nep-bec New Economics Papers
on Business Economics
Issue of 2008‒03‒01
fifteen papers chosen by
Christian Calmes
University of Quebec in Ottawa

  1. Real Business Cycles with Cournot Competition and Endogenous Entry By Colciago, Andrea; Etro, Federico
  2. The Persistence of Differences in Productivity, Wages, Skill Mixes and Profits Between Firms in a Rapidly Changing Environment By Katsuya Takii
  3. Differences in Social Preferences - Profitable for the Firm? By Küpper, Hans-Ulrich; Sandner, Kai
  4. Lumpy Labor Adjustment as a Propagation Mechanism of Business Cycles By Fang Yao
  5. Breakup of Repeat Transaction Contracts, Specific Investment, and Efficient Rent-Seeking By Bernhard Ganglmair
  6. The Impact of International Outsourcing on Labour Market Dynamics in Germany By Ronald Bachmann; Sebastian Braun
  7. Canadian Firm and Job Dynamics By Ravi Balakrishnan
  8. Coopetition in a Mixed Oligopoly Market By Duc-De Ngo; Mahito Okura
  9. Explaining the Great Moderation - it is not the shocks. By Domenico Giannone; Michele Lenza; Lucrezia Reichlin
  10. The Feldstein-Horioka fact. By Domenico Giannone; Michele Lenza
  11. Life-cycle patterns of interest rate markups in small firm finance By Moshe Kim; Eirik Gaard Kristiansen; Bent Vale
  12. Incomplete Contracts, Bankruptcy and the Firm’s Capital Structure By Elie Appelbaum
  13. The Return to Capital and the Business Cycle By Paul Gomme; B Ravikumar; Peter Rupert
  14. Stock market volatility and learning. By Klaus Adam; Albert Marcet; Juan Pablo Nicolini
  15. Perks: Contractual Arrangements to Restrain Moral Hazard By Joon Song

  1. By: Colciago, Andrea; Etro, Federico
    Abstract: We introduce Cournot competition and endogenous entry in an otherwise neoclassical macroeconomic framework. First, we develop a model with exogenous savings à la Solow describing the dynamic path of business creation. Then, we develop a model à la Ramsey describing the dynamic interaction of consumption and business creation. Our models are able to explain why markups vary countercylically and profits are procyclical. The analysis of permanent and temporary technology and preference shocks and of the second moments suggests that our model can outperform the Real Business Cycle framework in many dimensions.
    Keywords: Business Cycle; Cournot Competition; Endogenous Entry
    JEL: E32 L13
    Date: 2007–09–30
  2. By: Katsuya Takii (Osaka School of International Public Policy (OSIPP))
    Abstract: In this paper, we construct a dynamic assignment model that can provide a unified explanation of persistent differences in productivity, wages, skill mixes and profits between firms in a changing and uncertain environment. Large expected organization capital (firm-specific knowledge) attracts skilled workers, who help to accumulate organization capital. Accumulated large organization capital, in turn, confirms high expectations. This positive feedback brings about persistent differences in these variables in an uncertain environment. We estimate parameters and simulate the model. Our results show that a positive assignment mechanism accounts for a large part of the observed persistence; the difficulty of estimating organization capital plays only an auxiliary role.
    Keywords: Organization Capital, Assignment, Persistence
    JEL: J24 L25
    Date: 2008–02
  3. By: Küpper, Hans-Ulrich; Sandner, Kai
    Abstract: This paper analyzes the impact of heterogeneous (social) preferences on the weighing and the combination of performance measures as well as on firm profitability. We consider rivalry, egoism and altruism as extreme forms within the continuum of possible preferences and show, that the principal normally can exploit both altruistic as well as rivalistic behavior of his agents. Firm profits reach their maximum value, if the agents differentiate as much as possible in their individual characteristics. We provide further insights that in order to realize these gains in profitability, reallocations of participations in performance measures are necessary, where competitive agents have to be privileged compared to altruistic agents. In this context, stochastic interdependencies are of importance since they yield overlapping functions of the share parameters causing additional adaptions in the optimal design of the wage compensation system.
    Keywords: Social Preferences; Rivalry; Altruism; Egoism; Team Composition; Performance Measurement
    JEL: D23 D82 D86 M41 M52
    Date: 2008–02–21
  4. By: Fang Yao
    Abstract: This paper aims to study the quantitative significance of lumpy labor adjustment as a propagation mechanism for business cycles. In the baseline model, I introduce lumpy job turnover in the spirit of Taylor (1980) and Calvo (1983) in a DSGE framework and find that it performs as same as the quadratic-adjustment-cost model at the aggregate level, but different at firm’s level. In particular, It can capture lumpy labor adjustment at plant’s level through the ’front-loading effect’. Then I implement the Weibull distribution in the same framework to incorporate the increasing hazards of the labor adjustment process, which is supported by the evidence from micro data. This extension represents a substantial improvement over benchmark models. It can replicate high volatility of employment, low volatile labor productivity and persistent dynamics in output. Based on these results, I conclude that intratemporal substitution between the two production factors and the aggregation mechanism play an important role in the propagation mechanism.
    Keywords: Business cycles, Lumpy labor adjustment, Weibull distribution, Increasing hazard function
    JEL: E32 E24 E22
    Date: 2008–02
  5. By: Bernhard Ganglmair (Institute for Empirical Research in Economics, University of Zurich)
    Abstract: In a repeat trade model with buyer's specific investment, a simple renegotiable contract implements an efficient outcome if premature termination of trade is governed by an appropriate contract breakup rule. In equilibrium, such a rule allows for termination with positive probability and gives the buyer a bargaining leverage over the seller when the contract is renegotiated ex-post. These returns ("breakup rents") from buyer's rent-seeking complement his ex-post bargaining power and restore his ex-ante investment incentives when he would otherwise underinvest due to a standard (ex-ante) hold-up problem. Buyer's opportunism thus creates social value and restores efficiency in case of frictionless renegotiation. When the contract is rigid and not renegotiable until after the first round of trade, however, a first-best breakup rule does not exist. A second-best rule trades off buyer's investment and seller's activity distortions that arise from excessive effort to curb the buyer's bargaining leverage. Conditions on existence of a first or second-best breakup rule as well as implications for the legal discussion on compliance standards for breach of contract are given.
    Keywords: Repeat transaction trade, contract breakup, specific investment, hold-up, rent-seeking, installment contracts, compliance standards, breach of contract
    JEL: D86 K12 L14
    Date: 2008–01
  6. By: Ronald Bachmann; Sebastian Braun
    Abstract: Using an administrative data set containing daily information on individual workers' employment histories, we investigate how workers' labour market transitions are affected by international out- sourcing. In order to do so, we estimate hazard rate models for match separations, as well as for worker flows from employment to another job, to unemployment, and to out of the labour force. Outsourcing is found to have no significant impact on job stability in the manufacturing sector, but it is associated with increased job stability in the service sector. Furthermore, especially in the service sector the effect of outsourcing varies across skill levels. An analysis of the different labour market flows shows that labour market transitions are not affected symmetrically by in- ternational outsourcing.
    Keywords: Job stability, labour market transitions, worker flows, outsourcing, duration analysis
    JEL: F16 J63 J23
    Date: 2008–02
  7. By: Ravi Balakrishnan
    Abstract: To understand better Canada's smooth reallocation of labor in response to the recent commodity price boom, but seemingly poor productivity performance, this paper examines job and firm dynamics in Canada relative to the United States. Overall, it finds that while Canada's labor market efficiency seems comparable to that of the United States, product market rigidities appear to be reducing Canada's capacity for creative destruction, hence undermining productivity growth.
    Keywords: Productivity , Canada , Labor markets , Employment , Commodity prices ,
    Date: 2008–02–04
  8. By: Duc-De Ngo (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans); Mahito Okura
    Abstract: In this study, we aim to investigate the impact of privatization on the degree of cooperation and competition in a mixed oligopoly market. We consider a duopoly market that comprises one semipublic firm and one private firm. Each firm is assumed to determine the level of two types of effort: the cooperative effort made to enlarge the total market size and the competitive effort made to increase market share. <br />In a contest framework, our results show that the competitive effort level of the semipublic firm is smaller than that of the private firm. The more the semipublic firm is concerned for social welfare, the less it competes. On the basis of average costs, we then analyze the case in which only the semipublic firm undertakes cooperative effort. In this case, the private firm behaves as a free rider. Furthermore, we find that the semipublic firm expends more cooperative effort than does the private firm.
    Keywords: Coopetition, Mixed oligopoly, Contests, Free rider
    Date: 2007
  9. By: Domenico Giannone (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Michele Lenza (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Lucrezia Reichlin (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper shows that the explanation of the decline in the volatility of GDP growth since the mid-eighties is not the decline in the volatility of exogenous shocks but rather a change in their propagation mechanism. JEL Classification: E32, E37, C32, C53.
    Keywords: Shocks, Information, Great Moderation.
    Date: 2008–02
  10. By: Domenico Giannone (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Michele Lenza (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper shows that general equilibrium effects can partly rationalize the high correlation between saving and investment rates observed in OECD countries. We find that once controlling for general equilibrium effects the saving-retention coefficient remains high in the 70’s but decreases considerably since the 80’s, consistently with the increased capital mobility in OECD countries. JEL Classification: C23, F32, F41.
    Keywords: Saving-Investment Correlation, Capital Mobility, International Comovement, Dynamic Factor Model.
    Date: 2008–02
  11. By: Moshe Kim (University of Haifa and Universitat Pompeu Fabra); Eirik Gaard Kristiansen (Norwegian School of Economics and Business Administration); Bent Vale (Norges Bank (Central Bank of Norway))
    Abstract: We derive empirical implications from a stylized theoretical model of bankborrower relationships. Banks’ interest rate markups are predicted to follow a life-cycle pattern over the borrowing firms’ age. Due to endogenous bank monitoring by competing banks, borrowing firms initially face a low markup, thereafter an increasing markup due to informatonal lock-in until it falls for older firms when lock-in is resolved. By applying a large sample of small unlisted firms and a new measure of asymmetric information, we find that firms with significant asymmetric information problems have a more pronounced life-cycle pattern of interest rate markups. Additionally, we examine the effects of concentrated banking markets on interest markups. Results indicate that markups are mainly driven by asymmetric information problems and not by concentration. However, we find weak evidence that bank market concentration matters for old firms.
    Keywords: Banking, loan-pricing, lock-in, asymmetric information, competition
    JEL: G21 L15
    Date: 2007–09–11
  12. By: Elie Appelbaum (York University, Canada)
    Abstract: This paper considers the effects multilateral opportunistic behaviour on the firm’s capital structure. We show that multiple parties introduce greater incompleteness, because the firm cannot control future contracts in potential opportunistic coalitions. A higher debt-equity ratio increases the probability of opportunistic coalitions, hence increasing the costs of opportunistic behaviour. By choosing equity financing, the firm can avoid the costs of opportunistic behaviour altogether. Thus, in the absence of all other motives for using debt, the firm will be equity financed. Since, in general, there are other motives for holding debt, this implies that under these conditions, the debt-equity ratio will tend to be lower. We also show that if the firm can be franchised, equity financing yields a first best outcome. On the other hand, if debt is used (for other motives), or if the firm cannot be franchised, the first best solution cannot be achieved. The results in this paper suggest that, in general, the firm’s debt equity ratio will decrease with the number of interdependent contracts, the difficulty in writing contracts with the provider of the non-contractible input and his importance in an opportunistic coalition.
    Keywords: Incomplete Contracts, Opportunistic Behaviour, Bankruptcy, Capital Structure
    JEL: D0 C7 G3 L2
    Date: 2008–02
  13. By: Paul Gomme (Concordia University); B Ravikumar (University of Iowa); Peter Rupert (University of California, Santa Barbara)
    Abstract: We measure the return to capital directly from the NIPA and BEA data and examine the return implications of the real business cycle model. We construct a quarterly time series of the after-tax return to business capital. Its volatility is considerably smaller than that of S&P 500 returns. The standard business cycle model captures almost 50% of the volatility in the return to capital (relative to the volatility of output). We consider several departures from the benchmark model; the most promising is one with stochastic taxes which captures nearly 80% of the relative volatility in the return to capital.
    Keywords: return to capital, volatility, real business cycles,
    Date: 2007–05–01
  14. By: Klaus Adam (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Albert Marcet (Institut d’Anàlisi Economica CSIC, Universitat Autònoma de Barcelona, 08193 Bellaterra, Spain.); Juan Pablo Nicolini (Universidad Torcuato di Tella, Miñones 2177, Capital Federal, (C1428ATG) Argentina.)
    Abstract: Introducing bounded rationality into a standard consumption based asset pricing model with a representative agent and time separable preferences strongly improves empirical performance. Learning causes momentum and mean reversion of returns and thereby excess volatility, persistence of price-dividend ratios, long-horizon return predictability and a risk premium, as in the habit model of Campbell and Cochrane (1999), but for lower risk aversion. This is obtained, even though we restrict con- sideration to learning schemes that imply only small deviations from full rationality. The .ndings are robust to the particular learning rule used and the value chosen for the single free parameter introduced by learning, provided agents forecast future stock prices using past information on prices. JEL Classification: G12, D84.
    Keywords: Asset pricing, learning, near-rational price forecasts.
    Date: 2008–02
  15. By: Joon Song
    Abstract: Perks are a commodity bundle offered by an employer to an employee. They are used to directly control an employee's consumption. Consuming certain goods increases the marginal disutility of non-contractible effort. Lower consumption of such goods will make it less costly to induce an employee to put in high effort. To compensate for the decrease in such goods, an employer gives luxurious perks. By "luxurious" I mean that per-dollar marginal utilities of these perks are lower than those of other goods. This model explains the existence of perks such as box seat tickets and club memberships, which neither save tax nor enter the production function. Also, perks can be more luxurious at an unsuccessful outcome than at a successful outcome, and an employee with a more successful history receives more perks.
    Date: 2008–02–28

This nep-bec issue is ©2008 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.
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