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on Business Economics |
| By: | Jean-Pierre DANTHINE; John B. DONALDSON |
| Abstract: | We study the dynamic general equilibrium of an economy where risk averse shareholders delegate the management of the firm to risk averse managers. The optimal contract has two main components: an incentive component corresponding to a non-tradable equity position and a variable 'salary' component indexed to the aggregate wage bill and to aggregate dividends. Tying a manager's compensation to the performance of her own firm ensures that her interests are aligned with the goals of firm owners and that maximizing the discounted sum of future dividends will be her objective. Linking managers' compensation to overall economic performance is also required to make sure that managers use the appropriate stochastic discount factor to value those future dividends. |
| Keywords: | incentives; optimal contracting; stochastic discount factor |
| JEL: | E32 E44 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:lau:crdeep:07.10&r=bec |
| By: | Rosen Marinov (IUHEI, The Graduate Institute of International Studies, Geneva) |
| Abstract: | This paper investigates the effect of merger-driven market concentration on the mark-ups of non-merging rival firms in Europe's paper manufacturing industry. Using a representative data set of 400 independently-owned companies spanning a ten-year period, we aim to disentangle the impact of full-scale mergers and acquisitions from that due to other concentration-increasing developments. We find a positive and statistically significant relationship between price-cost margins and overall industry consolidation, as captured by the Herfindahl-Hirschman and four-firm indexes. However, takeover-related market share amalgamation has a negative impact, albeit of more modest proportions. The latter result seems to be driven by vertical transactions, suggesting that input-side channels, much as product price competition, may explain non-merging firms' mark-up response. |
| Keywords: | Mergers and acquisitions; Concentration; Mark-up; Competition policy |
| Date: | 2007–09–16 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heiwp21-2007&r=bec |
| By: | Alain Gabler |
| Abstract: | The counter-cyclicality in the relative price of equipment investment which is observed in the U.S. has been attributed to equipment-specific productivity shocks. Cross-country evidence indicates that a number of countries experience sizeable delays between a surge in equipment production and a fall in its relative price, which is difficult to reconcile with sector-specific shocks. I show that in the presence of sector specific, time-varying markups, relative price movements arise as a direct consequence of consumption smoothing, even if all shocks are aggregate, while barriers to firm entry lead to delays in relative price responses. A calibrated version of the model explains around one-third of the relative price fluctuations which are observed in the U.S., as well as the qualitative differences in the behaviour of this relative price across countries. |
| Keywords: | endogenous markups; firm entry and exit; relative prices |
| JEL: | E25 E32 D43 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2007/25&r=bec |
| By: | Rolf Schenker (KOF Swiss Economic Institute, ETH Zurich) |
| Abstract: | This paper compares quantitative and qualitative data on firm level. The data is taken from two Swiss investment surveys. This has not yet been done in the literature. We will see that the mean change in investment of firms planning to increase (decrease) investments is positive (negative). In contrast, the mean change in investment of firms indi- cating “no change” is indeed virtually zero. Carlson & Parkin (1975) assume the quantitative observations to follow a normal distribution. Other research (e.g. Dasgupta & Lahiri 1992) has been done assuming other distributions. In this paper we show that the micro data does not follow a normal, logistic or exponential distribution. Furthermore, we adopt the response functions presented by Ronning (1984) to the investment data. They help us to determine the share of firms giving the different qualitative statement for every instance of the quantitative data. We will show that with larger (smaller) quantitative changes, more firms give positive (negative) qualitative statements. |
| Keywords: | Response Functions, Investment survey, Qualitative response, Contingency Table |
| JEL: | C5 E22 C42 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:kof:wpskof:07-169&r=bec |
| By: | Kohei Daido (School of Economics, Kwansei Gakuin University); Hideshi Itoh (Graduate School of Commerce and Management, Hitotsubashi University) |
| Abstract: | We attempt to formulate and explain two types of self-fulfilling prophecy, called the Pygmalion effect (if a supervisor thinks her subordinates will succeed, they are more likely to succeed) and the Galatea effect (if a person thinks he will succeed, he is more likely to succeed). To this purpose, we extend a simple agency model with moral hazard and limited liability by introducing a model of reference-dependent preferences (RDP) by K˝oszegi and Rabin (2004). We show that the agent with high expectations about his performance can be induced to choose high effort with low-powered incentives. We then argue that the principal’s expectation has an important role as an equilibrium selection device. |
| Keywords: | Self-fulfilling prophecy, Pygmalion effect, Galatea effect, referencedependent preferences, agency model, moral hazard |
| JEL: | B49 D82 D86 M12 M52 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:kgu:wpaper:35&r=bec |
| By: | Erin Kepler; Scott Shane |
| Abstract: | This report describes a statistical evaluation of the similarities and differences between male and female entrepreneurs and their ventures. The purpose of the study was to gain a better understanding of the extent to which entrepreneurship by men and women is different. Using data from the Panel Study of Entrepreneurial Dynamics, the sample included 685 new business people who indicated that they were in the process of starting a business in 1998 or 1999. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:sba:wpaper:07ekss&r=bec |
| By: | Aubhik Khan; Julia K. Thomas |
| Abstract: | The authors study a model of lumpy investment wherein establishments face persistent shocks to common and plant-specific productivity, and nonconvex adjustment costs lead them to pursue generalized (S,s) investment rules. They allow persistent heterogeneity in both capital and total factor productivity alongside low-level investments exempt from adjustment costs to develop the first model consistent with the cross-sectional distribution of establishment investment rates. Examining the implications of lumpy investment for aggregate dynamics in this setting, the authors find that they remain substantial when factor supply considerations are ignored, but are quantitatively irrelevant in general equilibrium. ; The substantial implications of general equilibrium extend beyond the dynamics of aggregate series. While the presence of idiosyncratic shocks makes the time-averaged distribution of plant-level investment rates largely invariant to market-clearing movements in real wages and interest rates, the authors show that the dynamics of plants' investments differ sharply in their presence. Thus, model-based estimations of capital adjustment costs involving panel data may be quite sensitive to the assumption about equilibrium. Their analysis also offers new insights about how nonconvex adjustment costs influence investment at the plant. When establishments face idiosyncratic productivity shocks consistent with existing estimates, they find that nonconvex costs do not cause lumpy investments, but act to eliminate them. |
| Keywords: | Investments |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:07-24&r=bec |
| By: | Brian Headd; Bruce Kirchhoff |
| Abstract: | Using special tabulations from the U.S. Census Bureau, we use aggregate data to follow a cohort of firms over 10 years from their formation and the universe of existing firms to track their growth/decline in employment. We created a table to show the employment change categories for a cohort of new single establishment firms drawn from the 1992 universe of single establishment firms from 1992 to 2002. We also created tables to show the employment change categories for the universe of single establishment firms in the cohort defining declining and growing firms as separate sub-cohorts. Some industry detail is also described. We offer propositions related to firm growth and use data contained in the tables to seek verification. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:sba:wpaper:07bhbk&r=bec |
| By: | Ghosal, Vivek |
| Abstract: | Against the backdrop of the theories developed in the real options and financing constraints literatures, this paper examines the impact of profit uncertainty and sunk costs on firms’ entry and exit decisions. For our empirical analysis, we compile an extensive dataset containing information on 267 U.S. manufacturing industries over a 30-year period containing industry-specific information on the number of firms and establishments, the size distribution of establishments, measures of sunk capital costs and profit uncertainty, among others. Our dynamic panel data estimates show that greater uncertainty about profits, especially in conjunction with higher sunk costs, results in (1) a marked decrease in the number of small firms and establishments; (2) a less skewed size distribution of firms and establishments; and (3) a marginal increase in industry output concentration. In sharp contrast, large establishments seem virtually unaffected. The results point to uncertainty in conjunction with sunk costs fundamentally affecting firms’ decision-making and altering the structure of industries by putting smaller businesses at a disadvantage. |
| Keywords: | Uncertainty; sunk costs; real options; financing constraints; decision-making; small businesses. |
| JEL: | L40 G10 O30 L11 D80 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:5461&r=bec |
| By: | Karl J. Wennberg; Timothy Folta; Frederic Delmar |
| Abstract: | This paper tests a real options model of stepwise entrepreneurial entry. We distinguish between part time and full time entry among the self employed in Swedish knowledge intensive industries. Two multinomial logit models tests the entry from employment to part- or full time entry in 1998, and to subsequent full time entry in 1999. The empirical evidence indicates the need to distinguish between part time and full time entry, something overlooked in earlier research. We find strong support for our notion that entrepreneurs used part time entry as a strategy to test the value of their conceived business opportunity without risking their full income. However, our hypothesis that entrepreneurs use a real options heuristic shaped by the uncertainty and the irreversibility of entry received only mixed support. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:sba:wpaper:07kwtffd&r=bec |
| By: | Patrick Fève; Alain Guay |
| Abstract: | The usefulness of SVARs for developing empirically plausible models is actually subject to many controversies in quantitative macroeconomics. In this paper, we propose a simple alternative two step SVARs based procedure which consistently identifies and estimates the effect of permanent technology shocks on aggregate variables. Simulation experiments from a standard business cycle model show that our approach outperforms standard SVARs. The two step procedure, when applied to actual data, predicts a significant short-run decrease of hours after a technology improvement followed by a delayed and hump-shaped positive response. Additionally, the rate of inflation and the nominal interest rate displays a significant decrease after a positive technology shock. |
| Keywords: | SVARs, long-run restriction, technology shocks, consumption to output ratio, hours worked |
| JEL: | C32 E32 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:0736&r=bec |
| By: | Axel Dreher (KOF Swiss Economic Institute, ETH Zurich Switzerland and CESifo, Germany); Martin Gassebner (Department of Management, Technology, and Economics, ETH Zurich) |
| Abstract: | The paper investigates whether the impact of regulations on entrepreneurship depends on corruption. We first test whether regulations robustly deter firm entry into the markets. Our results show that some regulations are indeed important determinants of entrepreneurial activity. Specifically, more procedures required to start a business and larger minimum capital requirements are detrimental to entrepreneurship. Second, we test whether corruption reduces the negative impact of regulations on entrepreneurship in highly regulated economies. Our empirical analysis for a maximum of 43 countries over the period 2003-2005 shows that corruption is beneficial in highly regulated economies. At the maximum level of regulation among our sample of countries, corruption significantly increases entrepreneurial activity. Our results thus provide support for the ‘grease the wheels’ hypothesis. |
| Keywords: | corruption, start-ups, grease the wheels, entrepreneurship, regulation, doing business |
| JEL: | D73 F59 M13 L26 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:kof:wpskof:07-166&r=bec |
| By: | Head, Charles Keith; Mayer, Thierry; Ries, John |
| Abstract: | Advances in communication technology make it possible for workers in India to supply business services to head offices located anywhere. This has the potential to put high-wage workers in direct competition with much lower paid Indian workers. Service trade, however, like goods trade, is subject to strong distance effects, implying that the remote supply of services remains limited. We investigate this proposition by deriving a gravity-like equation for service trade and estimating it for a large sample of countries and different categories of service trade. We find that distance costs are high but are declining over time. Our estimates suggest that delivery costs create a significant advantage for local workers relative to competing workers in distant countries. |
| Keywords: | distance; gravity; services; trade |
| JEL: | F10 F14 F15 F16 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6542&r=bec |
| By: | Patrick Fève; Alain Guay |
| Abstract: | The response of hours worked to a technology shock is an important and a controversial issue in macroeconomics. Unfortunately, the estimated response is generally sensitive to the specification of hours in SVARs. This paper uses a simple two-step approach in order to consistently estimate technology shocks from a SVAR model and the response of hours that follow this shock. The first step considers a SVAR model with a set of relevant stationary variables, but excluding hours. Given a consistent estimate of technology shocks in the first step, the response of hours to this shock is estimated in a second step. When applied to US data, the two-step approach predicts a short-run decrease of hours after a technology improvement followed by a hump-shaped positive response. This result is robust to the specification of hours, different sample periods, measures of hours and output and to the variables included in the VAR in the first step. |
| Keywords: | SVARs, long-run restriction, technology shocks, consumption to output ratio, hours worked |
| JEL: | C32 E32 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:0737&r=bec |