nep-bec New Economics Papers
on Business Economics
Issue of 2007‒10‒27
thirty papers chosen by
Christian Calmes
University of Quebec in Ottawa

  1. Openness, technology capital, and development By Ellen R. McGrattan; Edward C. Prescott
  2. An Agency Theory of Dividend Taxation By Raj Chetty; Emmanuel Saez
  3. Corporate Control and the Stock Market By Stefano Demichelis; Klaus Ritzberger
  4. Productivity and U.S. Macroeconomic Performance: Interpreting the Past and Predicting the Future with a Two-Sector Real Business Cycle Model By Peter N. Ireland; Scott Schuh
  7. Size, Innovation and Internationalization: A Survival Analysis of Italian Firms By Giorgia Giovannetti; Giorgio Ricchiuti; Margherita Velucchi
  8. Signaling Quality Through Prices in an Oligopoly By Maarten C.W. Janssen; Santanu Roy
  9. Twin Deficits, Openness and the Business Cycle By Giancarlo Corsetti; Gernot J. Mueller
  10. Technology shocks, structural breaks and the effects on the business cycle. By Atella, Vincenzo; Centoni, Marco; Cubadda, Gianluca
  11. On the Principal-Agent Model, its Aplications And Implications Using a Simple Formulation By Resende-Filho, Moises
  12. Negative Blogs, Positive Outcomes: When should Firms Permit Employees to Blog Honestly? By Rohit Aggarwal; Ram Gopal; Ramesh Sankaranarayanan
  13. The Changing Nature of Wage Inequality By Thomas Lemieux
  14. Time to rethink merger policy? By Gual, Jordi
  15. Union Wages, Hours of Work and the Effectiveness of Partial Coordination Agreements By Sven Wehke
  16. Cultural Differences, Insecure Property Rights and the Mode of Entry Decision By Jiahua Che; Giovanni Facchini
  17. The Accrual Anomaly: Exploring the Optimal Investment Hypothesis By Jin Ginger Wu; Lu Zhang; X. Frank Zhang
  18. Ethical management systems for not-for-profit organizations By Argandoña, Antonio
  19. The dynamics of market structure and market size in two health services industries By Timothy Dunne; Shawn D. Klimek; Mark J. Roberts; Yi Xu
  20. The effects of past entry, market consolidation, and expansion by incumbents on the probability of entry By Robert M. Adams; Dean F. Amel
  21. Customer Infomation Sharing: Strategic Incentives and New Implications By Byung-Cheol Kim; Jay Pil Choi
  22. Search and the Firm's Choice of the Optimal Labor Contract By Dimitri Paolini
  23. Hold-up, Asset Ownership, and Reference Points By Oliver Hart
  24. You Don't Always Get What You Pay For By Wendelin Schnedler
  25. Reputation Effects By George J. Mailath
  26. Cracking the conundrum By David Backus; Jonathan H. Wright
  27. Competition in Prices and Service Level Guarantees By Ramesh Johari; Gabriel Weintraub
  28. Labor Market Dynamics and the Business Cycle: Structural Evidence for the United States By Morten O. Ravn; Saverio Simonelli
  29. Labor Turnover before Plant Closure:'Leaving the sinking ship' vs. 'Captain throwing ballast overboard' By Guido Schwerdt
  30. The Risk-Return Paradox for Strategic Management: Disentangling True and Spurious Effects By Henkel, Joachim

  1. By: Ellen R. McGrattan; Edward C. Prescott
    Abstract: In this paper, we extend the growth model to include firm-specific technology capital and use it to assess the gains from opening to foreign direct investment. A firm’s technology capital is its unique know-how from investing in research and development, brands, and organization capital. What distinguishes technology capital from other forms of capital is the fact that a firm can use it simultaneously in multiple domestic and foreign locations. Foreign technology capital is exploited by permitting foreign direct investment by multinationals. In both steady-state and transitional analyses, the extended growth model predicts large gains to being open.
    Date: 2007
  2. By: Raj Chetty; Emmanuel Saez
    Abstract: Recent empirical studies of dividend taxation have found that: (1) dividend tax cuts cause large, immediate increases in dividend payouts, and (2) the increases are driven by firms with high levels of shareownership among top executives or the board of directors. These findings are inconsistent with existing "old view" and "new view" theories of dividend taxation. We propose a simple alternative theory of dividend taxation in which managers and shareholders have conflicting interests, and show that it can explain the evidence. Using this agency model, we develop an empirically implementable formula for the efficiency cost of dividend taxation. The key determinant of the efficiency cost is the nature of private contracting. If the contract between shareholders and the manager is second-best efficient, deadweight burden follows the standard Harberger formula and is second-order (small) despite the pre-existing distortion of over-investment by the manager. If the contract is second-best inefficient -- as is likely when firms are owned by diffuse shareholders because of incentives to free-ride when monitoring managers -- dividend taxation generates a first-order (large) efficiency cost. An illustrative calibration of the formula using empirical estimates from the 2003 dividend tax reform in the U.S. suggests that the efficiency cost of raising the dividend tax rate could be close to the amount of revenue raised.
    JEL: G3 H20
    Date: 2007–10
  3. By: Stefano Demichelis; Klaus Ritzberger
    Abstract: This paper studies a general equilibrium model with an investor controlled firm. Shareholders can vote on the firm’s production plan in an assembly. Prior to that they may trade shares on the stock market. Since stock market trades determine the distribution of votes, trading is strategic. There is always an equilibrium, where share trades lead to owners deciding for competitive behavior, but there may also be equilibria, where monoplistic behavior prevails.
    Keywords: Corporate governance, general equilibrium, objective function of the firm, shareholder voting, stock markets.
    JEL: D21 D43 D51 G32 G34
    Date: 2007
  4. By: Peter N. Ireland; Scott Schuh
    Abstract: A two-sector real business cycle model, estimated with postwar U.S. data, identifies shocks to the levels and growth rates of total factor productivity in distinct consumption- and investment-goods-producing technologies. This model attributes most of the productivity slowdown of the 1970s to the consumption-goods sector; it suggests that a slowdown in the investment-goods sector occurred later and was much less persistent. Against this broader backdrop, the model interprets the more recent episode of robust investment and investment-specific technological change during the 1990s largely as a catch-up in levels that is unlikely to persist or be repeated anytime soon.
    JEL: E32 O41 O47
    Date: 2007–10
  5. By: Maxim Sinitsyn
    Abstract: This paper revisits the theory of oligopoly pricing and shows that for a large class of demand and cost functions, a mixed strategy equilibrium necessarily implies that each firm’s equilibrium strategy is a discrete distribution over a finite number of prices.
    JEL: D43 L13
    Date: 2007–06
  6. By: Mark Mink; Jan P.A.M. Jacobs; Jakob de Haan
    Abstract: We develop multivariate measures of synchronicity and co-movement of business cycles. In addition to synchronicity, the co-movement measure takes differences between cycle amplitudes into account that have been overlooked in most previous studies. We apply the new measures to the euro area. Synchronicity and co-movement for the region as a whole do not exhibit a clear upward tendency. Although several countries saw the similarity of their business cycle vis-`a-vis the euro area reference cycle increase, national business cycles remain fairly diverse. Changes in business cycle amplitudes cause most of the observed change in cycle co-movement.
    JEL: E32 F02 F42
    Date: 2007–09
  7. By: Giorgia Giovannetti (Università degli Studi di Firenze, Dipartimento di Scienze Economiche); Giorgio Ricchiuti (Università degli Studi di Firenze, Dipartimento di Scienze Economiche); Margherita Velucchi (Università degli Studi di Firenze, Dipartimento di Statistica “G. Parenti”)
    Abstract: The birth of new enterprises and their survival in the market are often seen as a crucial variable of economic growth and competitiveness in a modern economy. This paper focuses on business demography of Italian firms, using a merged dataset between Capitalia-Reprint and AIDA, to identify the relationships among firms’ characteristics their demographic dynamics and survival. We show that size and technological level increases survival probability. Internationalized firms show higher failure risk: on average the competition is stronger on international markets, forcing firms to be more efficient. Finally, a long lasting successful internationalized firm is a high-tech, large and innovating firm.
    Keywords: Business Demography, Survival, Competitiveness, Internationalization
    JEL: C41 L11 L25 F21
    Date: 2007
  8. By: Maarten C.W. Janssen (Tinbergen Institute and Erasmus University); Santanu Roy (Southern Methodist University)
    Abstract: Firms signal high quality through high prices even if the market structure is highly competitive and price competition is severe. In a symmetric Bertrand oligopoly where products may differ only in their quality, production cost is increasing in quality and the quality of each firm's product is private information (not known to consumers or to other firms), we show that there exist fully revealing equilibria in mixed strategies. In such equilibria, low quality firms enjoy market power when other firms are of high quality. High quality firms charge higher prices than low quality firms but lose business to rival firms with higher probability. Some of the revealing equilibria involve high degree of market power (price close to full information monopoly level) while others are more "competitive". Under certain conditions, if the number of firms is large enough, information is revealed in every equilibrium.
    Keywords: Signaling; Quality; Oligopoly; Incomplete Information.
    JEL: L13 L15 D82 D43
    Date: 2007–10
  9. By: Giancarlo Corsetti; Gernot J. Mueller
    Abstract: In this paper, we study the co-movement of the government budget balance and the trade balance at business cycle frequencies. In a sample of 10 OECD countries we find that the correlation of the two time series is negative, but less so in more open economies. Moreover, for the US the crosscorrelation function is S-shaped. We analyze these regularities taking the perspective of international business cycle theory. First, we show that a standard model delivers predictions broadly in line with the evidence. Second, we show that conditional on spending shocks the model predicts a perfect correlation of the budget balance and the trade balance. Yet, the effect of spending shocks on the trade balance is contained if an economy is not very open to trade.
    Keywords: Fiscal Policy, Twin deficits, Openness, Business Cycle
    JEL: F41 F42 E32
    Date: 2007
  10. By: Atella, Vincenzo; Centoni, Marco; Cubadda, Gianluca
    Abstract: This paper contributes to the literature on the role of technology shocks as source of the business cycle in two ways. First, we document that time-series of US productivity and hours are apparently affected by a structural break in the late 60’s, which is likely due to a major change in the monetary policy. Second, we show that the importance of demand shocks over the business cycle has sharply increased after the break.
    Keywords: Business cycle, technology shocks, structural breaks.
    JEL: C32 E32
    Date: 2007–10–22
  11. By: Resende-Filho, Moises
    Abstract: The principal-agent model has potential to be more often used as a conceptual framework in economic studies. This article provides and discusses some real examples in which the principal-agent framework fits well and therefore could be employed. Despite this, this type of model complexity can be a barrier to its suitable use. Thus, this article presents a principal-agent model that is simple enough to make it possible to find an analytical solution. Based on this, the main implications of the principal-agent conceptual framework are obtained. These implications are discussed, whenever it is possible, on the grounds of real examples.
    Keywords: Principal-agent model; incentive mechanisms; theory of firm; theory of organizations
    JEL: D86 D82
    Date: 2007–10–22
  12. By: Rohit Aggarwal (Operations and Information Management, School of Business, University of Connecticut); Ram Gopal (Operations and Information Management, School of Business, University of Connecticut); Ramesh Sankaranarayanan (Operations and Information Management, School of Business, University of Connecticut)
    Abstract: Weblogs or blogs have recently received a lot of attention, especially in the business community, with a number of firms encouraging their employees to publish blogs to reach out and connect to a wider audience. It is beginning to be recognized that employee blogs can cast a firm in either a positive or a negative light, thereby enhancing or harming the firm’s reputation. Paradoxically, under certain conditions negative postings by employees can actually help the overall reputation of the firm. The rationale for this is that negative posts raise the credibility of an employee blog and attract more readers, who then will also be exposed to the positive posts on the blog. Drawing from the literature on customer advocacy and the stage model theory of information processing in cognitive psychology, we develop a model to decipher the relationship between the extent of negative posts and the overall positive Word of Mouth (WOM) generated by the employee blogs for the firm. An empirical model is developed to account for the inherent non-linearities, endogeneity and unobserved heterogeneity concerns, and potential alternative specifications. Our results suggest that negative posts act as a catalyst to increase the readership of an employee blog, with readership increasing exponentially in the initial stages and then stabilizing. The empirical findings are used to generate an analytical framework that firms can use to formulate employee blogging policies. We illustrate the application of the framework using blogging data from Sun Microsystems.
    Keywords: blog, employee blogs, bloggers, blogging policies, word-of-mouth, customer advocacy, information processing theory, non-linear models
    JEL: C10 C23 C51 C52 C80 C87 D78 L10 M50 O33
    Date: 2007–09
  13. By: Thomas Lemieux
    Abstract: The paper reviews recent developments in the literature on wage inequality, with a particular focus on why inequality growth has been particularly concentrated in the top end of the wage distribution over the last 15 years. Several possible institutional and demand-side explanations are discussed for the secular growth in wage inequality in the United States and other advanced industrialized countries. The paper concludes that three promising explanations for the growth in top-end wage inequality are de-unionization, the increased prevalence of pay for performance, and changes in the relative demand for the types of tasks performed by workers in high-paying occupations.
    JEL: J24 J31 J51
    Date: 2007–10
  14. By: Gual, Jordi (IESE Business School)
    Abstract: This paper provides a critical analysis of some of the key features of merger policy as understood and practiced in leading jurisdictions such as the European Community and the United States. It focuses first on a discussion of the gradual move of merger policy towards the examination of unilateral effects. The critical appraisal of this process is based on the practical and theoretical shortcomings of the economic models that underlie the growing prominence of unilateral effects as the key anticompetitive factor arising from a proposed merger. The paper stresses that even if unilateral effects were to lead to an increase in the conventional measures of anticompetitive performance (such as markups), it is not clear that this implies less competitive behavior for many of the most relevant industries in today's advanced economies. Finally, the paper also examines the relationship between competition and welfare, and argues that even if competition does indeed diminish due to a merger, it does not necessarily follow that this is not good in terms of economic welfare, when we take fully into consideration the incentives to innovate and the dynamic welfare gains that arise from new products and production processes.
    Keywords: Mergers; Antitrust; Competition Policy;
    Date: 2007–05–17
  15. By: Sven Wehke (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: Small monopoly trade unions decide upon the wage rate per hour and the hours of work subject to firm's demand for union members. Since the resulting Nash equilibrium is characterized by excess unemployment, we study the employment and welfare effects when trade unions try to coordinate their policies. Firstly, we consider a joint agreement about marginal wage moderation, where trade unions remain free to choose the hours of work non-cooperatively. Secondly, we analyze in which way a joint change in the hours of work affects employment and welfare if trade unions are free to choose the wage rate.
    Keywords: unemployment, wage setting, hours of work, partial cooperation
    JEL: C72 J51
    Date: 2007–09
  16. By: Jiahua Che; Giovanni Facchini
    Abstract: We develop a theory of a multinational corporation's optimal mode of entry in a new market. The foreign firm can choose between a licensing agreement, a wholly owned subsidiary or shared control (joint venture). In an environment in which property rights are insecure, opportunism is possible, and the identification of new business opportunities is costly, we show that the relationship between the quality of the institutional environment and the mode of entry decision is non-monotonic. Licensing is preferred if property rights are strictly enforced, while a joint venture is chosen when property rights are poorly enforced. For intermediate situations, the better use of local knowledge made possible by shared control under a joint venture works as a double-edged sword. On the one hand, it makes the monitoring activity of the multinational more credible, on the other it offers insurance to both parties, potentially compromising the incentives faced by the local partner.
    Date: 2007–10–15
  17. By: Jin Ginger Wu; Lu Zhang; X. Frank Zhang
    Abstract: Interpreting accruals as working capital investment, we hypothesize that firms rationally adjust their investment to respond to discount rate changes. Consistent with the optimal investment hypothesis, we document that (i) the predictive power of accruals for future stock returns increases with the covariations of accruals with past and current stock returns, and (ii) adding investment-based factors into standard factor regressions substantially reduces the magnitude of the accrual anomaly. High accrual firms also have similar corporate governance and entrenchment indexes as low accrual firms. This evidence suggests that the accrual anomaly is more likely to be driven by optimal investment than by investor overreaction to excessive growth or over-investment.
    JEL: G12 G14 G31 G34 M41
    Date: 2007–10
  18. By: Argandoña, Antonio (IESE Business School)
    Abstract: Non-governmental organizations (NGOs) have proven to be excellent instruments for promoting a wide range of causes. But they need to adhere to strict ethical principles, which usually are embodied in voluntary codes and standards. This paper analyzes one such standard, the "Ethics. NGO management system" standard published by Aenor, a private Spanish organization committed to the development of standardization and certification. The analysis and comments are centered mainly on issues of NGO accountability.
    Keywords: Not-for-profit organizations; non-governmental organizations; code of ethics;
    Date: 2007–05–13
  19. By: Timothy Dunne; Shawn D. Klimek; Mark J. Roberts; Yi Xu
    Abstract: The relationship between the size of a market and the competitiveness of the market has been of long-standing interest to IO economists. Empirical studies have used the relationship between the size of the geographic market and both the number of firms in the market and the average sales of the firms to draw inferences about the degree of competition in the market. This paper extends this framework to incorporate the analysis of entry and exit flows. A key implication of recent entry and exit models is that current market structure will likely depend upon the history of past participation. The paper explores these issues empirically by examining producer dynamics for two health service industries, dentistry and chiropractic services.
    Keywords: Markets ; Industrial organization ; Service industries
    Date: 2007
  20. By: Robert M. Adams; Dean F. Amel
    Abstract: The threat of entry is an important factor in the evaluation of the potential competitive effects of proposed mergers and acquisitions. In the evaluation of proposed bank mergers, a high probability of entry, or strong potential competition, is often found to mitigate the potential anticompetitive effect of a proposed horizontal merger. Because the probability of entry is not directly observed for each local market, variables such as per capita income, population growth and past entry are typically used to predict the probability of future entry. This study extends previous research on the determinants of entry into local banking markets. In addition to variables considered by past research, such as market demographic characteristics, branching deregulation and past merger activity, this study considers the effects on future entry of past entry and strategic barriers to entry, which are proxied by changes in incumbent branching, the presence of small incumbent firms and market concentration. The analysis uses data that allow a broader definition of entry than that used in most past research. In most of the previous studies, bank entry is defined as the creation of a new banking institution. We show that this definition is problematic and misses entry due to branch network extension by existing banks, which is substantial. Results of our analysis are consistent with past research where past research exists. In addition, we find significant negative relationships between strategic barriers to entry and entry. Assessment of the quantitative significance of the results, however, finds that very large changes in the explanatory variables are needed to cause substantial changes in the probability of entry into banking markets.
    Date: 2007
  21. By: Byung-Cheol Kim (Michigan State University); Jay Pil Choi (Michigan State University)
    Abstract: We study oligopolistic firms' incentives to share customer information about past purchase history in a situation where firms are uncertain about whether a particular consumer considers the product offerings complements or substitutes. By addressing this new type of behavior-based price discrimination, we show that both the incentive to share customer information and its effects on consumers depend crucially on the relative magnitudes of the prices that would prevail in the complementary and substitute markets if consumers were fully segmented according to their preferences. This paper has important implications for merger analysis when the primary motive for merger is the acquisition of another firm's customer lists. We also find that the informational regime in which firms reside can have an influence upon the choice of product differentiation. Additionally, our analysis suggests a new role of middlemen as information aggregators.
    Keywords: Customer Information Sharing, Complements and Substitutes, Product Differentiation, Behavior-Based Price Discrimination, Merger and Acquisition, Middlemen
    JEL: D43 D62 D83 L14 L51 M31
  22. By: Dimitri Paolini
    Abstract: This article studies the behavior of a firm searching to fill a vacancy. The main assumption is that the firm can offer two different kinds of contracts to the workers, either a short-term contract or a long-term one. The short-term contract acts as a probationary stage in which the firm can learn the worker's type. After this stage, the firm can propose a long- term contract to the worker or it can decide to look for another worker. We show that, if the short-term wage is fixed endogenously, for the firms can be optimal to start a working relationship with a short-term contract, but that this policy has a negative impact on unemployment and welfare. On the contrary, if this wage is fixed exogenously, this policy could be optimal also from welfare point of view.
    Keywords: Search, Temporary Employment, Short-Term Wage.
    JEL: J31 J41 J64
    Date: 2007
  23. By: Oliver Hart
    Abstract: We study two parties who desire a smooth trading relationship under conditions of value and cost uncertainty. A rigid contract fixing price works well in normal times since there is nothing to argue about. However, when value or cost is exceptional, one party will hold up the other , damaging the relationship and causing deadweight losses as parties withhold cooperation. We show that a judicious allocation of asset ownership can help by reducing the incentives to engage in hold up. In contrast to the literature, the driving force in our model is payoff uncertainty rather than noncontractible investments.
    JEL: D23 D86 K12
    Date: 2007–10
  24. By: Wendelin Schnedler (University of Heidelberg, Department of Economics)
    Abstract: Consider a principal-agent relationship in which more effort by the agent raises the likelihood of success. Does rewarding success, i.e., paying a bonus, increase effort in this case? I find that bonuses have not only an incentive but also an income effect. Overall, bonuses paid for success may well reduce effort and hence the probability of success. I also identify conditions under which the income effect dominates the incentive effect, and single out the hazard-rate of effort as a crucial determinant of this trade-off.
    Keywords: bonus, premium, incentives, income effect, moral hazard
    JEL: D8 J3 M5
    Date: 2007–09
  25. By: George J. Mailath (Department of Economics, University of Pennsylvania)
    Abstract: This article gives a brief introduction to reputation effects. A canonical model is described, the reputation bound result of Fudenberg and Levine (1989 1992) and the temporary reputation result of Cripps, Mailath, and Samuelson (2004, 2007) are stated and discussed.
    Keywords: commitment, incomplete information, reputation bound, reputation effects
    JEL: C70 C78
    Date: 2007–10–09
  26. By: David Backus; Jonathan H. Wright
    Abstract: From 2004 to 2006, the FOMC raised the target federal funds rate by 4.25 percentage points, yet long-maturity yields and forward rates fell. We consider several possible explanations for this "conundrum." The most likely, in our view, is a fall in the term premium, probably associated with some combination of diminished macroeconomic uncertainty and financial market volatility, more predictable monetary policy, and the state of the business cycle.
    Date: 2007
  27. By: Ramesh Johari (Management Science and Engineering, Stanford University Author-Workplace-Homepage:; Gabriel Weintraub (Columbia Business School)
    Abstract: In this paper we study the implications of service level guarantees (SLGs) in a model of oligopoly competition where providers compete to deliver a service to congestion-sensitive consumers. The SLG is a contractual obligation on the part of the service provider: regardless of how many customers subscribe, the firm is responsible for investing in infrastructure, capacity, or service quality so that the congestion experienced by all subscribers is equal to the SLG. First, we analyze a game where firms compete by setting prices and SLGs simultaneously. We establish that this game can be reduced to standard oligopoly models of price competition, greatly simplifying the analysis of this otherwise complex competitive scenario. Notably, we find that when costs in the original game are convex, the resulting equivalent pricing game also has convex costs. Further, for a broad class of models exhibiting constant returns to investment, the resulting pricing game is equivalent to a standard price game with constant marginal costs; many loss systems, such as those modeled by the Erlang loss formula, exhibit constant returns to investment. We then consider another commonly used contractual agreement between firms and customers: firms first set prices and investment levels simultaneously, and then consumers choose where to subscribe. In this case, firms provide the best possible service given their infrastructure, but without an explicit guarantee. Using the Nash equilibria of the games played by firms, we compare this competitive model with the model where firms set prices and SLGs, in terms of the resulting prices, service levels, firms' profits, and consumers' surplus.
    Keywords: competition, game theory, congestion, contracting, pricing.
    JEL: D43 L13 L96 M21
    Date: 2007–09
  28. By: Morten O. Ravn; Saverio Simonelli
    Abstract: We use a 12-dimensional VAR to examine the dynamic effects on the labor market of four structural technology and policy shocks. For each shock, we examine the dynamic e®ects on the labor market, the importance of the shock for labor market volatility, and the comovement between labor market variables and other key aggregate variables in response to the shock. We document that labor market indicators display "hump-shaped" responses to the identified shocks. Technology shocks and monetary policy shocks are important for labor market volatility but the ranking of their importance is sensitive to the VAR specfication. The conditional correlations at business cycle frequencies are similar in response to the four shocks apart from the correlations between hours worked, labor productivity and real wages. To account for the unconditional correlations between these variables, a mixture of shocks are required.
    Keywords: Structural VAR, labor market dynamics, the Beveridge curve
    JEL: C32 E24 E32 E52 E62
    Date: 2007
  29. By: Guido Schwerdt
    Abstract: Involuntary job loss in administrative data is commonly identified by focusing on mass-layoffs or plant closures. However, such events usually do not happen without prior knowledge, which potentially leads to selection in the labor turnover of distressed firms. We find that workers separating from closing plants up to 2 quarters before closure are associated with significantly lower displacement costs and on average significantly higher pre-closure earnings levels as opposed to ultimately displaced workers. Furthermore, our results indicate that displaced workers with high pre-closure earnings experience significantly lower reductions in future employment probabilities. These findings suggest that compositional differences cause estimated displacement costs to differ between early leavers and ultimately displaced workers. Focusing exclusively on the latter group would lead to an overestimation of displacement costs.
    Keywords: plant closure, labor turnover, exact-matching, employer-employee data
    JEL: J63 J65 C21 C23
    Date: 2007
  30. By: Henkel, Joachim
    Abstract: The concept of risk is central to strategy research and practice. Yet, the expected positive association between risk and return, familiar from financial markets, is elusive. Measuring risk as the variance of a series of accounting-based returns, Bowman obtained the puzzling result of a negative association between risk and mean return. This finding, known as the Bowman paradox, has spawned a remarkable number of publications, and various explanations have been suggested. The present paper contributes to this literature by showing that skewness of individual firms’ return distributions has a considerable spurious effect on the mean-variance relationship. I devise a method to disentangle true and spurious effects, illustrate it using simulations, and apply it to empirical data. It turns out that the size of the spurious effect is such that, on average, it explains the larger part of the observed negative relationship. My results might thus help to reconcile mean-variance approaches to risk-return analysis with other, ex-ante, approaches. In concluding, I show that the analysis of skewness is linked to all three streams of literature devoted to explaining the Bowman paradox.
    Keywords: mean-variance; risk; risk-return paradox; skewness
    JEL: C81 G39 M29
    Date: 2007–10

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