nep-bec New Economics Papers
on Business Economics
Issue of 2007‒12‒08
seventeen papers chosen by
Christian Calmes
University of Quebec in Ottawa

  1. Personnel Economics: The Economist's View of Human Resources By Edward P. Lazear; Kathryn L. Shaw
  2. Contracting with a quiet life manager By Eduard Alonso-Paulí
  3. Do innovation and human capital explain the productivity gap between small and large firms? By Laia Castany; Enrique Lopez-Bazo; Rosina Moreno
  4. Collateralized capital and News-driven cycles By KOBAYASHI Keiichiro; NUTAHARA Kengo
  5. Are flexible contracts bad for workers? Evidence from job satisfaction data By John S Heywood; Colin Green
  6. The Adoption of a Code of Best Practice: Incentive Implications. By Eduard Alonso-Paulí
  7. Endogenous Market Structure and the Business Cycle By Andrea Colciago; Federico Etro
  8. Wage Structure, Raises and Mobility: International Comparisons of the Structure of Wages Within and Across Firms By Edward P. Lazear; Kathryn L. Shaw
  9. Multiple Equilibria in a Firing Game With Impartial Justice By Besancenot, Damien; Vranceanu, Radu
  10. Firm Entry and Institutional Lock-in: An Organizational Ecology Analysis of the Global Fashion Design Industry. By R. Wenting; K. Frenken
  11. Total Factor Productivity Growth in Chinese Industry: 1952-2005 By Selin Ozyurt
  12. Stock market performance and pension fund investment policy: rebalancing, free float, or market timing? By Jacob A. Bikker; Laura Spierdijk; Paul Finniez
  13. Business Conditions, Stock Market Volatility, and Expected Return By Chang-Jin Kim; Yunmi Kim; Charles R. Nelson
  14. Residual income and value creation: An investigation into the lost-capital paradigm By Magni, Carlo Alberto
  15. Markets, Institutions, and Transaction Costs: The Endogeneity of Governance By Geoffrey R D Underhill
  16. Physical Market Determinants of the Price of Crude Oil and the Market Premium By Chevillon, Guillaume; Rifflart, Christine
  17. Monopolistic Screening under Learning By Doing By Dennis Gaertner

  1. By: Edward P. Lazear; Kathryn L. Shaw
    Abstract: Personnel economics drills deeply into the firm to study human resource management practices like compensation, hiring practices, training, and teamwork. Many questions are asked. Why should pay vary across workers within firms--and how "compressed" should pay be within firms? Should firms pay workers for their performance on the job or for their skills or hours of work? How are pay and promotions structured across jobs to induce optimal effort from employees? Why do firms use teams and how are teams used most effectively? How should all these human resource management practices, from incentive pay to teamwork, be combined within firms? Personnel economics offers new tools and new answers to these questions. In this paper, we display the tools and principles of personnel economics through a series of models aimed at addressing the questions posed above. We focus on the building blocks that form the foundation of personnel economics: the assumptions that both the worker and the firm are rational maximizing agents; that labor markets and product markets must reach some price-quantity equilibrium; that markets are efficient or that market failures have introduced inefficiencies; and that the use of econometrics and experimental techniques has advanced our ability to identify underlying causal relationships.
    JEL: J01 J24 J3 J31 J32 J33
    Date: 2007–11
  2. By: Eduard Alonso-Paulí (Department of Economics, Universidad Pablo de Olavide)
    Abstract: The aim of this paper is to analyze how employees may affect firm's corporate governance. In particular, we analyze a shareholder-manager relationship through a principal-agent framework. The manager is the agent in charge of taking decisions for firm's success. Yet, when deciding, the manager takes into account employees' preferences, i.e. the manager wants to enjoy a "quiet life". Our result highlight that having a quiet-life manager is not necessarily linked to destroy value, as suggested in recent research. It might even recover part of the efficient decisions (at a cost borne by the shareholder).
    Keywords: Quiet-life bias, Corporate Governance, Moral Hazard
    JEL: L26 M14 D86
    Date: 2007–12
  3. By: Laia Castany (Faculty of Economics, University of Barcelona); Enrique Lopez-Bazo (Faculty of Economics, University of Barcelona); Rosina Moreno (Faculty of Economics, University of Barcelona)
    Abstract: Empirical evidence is compelling that large firms are more productive than small firms. The hypothesis in this paper is that the productivity differences between small and large firms are associated with two of the main determinants of a firm’s performance: the human and technological capital that firms incorporate. We suggest that the contribution of these factors in explaining the size of the productivity gap might not only be due to the fact that large firms make a more extensive use of them, but also because large firms obtain higher returns from their investment in human and technological capital. The evidence we obtain for a comprehensive sample of Spanish manufacturing firms (1990-2002) supports this hypothesis, which has important implications for the effectiveness of policies designed to improve productivity in SMEs by stimulating innovation and the use of more skilled workers.
    Keywords: total factor productivity; innovation; skilled labour; firm size.
    JEL: D24 J24 L25
    Date: 2007–11
  4. By: KOBAYASHI Keiichiro; NUTAHARA Kengo
    Abstract: Kobayashi, Nakajima, and Inaba (2007) show that in the neoclassical business cycle models with collateral constraints, a boom can be generated in response to an optimistic change in expectations on the future state of the economy. They call this business cycle a news-driven cycle. In their models, land is used as collateral, and borrowing for working capital is limited by the value of collateralized land. We simplify their model to one without land. We show that in an economy where capital goods are used as collateral, news-driven cycles can be generated.
    Date: 2007–12
  5. By: John S Heywood; Colin Green
    Abstract: If workers can choose between permanent and flexible contracts, compensating wage differentials should arise to equalize on-the-job utility in the two types of contracts. Estimating job satisfaction using the British Household Panel Survey shows that agency and casual contracts are associated with routinely lower satisfaction. This results because the low job satisfaction associated with less job security is not offset by higher compensation or other job characteristics. Job security is sufficiently important that holding constant this one facet of satisfaction eliminates the overall gap in job satisfaction between flexible and permanent contracts.
    Keywords: Flexible Contracts; Job Satisfaction; Job Security
    Date: 2007
  6. By: Eduard Alonso-Paulí (Department of Economics, Universidad Pablo de Olavide)
    Abstract: We study the incentives induced by the adoption of a Code of Best Practice. Using an agency model, we analyze whether and when firms are interested in adopting a Code that allows the shareholder to reduce the manager's discretion. Our results suggest that if a voluntary Code is available, not all firms will be interested in it. In firms that do adopt it, the Code is not always used to reach more efficient outcomes. Regarding investment decisions, we show that a proper design of a Code can alleviate the distortions caused by the agency problem at the investment level. Finally, we analyze some features that a regulator protecting shareholder's wealth should consider. Our findings suggest that heterogeneity in Codes may be partially explained by differences in the distribution of firms or by different abilities of the regulator.
    Keywords: Codes of Best Practice, Corporate Governance, Agency model, Limited Liability
    JEL: G38 D23 L20
    Date: 2007–12
  7. By: Andrea Colciago; Federico Etro
    Abstract: We introduce endogenous strategic interactions under competition in quantities and in prices together with endogenous entry in a dynamic stochastic general equilibrium model with ?exible prices. The endogenous mark ups depend on the form of competition and on the degree of substitutability between goods, and they vary countercylically while pro?ts are procyclical. Positive temporary shocks to productivity and government spending attract entry. Entry strengthens competition between ?rms, which temporary reduces mark ups and prices: this creates an intertemporal substitution e¤ect which provides an extra boost to consumption. The model outperforms the standard RBC framework in matching impulse response functions and second moments for US data.
    Keywords: Endogenous Market Structure, Firms?Entry, Business Cycle
    JEL: L11 E32
    Date: 2007–11
  8. By: Edward P. Lazear; Kathryn L. Shaw
    Abstract: The returns to talent or performance have grown over time in developed countries. Is talent concentrated in a few firms or are firms virtual microcosms of the economy, each having close to identical distributions of talent? The data show that talent is not concentrated in a few companies, but is widely dispersed across companies. Wage dispersion within firms is nearly as high as the wage dispersion overall. The standard deviation of wages within the firm is about 80% of the standard deviation across all workers in the economy. Firms are more similar than they are dissimilar, but they are not identical: the firm mean wage displays considerable dispersion across the population of firms. There is evidence that talent is becoming more concentrated over time within some firms relative to others. In four countries that estimated wage regressions with firm fixed effects, the firm fixed effects are contributing more to the R-squared of the wage regression over time. Law firms have more lawyers than janitors. Janitorial firms have more janitors than lawyers and the differences between firms have become more pronounced. Still, the variance of wages within the average firms remains high.
    JEL: J01 J2 J24 J3 J31
    Date: 2007–11
  9. By: Besancenot, Damien (Université Paris 13 and CEPN); Vranceanu, Radu (ESSEC Business School)
    Abstract: In many European countries, a majority of employees are hired under very protective labor contracts that restrict the ability of the employer to dismiss them. In particular, employees can take to courts the firm's layoff motive. This paper analyses the interaction between firms, employees and the labor judicial system specific to South European countries. If judges' error margin increases when the judicial system is subject to congestion, the game presents multiple equilibria which differ in the frequency of workers abusively fired for personal motives. Policy implications can be inferred.
    Keywords: EPL; Labor judges; Firing costs; Layoff motive; Multiple equilibria
    JEL: J32 J53 K31
    Date: 2007–11
  10. By: R. Wenting; K. Frenken
    Abstract: Few industries are more concentrated than the global fashion industry. We analyse the geography and evolution of the ready-to-wear fashion design industry by looking at the yearly entry rates following an organizational ecology approach. In contrast to earlier studies on manufacturing industries, we find that legitimation effects are local and competition effects are global. This result points to the rapid turnover of ideas in fashion on the one hand and the global demand for fashion apparel on the other hand. We attribute the decline of Paris in the post-war period to 'institutional lock-in', which prevented a ready-to-wear cluster to emerge as vested interested of haute couture designers were threatened. An extended organizational ecology model provides empirical support for this claim.
    Keywords: Organizational ecology, fashion industry, creative industries, clusters, institutional lock-in Length 22 pages
    Date: 2007–11
  11. By: Selin Ozyurt
    Abstract: This paper presents a timely assessment of Chinese industrial productivity performances over the period 1952-2005. The total factor productivity (TFP) growth analysis is based on a Cobb-Douglas specification with aggregated annual data set. This study tackles some theoretical and methodological issues raised by critics of previous studies. First of all, the use of economic tools allows us to relax some restrictive hypothesis of the neoclassical growth framework such as competitive market behaviour, constant returns to scale production technology and Hicks neutral technological change. In addition, our TFP growth estimates are adjusted for business fluctuations. The paper also deals with the autocorrelation issue prevailing in most previous studies. Our major findings are: (i) In Chinese industry, between 1952 and 2005 capital accumulation has been the main engine of economic takeoff. (ii) During the post-reform period, TFP growth contributed significantly to economic growth. (iii) TFP gains have exhibited a sharply increasing pattern since the late 1980’s, along with the accelerated integration of China into the world economy.
    Date: 2007–11
  12. By: Jacob A. Bikker; Laura Spierdijk; Paul Finniez
    Abstract: Using a measure of competition based on the Panzar-Rosse model, this paper explains bank competition across 76 countries on the basis of various determinants. Studies explaining banking competition are rare and typically insuffciently robust as they are based on a limited number of countries only. Traditionally, market structure indicators, such as the number of banks and banking concentration, have been considered the major determinants of competition in the banking sector. However, we find that these variables have no signiffcant impact on market power. Instead, we show that a country's institutional framework is a key factor in explaining banking competition. Extensive regulation, particularly antitrust policies, improves the competitive environment. The foreign investment climate, a proxy of contestability, also plays an important role. The fewer restrictions on foreign investments exist, the more competitive the banking sector becomes. In addition, activity restrictions make large banks less competitive and collusion markups are procyclical. Finally, competition is substantially weaker in countries with a socialist past, such as Central- and Eastern Europe.
    Keywords: banking competition; market structure; concentration; contestability; interindustry competition.
    Date: 2007–11
  13. By: Chang-Jin Kim; Yunmi Kim; Charles R. Nelson
    Date: 2007–12
  14. By: Magni, Carlo Alberto
    Abstract: This paper presents a new way of measuring residual income, originally introduced by Magni (2000a, 2000b, 2003). Contrary to the standard residual income, the capital charge is equal to the capital lost by investors. The lost capital may be viewed as (a) the foregone capital, (b) the capital implicitly infused into the business, (c) the outstanding capital of a shadow project, (d) the claimholders' credit. Relations of the lost capital with book values and market values are studied, as well as relations of the lost-capital residual income with the classical standard paradigm; many appealing properties are derived, among which a property of earnings aggregation. Different concepts and results, provided by different authors in such different fields as microeconomics, management accounting and corporate finance, are considered: O'Hanlon and Peasnell's (2002) unrecovered capital and Excess Value Created; Ohlson's (2005) Abnormal Earnings Growth, O'Byrne's (1997) EVA improvement, Keynes's (1967) user cost, Drukarczyk and Schueler's (2000) Net Economic Income, Fern\'{a}ndez's (2002) Created Shareholder Value, Anthony's (1975) profit. They are all conveniently reinterpreted within the theoretical domain of the lost-capital paradigm and conjoined in a unified view. The results found make this new theoretical approach a good candidate for firm valuation, incentive compensation, capital budgeting decision-making.
    Keywords: Management accounting; corporate finance; residual income; abnormal earnings; paradigm; value creation; incentive compensation; outstanding capital; lost capital; net present value; book value; market value.
    JEL: G11 M41 M40 M20 G10 G0 G30 M21
    Date: 2007–11
  15. By: Geoffrey R D Underhill (Universiteit van Amsterdam)
    Abstract: Much of the literature contrasts the dynamics of free markets with the ‘political’ dynamics of governance. The distinction portrays the process of ‘economic’ competition as separate from the deployment of private political resources to affect the terms of competition in line with agent preferences. This yields a distorted view of the ways in which real-world economic agents compete with each other, and the market-governance/state-market dichotomy creates more confusion than it clarifies, failing to account for the empirical observation that complex market systems and institutions of governance cannot be found apart. Even as an analytical distinction, the dichotomy blinds us to the ways in which states are active constituents of the market place, and the ways in which market actors and their constituencies are part of the wider process of governance shaping the terms of competition. This paper will extend the transaction cost approach and the insights of institutional economics to demonstrate in theoretical terms that the emergence of the institutions of governance is endogenous to the utility-maximising behaviour of economic agents. Utility-maximising behaviour and conflict over the terms of competition in the market generate both the formal and informal institutions and processes of governance such as regulation and dispute settlement. The paper then presents a conceptual model for understanding the essential integration of market and governance processes, the ‘state-market condominium’, in which markets are not just about what firms do in competition with each other, but are conceptualized as an ensemble of regulatory authority operating simultaneously through policy processes and the competitive interaction of firms. Contrasting forms of market correspond to political compromises based on the preferences of interacting agents. The model hypothesises reflexively that conflict over the terms of competition in markets generates changes in actor preferences concerning regulation and governance, and that the outcome of conflict over divergent actor preferences concerning governance and regulation generates changes in market structures. Changes in preferences concerning governance therefore are intimately bound up with preferences concerning market structure. This approach brings the work of economists and political scientists closer together.
    Date: 2007–06
  16. By: Chevillon, Guillaume (ESSEC Business School); Rifflart, Christine (Sciences-Po Center for Economic Research (OFCE) and National Political Science Foundation)
    Abstract: We analyze the physical, i.e. non financial, determinants of the real price of crude oil by means of an equilibrium correction model over the last two decades. We find that two cointegrating relations affect the change in prices: one refers to OPEC's cartel behavior attempting to control prices using its market power and quotas; the other to the coverage rate of expected future demand by OECD using inventory behaviours. We derive an equation for the change in oil prices which we use to assess the speculative elements of the early millennium price hike. We show that worries alien to the physical markets are the causes of the increase in oil prices and are able to quantify their impact.
    Keywords: Cointegration; Forecast; Market Premium; Oil Price
    JEL: C53 Q40
    Date: 2007–06
  17. By: Dennis Gaertner (Socioeconomic Institute, University of Zurich)
    Abstract: This paper investigates the design of incentives in a dynamic adverse selection framework when agents’ production technologies display learning effects and agents’ rate of learning is private knowledge. In a simple two-period model with full commitment available to the principal, we show that whether learning effects are over- or under-exploited crucially depends on whether learning effects increase or decrease the principal’s uncertainty about agents’ costs of production. Hence, what drives the over- or underexploitation of learning effects is whether more efficient agents also learn faster (so costs diverge through learning effects) or whether it is the less efficient agents who learn faster (so costs converge). Furthermore, we show that if divergence in costs through learning effects is strong enough, learning effects will not be exploited at all, in a sense to be made precise.
    Keywords: Asymmetric Information, Learning by Doing, Regulation
    JEL: D82 L14 L43 L51 O31
    Date: 2007–12

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.