nep-bec New Economics Papers
on Business Economics
Issue of 2007‒09‒30
twenty-one papers chosen by
Christian Calmes
University of Quebec in Ottawa

  1. Does intra-firm bargaining matter for business cycle dynamics? By Krause, Michael; Lubik, Thomas A.
  2. Corporate Governance and Executive Pay: Evidence from a Recent Reform By Teodora Paligorova
  3. Does Corporate Governance Matter in Competitive Industries? By Giroud, Xavier; Mueller, Holger M
  4. Entrepreneurship, Wealth, Liquidity Constraints and Start-up Costs By Raquel Fonseca; Pierre-Carl Michaud; Thepthida Sopraseuth
  5. Winners and losers: A Micro-level Analysis of International Outsourcing and Wages By Geishecker, Ingo; Görg, Holger
  6. Volatile multinationals? Evidence from the labor demand of German firms By Buch, Claudia M.; Lipponer, Alexander
  7. Equal Sharing Rules in Partnerships By Björn Bartling; Ferdinand von Siemens
  8. Human capital formation, inequality, and competition for jobs By Daniel Mejía; Marc St-Pierre
  9. Paying for Performance with Altruistic or Motivated Providers By Siciliani, Luigi
  10. Job satisfaction and co-worker wages: Status or signal? By Andrew E. Clark; Nicolai Kristensen; Niels Westergård-Nielsen
  11. U.S. Labour Market Dynamics Revisited By Yashiv, Eran
  12. The Equilibrium Size of the Financial Sector By Thomas Philippon
  13. Cumulative Innovation, Sampling and the Hold-Up Problem By Pollock, Rufus
  14. Skill Biased Financial Development: Education, Wages and Occupations in the U.S. Financial Sector By Thomas Philippon; Ariell Reshef
  15. Persistence of Monopoly, Innovation, and R&D Spillovers: Static versus Dynamic Analysis By Eugen Kovac; Viatcheslav Vinogradov; Kresimir Zigic
  16. Voluntary Commitments Lead to Efficiency By Adam Tauman Kalai; Ehud Kalai; Dov Samet
  17. The Effect of Bank Competition on the Bank’s Incentive to Collateralize By Christa Hainz
  18. Welfare Effects of Housing Price Appreciation in an Economy With Binding Credit Constraints By Ashot Tsharakyan
  19. Housing IS the Business Cycle By Edward E. Leamer
  20. Antidumping Protection and Productivity of Domestic Firms : A firm level analysis By Josef, KONINGS; Hylke, VANDENBUSSCHE
  21. Did US Safeguards Affect Mark-ups of EU Steel Producers? By Vandenbussche, Hylke; Zarnic, Ziga

  1. By: Krause, Michael; Lubik, Thomas A.
    Abstract: We analyse the implications of intra-firm bargaining for business cycle dynamics in models with large firms and search frictions. Intra-firm bargaining implies a feedback effect from the marginal revenue product to wage setting which leads firms to over-hire in order to reduce workers’ bargaining position within the firm. The key to this effect are decreasing returns and/or downward-sloping demand. We show that equilibrium wages and employment are higher in steady state compared to a bargaining framework in which firms neglect this feedback. However, the effects of intra-firm bargaining on adjustment dynamics, volatility and comovement are negligible.
    Keywords: Strategic wage setting, search and matching frictions, business cycle propagation
    JEL: E24 E32 J64
    Date: 2007
  2. By: Teodora Paligorova
    Abstract: I examine the effect of the Sarbanes-Oxley Act of 2002 (SOX) on the structure of executive pay. Specifically, I consider the increased board oversight implied by SOX, which is expected to weaken the pay-for-performance link under traditional agency models. Alternatively, if entrenched CEOs managed to capture the pay process before SOX, stronger boards are expected to reduce CEO pay for luck and strengthen pay for performance. Using ExecuComp data, I find that the pay-for-performance link increases after 2002, while pay for luck decreases only in firms with weaker board oversight prior to 2002, that is, in firms more affected by SOX stipulations. In contrast, the pay-for-performance link changes little in firms with independent boards.
    Keywords: Corporate governance, The Sarbanes-Oxley Act, incentive pay.
    JEL: G38 J33 M52
    Date: 2007–07
  3. By: Giroud, Xavier; Mueller, Holger M
    Abstract: By reducing the fear of a hostile takeover, business combination (BC) laws weaken corporate governance and create more opportunity for managerial slack. Using the passage of BC laws as a source of identifying variation, we examine if such laws have a different effect on firms in competitive and non-competitive industries. We find that while firms in non-competitive industries experience a substantial drop in performance, firms in competitive industries experience virtually no effect. Though consistent with the general notion that competition mitigates managerial agency problems, our results are, in particular, supportive of the stronger view expressed by A. Alchian, M. Friedman, and G. Stigler that managerial slack cannot survive in competitive industries. When we examine which agency problem competition mitigates, we find evidence consistent with a “quiet-life” hypothesis. While capital expenditures are unaffected by the passage of BC laws, input costs, wages, and overhead costs all increase, and only so in non-competitive industries. We also conduct event studies around the dates of the first newspaper reports about the BC laws. We find that while firms in non-competitive industries experience a significant decline in their stock prices, the stock price impact is small and insignificant in competitive industries.
    Keywords: corporate governance; product market competition
    JEL: G34 L1
    Date: 2007–09
  4. By: Raquel Fonseca; Pierre-Carl Michaud; Thepthida Sopraseuth
    Abstract: The authors study the effects of liquidity constraints and start-up costs on the relationship between wealth and the fraction of entrepreneurs in an economy. They develop a dynamic occupational choice model with endogenous wealth and entry into entrepreneurship. The model predicts that, with liquidity constraints, the probability of entering entrepreneurship is an increasing function of individual wealth while the introduction of start-up costs tends to flatten this relationship. The theoretical predictions can be tested on cross-sectional data with exogenous variation in liquidity constraints (e.g. access to credit) and business start-up costs. They use three highly comparable micro datasets (SHARE, ELSA and HRS) providing harmonized data on wealth and work status in 9 countries that characterized by very different levels of start-up costs and liquidity constraints. Their results support their theoretical predictions. While higher liquidity constraints yield a positive relationship with wealth profile for the fraction of workers in entrepreneurship, start-up costs weaken this relationship by depressing the marginal value of being an entrepreneur as a function of wealth. Countries with high start-up costs such as Italy, Spain and France have flatter wealth gradients.
    Keywords: entrepreneurship, wealth, liquidity constraints, start-up costs
    JEL: E20 D31 J62
    Date: 2007–05
  5. By: Geishecker, Ingo; Görg, Holger
    Abstract: Our paper investigates the link between international outsourcing and wages utilizing a large household panel and combining it with industry level information on industries' outsourcing activities from input-output tables. This approach avoids problems such as aggregation bias, potential endogeneity bias and poor skill definitions that commonly hamper industry-level studies. We find that outsourcing has had a marked impact on wages. Applying two alternative skill classifications we find evidence that a one percentage point increase in outsourcing reduced the wage for workers in the lowest skill categories by up to 1.5% while it increased wages for high-skilled workers by up to 2.6%. This result is robust to a number of different specifications.
    Keywords: international outsourcing; offshoring; skills; wages
    JEL: F16 J31
    Date: 2007–09
  6. By: Buch, Claudia M.; Lipponer, Alexander
    Abstract: Does more FDI make the world a riskier place for workers? We analyze whether an increase in multinational firms’ activities is associated with an increase in firm-level employment volatility. We use a firm-level dataset for Germany which allows us to distinguish between purely domestic firms, domestic multinationals, their foreign affiliates, and foreign firms that are active in Germany. We decompose the volatility of firms into their reaction and their exposure to aggregate developments. Generally, we find no above-average wage and output elasticities for multinational firms.
    Keywords: Employment volatility, labor demand, multinational firms
    JEL: F23 J23
    Date: 2007
  7. By: Björn Bartling (Institute for Empirical Research in Economics,; Ferdinand von Siemens (Department of Economics,
    Abstract: Partnerships are the prevalent organizational form in many industries. Most partnerships share pro¯ts 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: 2007–08
  8. By: Daniel Mejía; Marc St-Pierre
    Abstract: This paper develops a model where heterogeneous agents compete for the best available jobs. Firms, operating with different technologies, rank job candidates in the human capital dimension and hire the best available candidate due to complementarities between the worker’s human capital and technologies used in the production process. As a result, individuals care about their relative ranking in the distribution of human capital because this determines the firm they will be matched with and therefore the wage they will receive in equilibrium. The paper rationalizes a different channel through which peer effects and human capital externalities might work: competition between individuals for the best available jobs (or prizes associated with the relative position of individuals). We show that more inequality in the distribution of endowments negatively affects aggregate efficiency in human capital formation as it weakens competition for jobs between individuals. However, we find that the opposite is true for wage inequality, namely, more wage inequality encourages competition and, as a result, agents exert more effort and accumulate more human capital in equilibrium.
    Date: 2007–09–19
  9. By: Siciliani, Luigi
    Abstract: We present a model of optimal contracting between a purchaser (a principal) and a provider (an agent). We assume that: a) providers differ in efficiency and there are two types of provider; b) efficiency is private information (adverse selection); c) providers are partially altruistic or intrinsically motivated; d) they have limited liability. Four types of separating equilibrium can emerge, depending on the degree of altruism, characterised as very low, low, high and very high. i) For very low altruism the quantity of the efficient and inefficient types is distorted upwards and downwards respectively; the efficient type makes a positive profit. ii) For low altruism the quantity of the efficient and inefficient types is also distorted respectively upwards and downwards, but profits are zero for both types. iii) For high altruism the first best is attained: no distortions on quantities and zero profits. iv) For very high altruism the quantity of the inefficient type is distorted upwards, and the quantity of the efficient type is distorted either upwards or downwards. The inefficient type might have a positive profit. The quantity of the efficient type is higher than that of the inefficient type in all four possible equilibria. The transfer for the efficient type can be higher or lower than the inefficient one, unless altruism tends to zero in which case the transfer for the efficient type is higher. The utility of the efficient type is higher than that of the inefficient one when altruism is very low, low or high, though not necessarily when altruism is very high.
    Keywords: altruism; motivated agents; performance
    JEL: D82 I11 I18 L51
    Date: 2007–09
  10. By: Andrew E. Clark; Nicolai Kristensen; Niels Westergård-Nielsen
    Abstract: This paper uses matched employer-employee panel data to show that individual job satisfaction is higher when other workers in the same establishment are better-paid. This runs contrary to a large literature which has found evidence of income comparisons in subjective well-being. We argue that the difference hinges on the nature of the reference group. We here use co-workers. Their wages not only induce jealousy, but also provide a signal about the worker's own future earnings. Our positive estimated coefficient on others' wages shows that this positive future earnings signal outweighs any negative status effect. This phenomenon is stronger for men, and in the private sector.
    Date: 2007
  11. By: Yashiv, Eran
    Abstract: The picture of U.S. labour market dynamics is opaque. Empirical studies have yielded contradictory findings and debates have emerged regarding their implications. This paper aims at clarifying the picture, which is important for the understanding of the operation of the labour market, for the study of business cycles, for the explanation of wage behaviour, and for the formulation of policy. The paper determines what facts can be established, what are their implications, and what remains to be further investigated. The main contributions made here are: (i) Listing of data facts that can be agreed upon. These indicate that there is considerable cyclicality and volatility of both accessions to employment and separations from it. Hence, both are important for the understanding of the business cycle. (ii) Presenting the business cycle facts of key series. (iii) Pointing to specific gaps in the data picture: disparities in the measurement of the sizeable flows between employment and the pool of workers out of the labour force, disagreements about the relative volatility of job finding and separation rates across data sets, and the fact that the fit of the gross flows data with net employment growth data differs across studies and is not high. The definite characterization of labour market dynamics depends upon the closing of these data gaps.
    Keywords: business cycles; gross worker flows; hiring; job finding; labour market dynamics; separation
    JEL: E24 J63 J64
    Date: 2007–09
  12. By: Thomas Philippon
    Abstract: Over the past 60 years, the value added of the U.S. financial sector has grown from 2.3% to 7.7% of GDP. I present a model of the equilibrium size of this industry and I study the factors that might explain its evolution. According to the model, a shift in the joint distribution of cash flows and investment opportunities across U.S. firms has increased the demand for financial services. Improvements in the relative efficiency of the finance industry also play a role. Without these improvements, a much larger fraction of firms would be financially constrained today.
    JEL: E2 G2 G3 O16
    Date: 2007–09
  13. By: Pollock, Rufus
    Abstract: With cumulative innovation and imperfect information about the value of innovations, intellectual property rights can result in hold-up and therefore it may be better not to have them. Extending the basic cumulative innovation model to include `sampling' by second-stage firms, we find that the lower the cost of sampling, or the larger the differential between high and low value second-stage innovations, the more likely it is that a regime without intellectual property rights will be preferable. Thus, technological change which reduces the cost of encountering and trialling new `ideas' implies a reduction in the socially optimal level of rights such as patent and copyright.
    Keywords: Cumulative Innovation; Hold-Up; Sampling; Intellectual Property
    JEL: L5 O3 K3
    Date: 2006–01–24
  14. By: Thomas Philippon; Ariell Reshef
    Abstract: Over the past 60 years, the U.S. financial sector has grown from 2.3% to 7.7% of GDP. While the growth in the share of value added has been fairly linear, it hides a dramatic change in the composition of skills and occupations. In the early 1980s, the financial sector started paying higher wages and hiring more skilled individuals than the rest of economy. These trends reflect a shift away from low-skill jobs and towards market-oriented activities within the sector. Our evidence suggests that technological and financial innovations both played a role in this transformation. We also document an increase in relative wages, controlling for education, which partly reflects an increase in unemployment risk: Finance jobs used to be safer than other jobs in the private sector, but this is not longer the case.
    JEL: G2 J21 J24 J3
    Date: 2007–09
  15. By: Eugen Kovac; Viatcheslav Vinogradov; Kresimir Zigic
    Abstract: We build a dynamic duopoly model that accounts for the empirical observation of monopoly persistence in the long run. More specifically, we analyze the conditions under which it is optimal for the market leader in an initially duopoly setup to undertake pre-emptive R&D investment ("strategic preda- tion") that eventually leads to the exit of the follower firm. The follower is assumed to benefit from the innovative activities of the leader through R&D spillovers. The novel feature of our approach is that we introduce an explicit dynamic model and contrast it with its static counterpart. Contrary to the predictions of the static model, strategic predation that leads to the persis- tence of monopoly is in general the optimal strategy to pursue in a dynamic framework when spillovers are not large.
    Keywords: Dynamic duopoly, R&D spillovers, persistence of monopoly, strate- gic predation, accommodation.
    JEL: L12 L13 L41
    Date: 2007–01
  16. By: Adam Tauman Kalai; Ehud Kalai; Dov Samet
    Abstract: Consider an agent (manager,artist, etc.) who has imperfect private information about his productivity. At the beginning of his career (period 1, “short run”), the agent chooses among publicly observable actions that generate imperfect signals of his productivity. The actions can be ranked according to the informativeness of the signals they generate. The market observes the agent’s action and the signal generated by it, and pays a wage equal to his expected productivity. In period 2 (the “long run”), the agent chooses between a constant payoff and a wage proportional to his true productivity, and the game ends. We show that in any equilibrium where not all types of the agent choose the same action, the average productivity of an agent choosing a less informative action is greater. However, the types choosing that action are not uniformly higher. In particular, we derive conditions for the existence of a tripartite equilibrium where low and high types pool on a less informative action while medium (on average, lower) types choose to send a more informative signal.
    Keywords: signalling, career concerns
    JEL: D82 D86
    Date: 2007–01
  17. By: Christa Hainz (Department of Economics, University of Munich, Akademiestr. 1/III, 80799 Munich, Tel.:+49 89 2180 3232, Fax.: +49 89 2180 2767,
    Abstract: It has been argued that competing banks make inefficiently frequent use of collateralization in situations where they are better able to evaluate a project’s risk than entrepreneurs. We study the bank’s choice between screening and collateralization in a model where banks do not have this superior screening skill. In particular, we study the effect of bank competition on this choice. We find that competing banks use collateral less often than a monopolistic bank because competition will intensify if both banks collateralize. Moreover, bank competition is welfare improving if collateralization is rather costly.
    Keywords: collateralization, screening, incentives, bank competition
    JEL: D82 G21 K00
    Date: 2007–09
  18. By: Ashot Tsharakyan
    Abstract: This research analyzes the effects of recent housing price appreciation on aggregate welfare. It generalizes the results of Bajari et al (2005), who find that in a credit unconstrained economy with exogenous housing prices there is no effect of housing price appreciation on aggregate welfare. However, I demonstrate that if the households are credit-constrained and housing price is endogenous its appreciation implies a non-zero change in aggregate welfare. First, credit constraints are incorporated into Bajari et al’s model and it is shown that if they are binding housing price appreciation implies an improvement in aggregate welfare. I then construct a model where housing price appreciation is endogenous and is driven by demand and supplyside shocks. The supply shock results from a change in building permit cost. The demand shifts are generated based on dynamics of household income and interest rates. Both credit-constrained and unconstrained versions of this model are considered. Afterwards, using my theoretical results I calculate the aggregate welfare effects of housing price appreciation driven by the combination of demand-side and supply-side shocks observed in the US housing market from 1995 to 2004. The final result implies that housing price appreciation in 1995-2004 driven by the given combination of demand and supply-side shocks led to per household improvement of aggregate welfare by an amount equivalent to about 40% of mean household income in 2004.
    Keywords: Housing price appreciation, aggregate welfare, binding credit constraints, endogenous housing price, demand and supply side shocks, median household income.
    JEL: R2 R20 R21 R31
    Date: 2007–07
  19. By: Edward E. Leamer
    Abstract: Of the components of GDP, residential investment offers by far the best early warning sign of an oncoming recession. Since World War II we have had eight recessions preceded by substantial problems in housing and consumer durables. Housing did not give an early warning of the Department of Defense Downturn after the Korean Armistice in 1953 or the Internet Comeuppance in 2001, nor should it have. By virtue of its prominence in our recessions, it makes sense for housing to play a prominent role in the conduct of monetary policy. A modified Taylor Rule would depend on a long-term measure of inflation having little to do with the phase in the cycle, and, in place of Taylor's output gap, housing starts and the change in housing starts, which together form the best forward-looking indicator of the cycle of which I am aware. This would create pre-emptive anti-inflation policy in the middle of the expansions when housing is not so sensitive to interest rates, making it less likely that anti-inflation policies would be needed near the ends of expansions when housing is very interest rate sensitive, thus making our recessions less frequent and/or less severe.
    JEL: E17 E3 E32 E52
    Date: 2007–09
  20. By: Josef, KONINGS (KULeuven Department of Economics); Hylke, VANDENBUSSCHE (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)
    Abstract: We analyze the relationship between Antidumping (AD) Protection and the productivity of EU domestic firms in import-competing industries. For this purpose we identify a panel of domestic firms between 1993 and 2003 that a some point during this period are affected by AD initiations. Using a difference-in-difference approach, we find that AD measures result in improvements of measured productivity for domestic firms. Total Factor Productivity (TFP) of protected firms increases by 2% in the short-run and by 5% to 13% in the long-run. However, there is substantial heterogeneity across firms. The effect of protection depends on the initial Òdistance-to-the-frontier firmÓ in the industry. While protection raises TFP of ÒlaggardÓ domestic firms, it lowers TFP for ÒefficientÓ firms that operate close to the efficiency frontier. These results are consistent with recent theoretical work supporting the view that trade policy, under certain conditions, can induce technological catching-up. While this paper evaluates the effectiveness of AD policy it does not engage in a welfare analysis.
    Date: 2007–09–17
  21. By: Vandenbussche, Hylke; Zarnic, Ziga
    Abstract: This paper empirically investigates the effects of the US safeguard protection on steel imports in 2002 on the mark-ups of EU steel producers. We identify a large panel of EU steel producers between 1995 and 2005 affected by the safeguards. Using the Roeger methodology, our results show that the protection signifcantly reduced the EU firms' mark-ups. Single-product firms suffered relatively more from the safeguards than multi-product firms. Our evidence further suggests that the US protection resulted in some diverting of the EU steel especially towards China, aggravating the situation on the Chinese steel market and ultimately resulting in the Chinese trade protection of steel imports.
    Keywords: firm data; price-cost margins; safeguard measures; steel industry; trade diversion
    JEL: F13 L13 L61
    Date: 2007–09

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