nep-bec New Economics Papers
on Business Economics
Issue of 2008‒02‒23
eleven papers chosen by
Christian Calmes
University of Quebec in Ottawa

  1. Returns to Tenure or Seniority? By Sebastian Buhai; Miguel Portela; Coen Teulings; Aico van Vuuren
  2. On the Effects of the Degree of Discretion in Reporting Managerial performance By De Waegenaere, A.M.B.; Wielhouwer, J.L.
  3. Codes of Best Practice in Competitive Markets for Managers By Eduard Alonso-Paulí
  4. Signaling Quality through Prices in an Oligopoly By Maarten C.W. Janssen; Santanu Roy
  5. Productivity Gains from Offshoring: an Empirical Analysis for the Netherlands By Frank A.G. den Butter; Christiaan Pattipeilohy
  6. A Dynamic Model of Endogenous Mergers and Trade Liberalization By Chaudhuri, A.R.
  7. Procurement: The Transaction Costs Perspective in a Globalising World By Frank A.G. den Butter
  8. Hawks and doves in segmented markets : A formal approach to competitive aggressiveness By Claude d’Aspremont; Rodolphe Dos Santos Ferreira; Jacques Thépot
  9. The Determinants of Managerial Decisions Under Risk By Martin G. Kocher; Ganna Pogrebna; Matthias Sutter
  10. Welfare Effect of Mergers and Trade Liberalization By Chaudhuri, A.R.; Benchekroun, H.
  11. How Banking Competition Changed over Time By Jacob A. Bikker; Laura Spierdijk

  1. By: Sebastian Buhai (Aarhus School of Business, University of Aarhus, Denmark, and Erasmus University Rotterdam); Miguel Portela (University of Minho, Portugal); Coen Teulings (CPB Netherlands Bureau for Economic Policy Analysis, The Hague, and University of Amsterdam); Aico van Vuuren (VU University Amsterdam)
    Abstract: This study documents two empirical regularities, using data for Denmark and Portugal. First, workers who are hired last, are the first to leave the firm (Last In, First Out; LIFO). Second, workers’ wages rise with seniority (= a worker’s tenure relative to the tenure of her colleagues). We seek to explain these regularities by developing a dynamic model of the firm with stochastic product demand and hiring cost (= irreversible specific investments). There is wage bargaining between a worker and its firm. Separations (quits or layoffs) obey the LIFO rule and bargaining is efficient (a zero surplus at the moment of separation). The LIFO rule provides a stronger bargaining position for senior workers, leading to a return to seniority in wages. Efficiency in hiring requires the workers’ bargaining power to be in line with their share in the cost of specific investment. Then, the LIFO rule is a way to protect their property right on the specific investment. We consider the effects of Employment Protection Legislation and risk aversion.
    Keywords: irreversible investment; efficient bargaining; seniority; LIFO; matched employer-employee data; EPL
    JEL: J31 J41 J63
    Date: 2008–01–22
  2. By: De Waegenaere, A.M.B.; Wielhouwer, J.L. (Tilburg University, Center for Economic Research)
    Abstract: We consider a principal-agent setting in which a manager?s compensation de- pends on a noisy performance signal, and the manager is granted the right to choose an (accounting) method to determine the value of the performance signal. We study the effect of the degree of such reporting discretion, measured by the number of acceptable methods, on the optimal contract, the expected cost of com- pensation and the manager?s expected utility. We find that while an increase in reporting discretion never harms the manager, the effect on the expected cost of compensation is more subtle. We identify three main effects of increased report- ing discretion and characterize the conditions under which the aggregate of these three effects will lead to a higher or lower cost of compensation.
    Keywords: managerial compensation;reporting flexibility.
    JEL: D82 D86 M41
    Date: 2008
  3. By: Eduard Alonso-Paulí
    Abstract: We study firms' corporate governance in environments where possibly heterogeneous shareholders compete for possibly heterogeneous managers. A firm, formed by a shareholder and a manager, can sign either an incentive contract or a contract including a Code of Best Practice. A Code allows for a better manager's control but makes manager's decisions hard to react when market conditions change. It tends to be adopted in markets with low volatility and in low-competitive environments. The firms with the best projects tend to adopt the Code when managers are not too heterogeneous while the best managers tend to be hired through incentive contracts when the projects are similar. Although the matching between shareholders and managers is often positively assortative, the shareholders with the best projects might be willing to renounce to hire the best managers, signing contracts including Codes with lower-ability managers.
    Keywords: Corporate Governance, Incentives, Moral Hazard, Matching model
    Date: 2008–02–16
  4. By: Maarten C.W. Janssen (Erasmus University Rotterdam); Santanu Roy (Southern Methodist University, Dallas, Texas)
    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: 2007–10–22
  5. By: Frank A.G. den Butter (VU University Amsterdam); Christiaan Pattipeilohy (VU University Amsterdam, and Frisch Center, Oslo)
    Abstract: A major question in the globalization debate is whether outsourcing and offshoring activities are beneficial to the home country. This paper investigates the effects on productivity and trade from the perspective of transaction costs, using a recent theory on trade in tasks. A production function is estimated for the Netherlands for the period 1972-2001. It suggests that the effect of offshoring manufacturing and services on total factor productivity (TFP) is positive and larger than the effect of R&D on productivity.
    Keywords: globalization; offshoring; foreign direct investments; transaction costs; total factor productivity
    JEL: F10 F43 O47
    Date: 2007–11–23
  6. By: Chaudhuri, A.R. (Tilburg University, Center for Economic Research)
    Abstract: This paper uses a dynamic dominant-firm model with an endogenous merger process to examine the effects of trade liberalization on industry structure. Domestic and cross-border mergers and demergers are allowed for. When firms are myopic and the dominant firm has a sufficiently high pre-merger capital share in any one country, trade liberalization causes the industry to become significantly more concentrated. When firms are forward-looking, this anti-competitive effect of trade liberalization is mitigated. Tariff reduction from a prohibitive to a non-prohibitive level aligns merger patterns across countries and initiates merger (or demerger) waves simultaneously across countries, provided all firms are equally forward-looking. When the dominant firm is more forward-looking than the fringe, however, this result may be reversed. These results, thus, highlight the importance of taking into consideration existing industry structure and firms' discount rates whilst formulating competition policy in the face of trade liberalization.
    Keywords: endogenous market structure;horizontal mergers;trade liberalization
    JEL: L41 F13
    Date: 2008
  7. By: Frank A.G. den Butter (VU University Amsterdam)
    Abstract: Fragmentation of production into more and more complex supply chains is a prominent feature of globalisation. It implies that transaction costs as part of total costs of ownership carry a large weight in procurement decisions. An analysis of the various types of transaction costs is also essential in the “make or buy” and location decisions in global sourcing. A distinction can be made between “hard” and “soft” transaction costs. Soft transaction costs are difficult to quantify but become more important in strategic business decisions now that formal trade barriers gradually disappear and transport costs are reduced. Business strategies to keep transaction costs low in the long run can also, to a considerable extent, explain socially responsible business conduct from the perspective of rational economic behaviour.
    Keywords: procurement; outsourcing; transaction costs; managing transactions; orchestrating the supply chain
    JEL: F23 M14 M21
    Date: 2007–11–23
  8. By: Claude d’Aspremont; Rodolphe Dos Santos Ferreira; Jacques Thépot (Laboratoire de Recherche en Gestion et Economie, Université Louis Pasteur)
    Abstract: Competitive aggressiveness is analyzed in a simple spatial oligopolistic competition model, where each one of two firms supplies two connected market segments, one captive the other contested. To begin with, firms are simply assumed to maximize profit subject to two constraints, one related to competitiveness, the other to market feasibility. The competitive aggressiveness of each firm, measured by the relative implicit price of the former constraint, is then endogenous and may be taken as a parameter to characterize the set of equilibria. A further step consists in supposing that competitive aggressiveness is controlled by each firm through its manager hiring decision, in a preliminary stage of a delegation game. When competition is exogenously intensified, through higher product substitutability or through larger relative size of the contested market segment, competitive aggressiveness is decreased at the subgame perfect equilibrium. This decrease partially compensates for the negative effect on profitability of more intense competition.
    Date: 2007
  9. By: Martin G. Kocher; Ganna Pogrebna; Matthias Sutter
    Abstract: In hierarchical organizations the role of a team leader often requires making decisions which do not necessarily coincide with the majority opinion of the team. However, these decisions are final and binding for all team members. We study experimentally why, and under which conditions, leaders resort to such decisions. In our experiment, teams are presented with several paired lottery choices. They decide by majority voting which lottery from the lottery pair they prefer to be played out. After all members of the team have made their choices, the team leader is informed about the outcome of the vote and has an opportunity either to confirm or to alter the majority decision. We find that leaders overrule their teams in 35% of cases and such decisions are primarily driven by divergent preferences of leaders and the other team members. Male, younger and more risk seeking (as opposed to female, older and more risk averse) leaders overrule decisions of ordinary team members more often. We discuss the implications of our findings for the management of organizations.
    Keywords: leadership, risk attitude, managerial decisions, collective choice, choice under risk.
    JEL: C91 C92 D91 M14
  10. By: Chaudhuri, A.R.; Benchekroun, H. (Tilburg University, Center for Economic Research)
    Abstract: In a two-country model where firms behave a la Cournot, we show that marginal and non-marginal trade liberalization have different effects on the social desirability of horizontal mergers. Marginal tariff reductions increase (decrease) the desirability of merger at sufficiently low (high) tariff levels. In the neighborhood of free trade, for sufficiently low cost savings from merger, trade liberalization increases the desirability of merger whilst decreasing the profitability, implying that mergers should be actively encouraged by competition authorities. Furthermore, we identify ranges of tariff levels for which, if trade liberalization increases (decreases) the desirability of merger, it necessarily increases (decreases) its profitability.
    JEL: L41 F13
    Date: 2008
  11. By: Jacob A. Bikker; Laura Spierdijk
    Abstract: This paper is the first detailed and world-wide investigation of the developments in banking competition during the past fiffteen years. Using the Panzar-Rosse approach, we establish significant changes over time in the competitiveness of the banking industry. The changes in competition over time are small on average, but substantial for several countries and regions. Various Western economies faced a significant decline in banking competition during recent years. In particular, the competitive climate in the euro area was subject to a major break around 2001 - 2002, initiating a period of less competition. Also for the United States and Japan we establish a break during this period. The part of Eastern Europe that now belongs to the European Union experienced a significant but modest decrease in competition during the past ten years. Furthermore, the banking industry in emerging markets became more competitive during the last decade. We attribute the predominantly downward trend in competition to increased bank size and the shift from traditional intermediation to off-balance sheet activities.
    Keywords: competition, banking industry, Panzar-Rosse model, structural breaks
    JEL: C52 G21 L11 L13
    Date: 2008–02

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