    Abstract: Implementing performance pay requires that workers' output be measured. When measurement costs differ among firms, those with a measurement cost advantage choose to implement performance pay. They attract the best workers, and both the level and variability of compensation are higher at these firms than at salary firms. Workers may select firms with different compensation methods at different stages of their work life. Productive workers start at performance pay firms and switch to salary firms once their productivity is revealed. The magnitude of the resulting worker flows depends on the payoff from effort and is therefore related to the age profile of the wage differential between performance pay and salary firms. Advantages in measuring worker productivity constitute a plausible explanation for the emergence of specialized business related service (BRS) firms. Accordingly, BRS firms should make a much wider use of performance pay and employ better workers than diversified corporations. Data from the 1998 Swiss Wage Structure Survey confirm the model's predictions both for the economy at large and for BRS firms.
    Keywords: asymmetric information, sorting, incentives, productivity, outsourcing
    JEL: J22 J29 J50
    Date: 2007–08
  2. By: Christian Grund (University of Wuerzburg and IZA); Dirk Sliwka (University of Cologne and IZA)
    Abstract: We investigate the use of performance appraisal (PA) in German Firms. First, we derive hypotheses on individual and job based determinants of PA usage. Based on a representative German data set on individual employees, we test these hypotheses and also explore the impact of PA on performance pay and further career prospects. The results include that PA is positively linked to an individual’s willingness to take risks. The performance of older employees and woman is evaluated less often. Furthermore, larger firms evaluate the performance of their employees more. We find evidence for a nonmonotonic relation between the hierarchical level and usage of performance appraisal: The performance of employees with very high or very low responsibilities is assessed less often.
    Keywords: performance appraisal, performance evaluation, GSOEP
    JEL: J33 M52
    Date: 2007–08
  3. By: Beker, Pablo F (Department of Economics, University of Warwick)
    Abstract: In the early stages of the process of industry evolution, firms are financially constrained and might pay different wages to workers according to their expectations about the prospects for advancement offered by each firm’s job ladder. This paper argues that, nevertheless, if the output market is competitive, the positive predictions of the perfectly competitive model are still a good description of the long run outcome. If firms maximize the discounted sum of constrained profits, financing expenditure out of retained earnings, profits are driven down to zero as the perfectly competitive model predicts. Ex ante identical firms may follow different growth paths in which workers work for a lower entry-wage in firms expected to grow more. In the steady state, however, workers performing the same job, in ex-ante identical firms, receive the same wage. I explain when the long run outcome is efficient, when it is not, and why firms that produce inefficiently might drive the efficient ones out of the market even when the steady state has the positive properties of aWalrasian equilibrium. To some extent, it is not technological efficiency but workers’ self-fulfilling expectations about their prospects for advancement within the firm that explains which firms have lower unit costs, grow more, and dominate the market.
    Keywords: Industry Evolution ; Market Selection Hypothesis ; Production under Incomplete Markets ; Retained Earnings Dynamic ; Self-Fulfilling Expectations ; Internal Labor Markets
    JEL: D21 D52 D61 D84 D92 J41
    Date: 2007
  4. By: C. Mirjam van Praag (University of Amsterdam, Tinbergen Institute, Max Planck Institute of Economics Jena and IZA); Peter H. Versloot (University of Amsterdam and Tinbergen Institute)
    Abstract: This paper examines to what extent recent empirical evidence can collectively and systematically substantiate the claim that entrepreneurship has important economic value. Hence, a systematic review is provided that answers the question: What is the contribution of entrepreneurs to the economy in comparison to non-entrepreneurs? We study the relative contribution of entrepreneurs to the economy based on four measures that have most widely been studied empirically. Hence, we answer the question: What is the contribution of entrepreneurs to (i) employment generation and dynamics, (ii) innovation, and (iii) productivity and growth, relative to the contributions of the entrepreneurs’ counterparts, i.e. the ‘control group’? A fourth type of contribution studied is the role of entrepreneurship in increasing individuals’ utility levels. Based on 57 recent studies of high quality that contain 87 relevant separate analyses, we conclude that entrepreneurs have a very important - but specific - function in the economy. They engender relatively much employment creation, productivity growth and produce and commercialize high quality innovations. They are more satisfied than employees. More importantly, recent studies show that entrepreneurial firms produce important spillovers that affect regional employment growth rates of all companies in the region in the long run. However, the counterparts cannot be missed either as they account for a relatively high value of GDP, a less volatile and more secure labor market, higher paid jobs and a greater number of innovations and they have a more active role in the adoption of innovations.
    Keywords: entrepreneur, entrepreneurship, self-employment, productivity, economic development, growth, employment, innovation, patents, R&D, utility, remuneration, income
    JEL: D24 D31 E23 E24 J21 J28 J31 L26 M13
    Date: 2007–08
  5. By: Jonathan P Thomas (Economics, University of Edinburgh); Tim Worrall (Economics, Keele University)
    Abstract: We present an overview of models of long-term self-enforcing labour contracts in which risk sharing is the dominant motive for contractual solutions. A base model is developed which is sufficiently general to encompass the two-agent problem central to most of the literature, including variable hours. We consider two-sided limited commitment and look at its implications for aggregate labour market variables. We consider the implications for empirical testing and the available empirical evidence. We also consider the one-sided limited commitment problem for which there exists a considerable amount of empirical support.
    Keywords: Labour contracts, self-enforcing contracts, business cycle, unemployment.
    JEL: E32 J41
    Date: 2007–09
  6. By: Wendelin Schnedler (University of Heidelberg and IZA); Radovan Vadovic (ITAM, Mexico City)
    Abstract: What is the motivational effect of imposing a minimum effort requirement? Agents may no longer exert voluntary effort but merely meet the requirement. Here, we examine how such hidden costs of control change when control is considered legitimate. We study a principalagent model where control signals the expectations of the principal and the agent meets these expectations because he is guilt-averse. We conjecture that control is more likely to be considered legitimate (i) if it is not exclusively aimed at a specific agent or (ii) if it protects the endowment of the principal. Given the conjecture, the model predicts that hidden costs are lower when one of the two conditions is met. We experimentally test these predictions and find them confirmed.
    Keywords: moral hazard, intrinsic motivation, guilt aversion
    JEL: C7 C9 M5
    Date: 2007–08
  7. By: Tina Kao & Flavio Menezes (School of Economics, The University of Queensland)
    Abstract: We follow the duopoly framework with differentiated products as in Singh and Vives (1984) and Zanchettin (2006) and examine the welfare effects of a merger between two asymmetric firms. We find that for quantity competition, the merger increases total welfare if the cost asymmetry falls into a specific range. Furthermore, this parameter range widens if the products are closer substitutes. On the other hand, mergers are never welfare enhancing in this setting when firms compete in prices.
  8. By: Peter Berkhout (SEO Amsterdam); Joop Hartog (University of Amsterdam and IZA)
    Abstract: Firms hiring fresh graduates face uncertainty on the future productivity of workers. Intuitively, one expects starting wages to reflect this. Formal analysis supports the intuition. We use the dispersion of exam grades within a field of education as an indicator of the heterogeneity that employers face. We find solid evidence that starting wages are lower if the variance of exam grades is higher and that starting wages are lower if the skew is higher: employers shift quality risk to new hires, but pay for the opportunity to catch the really good workers.
    Keywords: wages, risk, ability
    JEL: J31
    Date: 2007–08
  9. By: Ulf von Lilienfeld-Toal; Stefan Ruenzi
    Abstract: We examine the relationship between CEO ownership and stock market performance. Firms in which the CEO voluntarily holds a considerable share of outstanding stocks outperform the market by more than 10% p.a. after controlling for traditional risk factors. The effect is most pronounced in firms that are characterized by large managerial discretion of the CEO. The abnormal returns we document are one potential explanation why so many CEOs hold a large fraction of their own company’s stocks. We also examine several potential explanations why the existence of an owner CEO is not fully reflected in prices but leads to abnormal returns.
    Keywords: CEO-Ownership, Asset Pricing with large shareholders.
    JEL: G12 G30
    Date: 2007–09
  10. By: Tharavanij, Piyapas
    Abstract: This paper investigates cross-country evidence on how capital market affects business cycle volatility. In contrast to the large and growing literature on the impact of finance and growth, empirical work on the relationship between finance and volatility has been relatively scarce. Theoretically, more developed capital market should lead to lower macroeconomic volatility. The major finding is that countries with more developed capital market have smoother economic fluctuations. Results are generated using panel estimation technique with panel data from 44 countries covering the years 1975 through 2004.
    Keywords: business cycle; capital market; financial development; financial structure; panel data; market-based; bank-based
    JEL: G00 G21 E44 E32 C33
    Date: 2007–09–09
  11. By: Bartling, Björn; von Siemens, Ferdinand
    Abstract: Partnerships are the prevalent organizational form in many industries. Most partnerships share profits equally among the partners. Following Kandel and Lazear (1992) it is often argued that ``peer pressure'' mitigates the arising free-rider problem. This line of reasoning takes the equal sharing rule as exogenously given. The purpose of our paper is to show that with inequity averse partners - a behavioral assumption akin to peer pressure - the equal sharing rule arises endogenously as an optimal solution to the incentive problem in a partnership.
    Keywords: equal sharing rule; partnerships; incentives; peer pressure; inequity aversion
    JEL: D20 D86 J54
    Date: 2007–09
  12. By: Elena Cefis; Anna Sabidussi; Hans Schenk
    Abstract: We investigate the effects of M&A on innovation in the specific context of potential or realized market dominance. Authorities are challenged by balancing both detrimental and beneficial effects of mergers on innovation, especially when a merger threatens to result in market dominance, while firms would wish to uncover all the potential benefits arising from M&A. The effects of M&As on innovation have been tested on a panel dataset, constructed from the Dutch Community Innovation Survey and the Dutch Business Register, including around 1000 manufacturing companies. We have adopted a comprehensive approach, taking into consideration three dimensions of innovation: innovation inputs, innovation outputs and efficiency. The results show that M&As performed in the previous 3-5 years have a positive and significant effect on innovation except R&D expenses and innovation efficiencies. The results also suggest that technological regimes are critical to understanding the patterns of innovation.
    Keywords: Mergers and Acquisitions, Innovation, Market Dominance
    JEL: C14 D21 L11 L25
    Date: 2007–09
  13. By: Mylovanov, Tymofiy; Schmitz, Patrick W.
    Abstract: We study a two-period moral hazard problem with risk-neutral and wealth-constrained agents and three identical tasks. We show that the allocation of tasks over time is important if there is a capacity constraint on the number of tasks that can be performed in one period. We characterize the optimal schedule of tasks over time and the optimal assignment of tasks to agents conditional on the outcomes of previous tasks. In particular, we show that delaying tasks is optimal if and only if the effect of an agent's effort on the probability of success is relatively low.
    Keywords: hidden actions; Job design; limited liability; task assignment
    JEL: D86 L23 M54
    Date: 2007–09
  14. By: Beker, Pablo F (Department of Economics, University of Warwick)
    Abstract: The purpose of this paper is to explain how the choice between distributing cash through dividends or shares repurchases affects the firm’s ability to raise capital in the financial market. I assume investors have quadratic preferences over wealth but different prior beliefs about the likelihood a distribution takes place. At date zero agents purchase shares given their expectation about the firm’s payout method. At date 1 the firm announces whether the payout takes place that period. As in Brennan and Thakor [3], investors with different shareholdings have different incentives to gather information and, therefore, heterogeneous preferences about payout methods at date 1. I assume the firm adopts the payout method preferred by the majority of shareholders at date 1 under the one share/one vote rule. At date 2 the firm is liquidated and the remaining output is distributed among its shareholders. If at date zero agents disagree but not too much on the probability a distribution takes place, I show that a firm expected to pay dividends raises strictly more financial capital than an otherwise identical firm which is expected to repurchase shares. Therefore, a larger fraction of cash is distributed as dividend than through repurchases. One concludes that even in the presence of a small tax disadvantage financial markets favor dividend paying firms.
    Keywords: Market Selection Hypothesis ; Payout Policy ; Production under Incomplete Markets
    JEL: G35 D52 D84
    Date: 2007
  15. By: Matthew A Cole; Robert R J Elliott; Eric Strobl
    Abstract: In this paper we extend the debate on the environmental implications of foreign direct investment in developing countries by examining a new mechanism through which foreign influence can affect the environmental performance of firms. We focus on the extent to which key workers who have had previous training or experience in a foreign owned firm transfer and utilise their knowledge gained to the benefit of the local environment. To this end we use detailed firm-level data on manufacturing firms in Ghana. Our econometric results sugggest that the foreign training of a firm's decision maker does reduce fuel use, particularly so in foreign owned firms. Foreign ownership per se does not influence fuel use or total energy use but is found to increase electricity use, perhaps the cleanest form of energy used by Ghanaian firms.
    Keywords: Environment, Spillovers, FOreign Direct Investment
    JEL: Q56 Q52 F21 F23
    Date: 2007–08
  16. By: Tharavanij, Piyapas
    Abstract: This paper investigates the effect of capital market development on severity of economic contraction, and probability of economic downturn. The major finding is that countries with deeper capital market would face less severe business cycle output contraction, and lower chance of an economic downturn. The results hold even after controlling for other relevant variables, country specific effects, and state dependence. However, marginal effects are relatively small. Results are generated using panel estimation technique with panel data from 44 countries covering the years 1975 through 2004.
    Keywords: business cycle; capital market; financial development; financial structure; panel data; market-based; bank-based
    JEL: C34 G00 G21 E44 E32 C35 C33
    Date: 2007–09–09
  17. By: Oliver Hart; John Moore
    Abstract: We argue that a contract provides a reference point for a trading relationship: more precisely, for parties’ feelings of entitlement. A party’s ex post performance depends on whether he gets what he is entitled to relative to outcomes permitted by the contract. A party who is shortchanged shades on performance. A flexible contract allows parties to adjust their outcome to uncertainty, but causes inefficient shading. Our analysis provides a basis for long-term contracts in the absence of noncontractible investments, and elucidates why “employment” contracts, which fix wage in advance and allow the employer to choose the task, can be optimal.
  18. By: Shigeru Fujita; Garey Ramey
    Abstract: This paper uses CPS gross flow data, adjusted for margin error and time aggregation error, to analyze the business cycle dynamics of separation and job finding rates and to quantify their contributions to overall unemployment variability. Cyclical changes in the separation rate lead those of unemployment, while the job finding rate and unemployment move contemporaneously. Fluctuations in the separation rate explain between 40 and 50 percent of fluctuations in unemployment, depending on how the data are detrended. The authors results suggest an important role for the separation rate in explaining the cyclical behavior of unemployment.
    Keywords: Job hunting ; Unemployment
    Date: 2007

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