nep-bec New Economics Papers
on Business Economics
Issue of 2007‒12‒01
fourteen papers chosen by
Christian Calmes
University of Quebec in Ottawa

  1. Team Governance: Empowerment or Hierarchical Control By Friebel, Guido; Schnedler, Wendelin
  2. Executive Compensation: The View from General Equilibrium By Jean-Pierre Danthine; John B. Donaldson
  3. Limited Commitment Models of the Labour Market By Jonathan Thomas; TIm Worrall
  4. Firms' Stakeholders and the Costs of Transparency By Andres Almazan; Javier Suarez; Sheridan Titman
  5. Technology Innovations, Organisational Changes and Firms’ Wages in Italy By Paolo Ghinetti
  6. The Business Cycle Implications of Reciprocity in Labour Relations By Danthine, Jean-Pierre; Kurmann, Andre
  7. Wage Dispersion and Team Performance - An Empirical Panel Analysis By Egon Franck; Stephan Nüesch
  8. Inefficient Credit Booms By Guido Lorenzoni
  9. The Impact of Firm Level Contracting on Wage Levels and Inequality: Spain 1995-2002. By Sara de la Rica; Ainara González de San Román
  10. Endogenous Entry, Product Variety, and Business Cycles By Florin Bilbiie; Fabio Ghironi; Marc J. Melitz
  11. Private risk premium and aggregate uncertainty in the model of uninsurable investment risk By Francisco Covas; Shigeru Fujita
  12. Dynamic Optimal Insurance and Lack of Commitment By Alexander K. Karaivanov; Fernando M. Martin
  13. Strategic Shirking in Bilateral Trade By Christoph Luelfesmann
  14. Tenancy Default, Excess Demand and the Rental Market By Katherine Cuff and Nicolas Marceau

  1. By: Friebel, Guido; Schnedler, Wendelin
    Abstract: We investigate a team setting in which workers have different degrees of commitment to the outcome of their work. We show that if there are complementarities in production and if the team manager has some information about team members, interventions that the manager undertakes in order to assure certain efforts may have destructive effects: they can distort the way workers perceive their fellow workers and they may also lead to a reduction of effort by those workers that care most about output. Moreover, interventions may hinder the development of a cooperative organizational culture in which workers trust each other. Thus, our framework provides some first insights into the costs and benefits of interventions in teams. It identifies that team governance is driven by the importance of tasks that cannot be monitored. The more important these tasks, the more likely it is that teams are empowered.
    Keywords: incentives; informed principal; intrinsic motivation; team work
    JEL: D86 M54
    Date: 2007–11
  2. By: Jean-Pierre Danthine (University of Lausanne, CEPR and Swiss Finance Institute); John B. Donaldson (Columbia University)
    Abstract: We study the dynamic general equilibrium of an economy where risk averse shareholders delegate the management of the ¯rm 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 ¯rm ensures that her interests are aligned with the goals of ¯rm 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
  3. By: Jonathan Thomas; TIm Worrall
    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, unemployment, business cycle.
    JEL: E32 J41
    Date: 2007–11–26
  4. By: Andres Almazan; Javier Suarez; Sheridan Titman
    Abstract: We develop a model of a firm whose production process requires it to start and nurture a relationship with its stakeholders. Because there are spillover benefits associated with being associated with a "winner," the perceptions of stakeholders and potential stakeholders can affect firm value. Our analysis indicates that while transparency (i.e., generating information about a firm's quality) may improve the allocation of resources, a firm may have a higher ex ante value if information about its quality is not prematurely generated. The costs associated with transparency arise because of asymmetric information regarding the extent to which stakeholders benefit from having a relationship with a high quality firm. These costs are higher when firms can initiate non-contractible innovative investments that enhance the value of their stakeholder relationships. Stakeholder effects of transparency are especially important for younger firms with less established track records (e.g., start-ups).
    JEL: D21 D23
    Date: 2007–11
  5. By: Paolo Ghinetti (SEMEQ Department - Faculty of Economics - University of Eastern Piedmont)
    Abstract: This paper uses longitudinal data for a sample of Italian firms to study the effects of technological and organisational changes on wage levels and on wage differentials by skills inside the firm. Fixed effect estimates reveal that technological changes are associated with higher absolute and relative wages for skilled workers. About organisational changes, initially their relationship with firms’ wages is negative, but it becomes positive in subsequent periods, especially for skilled workers. Finally, there is no evidence that the wage increase is higher when technological and organisational changes are adopted in conjunction instead of separately.
    Keywords: Information technology; organisational change; wages; Italy
    JEL: J24 J31 L23 O33
    Date: 2007–09
  6. By: Danthine, Jean-Pierre; Kurmann, Andre
    Abstract: We develop a reciprocity-based model of wage determination and incorporate it into a modern dynamic general equilibrium framework. We estimate the model and find that, among potential determinants of wage policy, rent-sharing (between workers and firms) and a measure of wage entitlement are critical to fit the dynamic responses of hours, wages and inflation to various exogenous shocks. Aggregate employment conditions (measuring workers' outside option), on the other hand, are found to play only a negligible role in wage setting. These results are broadly consistent with micro-studies on reciprocity in labour relations but contrast with traditional efficiency wage models which emphasize aggregate labour market variables as the main determinant of wage setting. Overall, the empirical fit of the estimated model is at least as good as the fit of models postulating nominal wage contracts. In particular, the reciprocity model is more successful in generating the sharp and significant fall of inflation and nominal wage growth in response to a neutral technology shock.
    Keywords: Efficiency wages; Estimated DSGE models; Reciprocity
    JEL: E24 E31 E32 E52 J50
    Date: 2007–11
  7. By: Egon Franck; Stephan Nüesch (Institute for Strategy and Business Economics, University of Zurich; Institute for Strategy and Business Economics, University of Zurich)
    Abstract: The impact of intra-team pay dispersion on team productivity is a highly discussed issue. On one hand, wage differentials provide incentives for higher employee effort. On the other hand, pay inequality discourages cooperation among team members, which reduces performance. Analyzing non-linear effects of wage dispersion in professional team sports, we find empirical evidence that an initial increase of intra-team inequity reduces team performance, but at some point the relation reverses. In addition, we show that the pay structure of a team clearly affects the teamÕs playing style.
    Keywords: wage dispersion, team performance, relative deprivation, tournament theory
    JEL: D31 L83 M52
    Date: 2007
  8. By: Guido Lorenzoni
    Abstract: This paper studies the welfare properties of competitive equilibria in an economy with financial frictions hit by aggregate shocks. In particular, it shows that competitive financial contracts can result in excessive borrowing ex ante and excessive volatility ex post. Even though, from a first-best perspective the equilibrium always displays under-borrowing, from a second-best point of view excessive borrowing can arise. The inefficiency is due to the combination of limited commitment in financial contracts and the fact that asset prices are determined in a spot market. This generates a pecuniary externality that is not internalized in private contracts. The model provides a framework to evaluate preventive policies which can be used during a credit boom to reduce the expected costs of a financial crisis.
    JEL: E32 E44 E61 G10 G18
    Date: 2007–11
  9. By: Sara de la Rica (The University of the Basque Country, IZA); Ainara González de San Román (The University of the Basque Country)
    Abstract: This paper provides microeconomic evidence on the variation over time of the firm-specific wage premium in Spain from 1995 to 2002, and its impact on wage inequality. We make use of two waves of a detailed linked employer-employee data set. In addition, a new data set with financial information on firms is used for 2002 to control as flexibly as possible for di¤erences in the performance of firms (aggregated at industry level). To our knowledge, there is no microeconomic evidence on the dynamics of the firm-specific wage premium for Spain or for any other country with a similar institutional setting. Our results suggest that there is a clear tendency towards centralization in the collective bargaining process in Spain over this seven-year period, that the firm-level contract wage premium undergoes a substantial decrease, particularly for women, and finally that the "centralization" observed in the collective bargaining process has resulted in a slight decrease in wage inequality.
    Keywords: Firm-level contracts, Matched employer-employee data, wage inequality
    Date: 2007–11–26
  10. By: Florin Bilbiie; Fabio Ghironi; Marc J. Melitz
    Abstract: This paper builds a framework for the analysis of macroeconomic fluctuations that incorporates the endogenous determination of the number of producers over the business cycle. Economic expansions induce higher entry rates by prospective entrants subject to irreversible investment costs. The sluggish response of the number of producers (due to the sunk entry costs) generates a new and potentially important endogenous propagation mechanism for real business cycle models. The stock-market price of investment (corresponding to the creation of new productive units) determines household saving decisions, producer entry, and the allocation of labor across sectors. The model performs at least as well as the benchmark real business cycle model with respect to the implied second-moment properties of key macroeconomic aggregates. In addition, our framework jointly predicts a procyclical number of producers and procyclical profits even for preference specifications that imply countercyclical markups. When we include physical capital, the model can reproduce the variance and autocorrelation of GDP found in the data.
    JEL: E20 E32
    Date: 2007–11
  11. By: Francisco Covas; Shigeru Fujita
    Abstract: This paper studies cyclical properties of the private risk premium in a model where a continuum of heterogeneous entrepreneurs are subject to aggregate as well as idiosyncratic risks, both of which are assumed to be highly persistent. The calibrated model matches highly skewed wealth and income distributions of entrepreneurs found in the Survey of Consumer Finances. The authors provide an accurate numerical solution to the model even though the model is shown to exhibit serious nonlinearities that are absent in incomplete market models with idiosyncratic labor income risk. The model is able to generate the aggregate private risk premium of 2-3 percent and the low risk-free rate. However, it generates very little variation in these variables over the business cycle, suggesting that the model lacks the ability to amplify aggregate shocks.
    Date: 2007
  12. By: Alexander K. Karaivanov (Simon Fraser University); Fernando M. Martin (Simon Fraser University)
    Abstract: We analyze the role of commitment in a dynamic principal-agent model of optimal insurance with hidden effort and observable but non-contractible savings. We argue that the optimal contract under full commitment is time-inconsistent. Consequently, we analyze the optimal time-consistent Markov-perfect insurance contract when both the agent and the principal cannot commit for longer than one period and contrast our results with the full commitment case from the existing literature. We find that the optimal contract under lack of commitment provides additional insurance relative to the autarky allocation and features non-degenerate long-run asset and consumption distributions. Furthermore, the no-commitment contract differs significantly from the commitment contract in the time profiles of consumption, savings, and welfare. We solve for the optimal insurance contracts in several environments featuring different degrees of market incompleteness and find that the welfare loss due to lack of commitment can be very high relative to the welfare costs of moral hazard or savings non-contractibility.
    Keywords: optimal insurance, time consistency, moral hazard
    JEL: D11 E21
    Date: 2007–10
  13. By: Christoph Luelfesmann (Simon Fraser University)
    Abstract: This paper explores a version of the canonical holdup model where agents undertake specific investments prior to their transaction. In this setting, we identify a novel reason for contractual inefficiency. An investing party (here, the seller) may shirk for strategic reasons, in particular, exert an effort so low that subsequent trade becomes inefficient. We first show that under a fixed-price contract which would otherwise be optimal and induce trade, strategic shirking can arise irrespective of the precontracted trade price. We then establish that if strategic shirking arises under a fixed-price contract, no general mechanism exists which restores efficient trade. Finally, we show that the defection issue is more severe when the parties trade after the buyer's valuation was realized, as compared to a scenario where the trade transaction is finalized in a state of uncertainty.
    Keywords: Bilateral Trade, Hold-Up, Specific Investments, Shirking.
    JEL: D23 H57 L51
    Date: 2007–10
  14. By: Katherine Cuff and Nicolas Marceau
    Abstract: We develop a model of a competitive rental housing market with an endogenous rate of tenancy default arising from income uncertainty. Potential tenants must choose to engage in a costly search for rental housing, and must commit to a rental agreement before the uncertainty is resolved. We show that there are two possible equilibria in this market: a market-clearing equilibrium and an equilibrium with excess demand. Therefore, individuals might not have access to rental housing because they are unable to afford to look for housing, they are unable to pay their rent, or with excess demand in the market they are simply unable to find a rental unit. We show that government regulations affecting the cost of default to the housing suppliers and the quality of rental units can have different effects on the equilibrium variables of interest — rental rate, quantity demanded and supplied, and access to rental housing — depending on the type of equilibria in the market. A numerical example illustrates these results.
    Keywords: Tenancy Default, Excess Demand, Rental Housing Policies
    JEL: R21 R31 R38 D41
    Date: 2007–11

This nep-bec issue is ©2007 by Christian Calmes. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.