nep-bec New Economics Papers
on Business Economics
Issue of 2008‒03‒08
23 papers chosen by
Christian Calmes
University of Quebec in Ottawa

  1. Tunnel-proofing the executive suite: temptation, and the design of executive compensation By Thomas H. Noe
  2. Job and Worker Reallocation in German Establishments: The Role of Employers’ Wage Policies and Labour Market Institutions By Guertzgen, Nicole
  3. ‘Make-or-Buy’ in International Oligopoly and the Role of Competitive Pressure By Dermot, Leahy; Catia , Montagna
  4. Stock Market Liquidity and Firm Performance: Wall Street Rule or Wall Street Rules? By Vivian W. Fang; Thomas H. Noe; Sheri Tice
  5. Gains and Pains from Contract Research: A Transaction and Firm-level Perspective By Grimpe, Christoph; Kaiser, Ulrich
  6. Extending the Managerial Power Theory of Executive Pay: A Cross National Test By Otten, J.A.; Heugens, P.P.M.A.R.
  7. Job Assignments, Intrinsic Motivation and Explicit Incentives By Julia Nafziger
  8. Why do Firms Train Apprentices? The Net Cost Puzzle Reconsidered By Jens Mohrenweiser; Thomas Zwick
  9. Wages, Fringe Benefits and Efficiency in Union-Firm Bargaining By Elie Appelbaum
  10. Activists, raiders, and directors: Opportunism and the balance of corporate power By Thomas H. Noe; Michael J. Rebello; Ramana Sonti
  11. Production Offshoring and the Skill Composition of Italian Manufacturing Firms: A Counterfactual Analysis By Roberto Antonietti; Davide Antonioli
  12. International Transmission of Shocks under Financial Frictions: Some Implications for International Business Cycle Comovement By de Blas, Beatriz
  13. Skill Composition: Exploring a Wage-based Skill Measure By Øivind A. Nilsen, Arvid Raknerud, Marina Rybalka and Terje Skjerpen
  14. Endogenous Verifiability and Optimality in Agency: A non-contingent approach By Manuel Willington; Roy Costilla
  15. On the Persistence of Job Creation in Old and New Firms By René Böheim; Alfred Stiglbauer; Rudolf Winter-Ebmer
  16. Firms’ International Status and Heterogeneity in Performance: Evidence From Italy By Alfredo Minerva; Lorenzo Casaburi; Valeria Gattai
  17. Does Classical Competition Explain the Statistical Features of Firm Growth? By Alfarano, Simone; Milakovic, Mishael
  18. Firm Productivity and the Foreign-Market Entry Decision By Raff, Horst; Ryan, Michael; Stähler, Frank
  19. Cournot Duopoly with Capacity Limit Plants By Fabio TRAMONTANA; Laura GARDINI; Puu TONU
  20. Long-term growth determinants of young businesses in Germany : effects of regional concentration and specialisation By Otto, Anne; Fornahl, Dirk
  21. Apprenticeship Training – What for? Investment in Human Capital or Substitute for Cheap Labour? By Jens Mohrenweiser; Uschi Backes-Gellner
  22. A Model of Vertical Oligopolistic Competition By Markus Reisinger; Monika Schnitzer
  23. Global Macro-Financial Shocks and expected default frequencies in the Euro area. By Olli Castrén; Stéphane Dées; Fadi Zaher

  1. By: Thomas H. Noe
    Abstract: This paper considers optimal compensation for a CEO who is entrusted with administering corporate assets honestly. Optimal compensation designs maximize integrity at minimum cost. These designs are very ‘low powered,’ i.e., while specifying a lower bound for performance and increasing pay with performance, they increase compensation at a rapidly decreasing rate. Thus, integrity considerations engender optimal compensation packages that closely resemble the very pervasive 80/120 bonus plans, exactly the sort of compensation which Jensen (2003) argues should compromise integrity. Under optimal designs, expected compensation increases linearly with firm size, and increases in the market/book ratio. Moreover, given optimal compensation, CEO asset diversion is limited to high market-to-book firms that have received negative productivity shocks.
    Keywords: incentives, managerial compensation, agency
    Date: 2008
  2. By: Guertzgen, Nicole
    Abstract: Using a large linked employer-employee data set, this paper studies the relationship between job reallocation, worker reallocation and the flexibility of wages in western German manufacturing. Using the plant-specific residual wage dispersion as a proxy for wage flexibility, we find that more flexible wages are associated with less job reallocation due to demand shocks being absorbed by wage rather than by quantity adjustments. As to excess worker reallocation, our results provide evidence of a significant positive relationship between excess worker flows and residual wage dispersion. Consistent with the hypothesis that more flexible wages should help employers in dissolving bad matches, this relationship is found to be most pronounced for low-quality workers. In interacting our measure of wage flexibility with the degree of plantspecific employment protection we find that less stringent firing practices may considerably reduce the need for more flexible wages in order to attain optimal worker-firm matches.
    Keywords: Job Reallocation, Worker Reallocation, Wage Dispersion
    JEL: J31 J63
    Date: 2007
  3. By: Dermot, Leahy; Catia , Montagna
    Abstract: We study how competitive pressure influences the make-or-buy decision that oligopolistic firms face between producing an intermediate component in-house or purchasing it from a domestic supplier. We model outsourcing as a bilateral relationship in which the supplier undertakes relationship specific investments. A home and foreign firm compete in the home market. Firms’ mode of operation decision depends on cost and strategic considerations. Competitive pressure increases firms’ incentive to outsource. Consumer gains from trade liberalisation are enhanced when it leads to less outsourcing.
    Keywords: Outsourcing; Vertical Integration; Trade Liberalisation; Oligopoly
    JEL: L2 F2 F1 L1
    Date: 2007
  4. By: Vivian W. Fang; Thomas H. Noe; Sheri Tice
    Abstract: This paper investigates the relation between stock liquidity and firm performance. We find that firms with liquid stocks have better firm performance as measured by the market-to-book ratio. This result holds even when we include industry or firm fixed effects, control for idiosyncratic risk, control for endogenous liquidity with instrumental variables, or use alternative measures of liquidity. To identify the causal effect of liquidity on firm performance, we study an exogenous shock to liquidity---the decimalization of stock trading---and document that the increase in liquidity around decimalization improved firm performance. We next investigate the causes of liquidity’s beneficial effect and find support for liquidity enhancing performance by increasing the information content of market prices, and strengthening the incentive effects of performance based compensation contracts. We find no evidence that liquidity enhances blockholder intervention. Finally, momentum trading, analyst coverage, investor overreaction and liquidity’s valuation effects do not appear to drive our results.
    Keywords: Stock Market Liquidity; Firm Performance; Feedback Mechanism; Managerial Compensation; Blockholder Intervention.
    Date: 2008
  5. By: Grimpe, Christoph; Kaiser, Ulrich
    Abstract: Determining the research and development (R&D) boundaries of the firm as the choice between internal, collaborative and external technology acquisition has since long been a major challenge for firms to secure a continuous stream of innovative products or processes. While research on R&D cooperation or strategic alliances is abundant, little is known about the outsourcing of R&D activities to contract research organizations and its implications for innovation performance. This paper investigates the driving forces of external technology sourcing through contract research based on arguments from transaction cost theory and the resource-based view of the firm. Using a large and comprehensive data set of innovating firms from Germany our findings suggest that technological uncertainty, contractual experience and openness to external knowledge sources motivate the choice for engaging in contract research activities. Moreover, we show that internal and external R&D sourcing are complements: the marginal contribution of internal (external) R&D is the larger the more firms spend on external (internal) R&D.
    Keywords: Contract research, innovation, transaction cost theory, firm capabilities
    JEL: C24 O32
    Date: 2008
  6. By: Otten, J.A.; Heugens, P.P.M.A.R. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: Contextual factors are typically neglected in both theorizing and empirical tests on executive pay. The fast majority of empirical investigations use data from U.S. based firms. Theoretical implications are typically developed, understood and tested on the basis of the U.S. context. However, the U.S. case is not the world wide standard. Pay in other countries is on average considerably lower and have a different pay mix. The puzzle that from the typical use of agency theory can’t be explained is the variance of pay practices that exist not only within countries but also across countries. This paper extends scholars renewed attention to managerial power theory on executive pay. It sets out how and why institutional theory must be included in explanations of executive pay. On the basis of a sample of executive pay packages from 17 different countries we test the theoretical extensions. Results indicate that institutions interact with firm level determinants of executive pay. Explanations for executive pay should therefore account for the variance of pay practices within and across countries. Highlighting that the institutional embeddedness of pay practices play an important role in finding conclusive explanations of current pay practices.
    Keywords: managerial power theory;executive pay;executive compensations
    Date: 2007–12–08
  7. By: Julia Nafziger
    Abstract: This paper considers the interplay of job assignments with the intrinsic and extrinsic motivation of an agent. Job assignments influence the self confidence of the agent, and thereby his intrinsic motivation. Monetary reward allow the principal to complement intrinsic motivation with extrinsic incentives. The main result is that the principal chooses an inefficient job assignment rule to enhance the agent's intrinsic motivation even though she can motivate him with monetary rewards. This shows that, in the presence of intrinsically motivated agents, it is not possible to separate job assignment decisions from incentive provision.
    Keywords: Intrinsic and Extrinsic Motivation, Job Assignments
    JEL: D82 J31 J33 M12
  8. By: Jens Mohrenweiser (Institute for Strategy and Business Economics, University of Zurich); Thomas Zwick (Zentrum für Europäische Wirtschaftsforschung (ZEW) (Centre for European Economic Research))
    Abstract: This paper investigates the short-term costs and benefits of apprenticeship training in Germany. It calls into question the popular stylised fact that apprenticeship training always leads to net costs during the apprenticeship period. We analyse the impact of the proportion of different occupational groups of apprentices on firm performance. We use representative matched employer–employee panel data that allow us to correct for different sources of estimation bias. We show that the proportion of apprentices in trade, commercial, craft and construction occupations has a direct positive impact on firm performance: the companies cover their training costs immediately. In contrast, companies with apprentices in the manufacturing occupations face net training costs during the apprenticeship period but gain by the long-term employment of its graduate apprentices.
    Keywords: apprenticeship training, performance, panel data estimation
    JEL: C33 D24 J24
    Date: 2008–03
  9. By: Elie Appelbaum (York University, Canada)
    Abstract: This paper provides an efficient union-firm bargaining solution within the right to manage framework, by separating efficiency and distribution considerations through bargaining over wage and fringe benefits. We show that without insurance considerations, efficiency is achieved by equating the wage and workers’ opportunity cost and providing the union with a surplus share in accordance with its bargaining power. We also show that with insurance considerations, the optimal contract, again, equates the wage and workers’ opportunity cost, but it also provides full insurance. There is empirical evidence that fringe benefits are, indeed, common and play an important role in union contracts.
    Keywords: Price Union Contracts, Efficient Bargaining, Right to Manage
    JEL: J5 C78
    Date: 2008–02
  10. By: Thomas H. Noe; Michael J. Rebello; Ramana Sonti
    Abstract: We model corporate governance in a world with competitive securities markets as well as markets for corporate assets. We show that varying the liquidity and opacity of corporate assets, the vitality of the market for corporate control, and the costs of enforcing shareholder rights to cash flows leads to a plethora of institutional designs. When asset liquidity is high, shareholder rights are enforced through the option to liquidate as in a mutual fund. When the opacity of corporate assets is relatively high and asset liquidity is relatively low, firms will eschew reliance on board monitoring and instead rely on shareholder activism. An increase in the cost of ownership concentration, by increasing the inefficiency of shareholder activism, will increase the reliance on board activism and decrease the reliance on CEO compensation. Decreases in the cost of enforcement of shareholder rights and the opacity of corporate assets, and increased raider activity further strengthen the preference for activist boards.
    Keywords: governance, asset liquidity, institutional design
    JEL: G20 G34
    Date: 2008
  11. By: Roberto Antonietti (University of Padua); Davide Antonioli (University of Ferrara)
    Abstract: This work explores the effects of cross-border relocation of production on the skill composition of Italian manufacturing firms. Its aim is to assess if the firms’ strategy to offshore production activities towards cheap labor countries determines a bias in the relative employment of skilled versus unskilled workers. Using a balanced panel of firm-based data across the period 1995-2003, we test this skill-bias hypothesis by means of a counterfactual experiment in which we employ a difference-in-differences propensity score matching estimator in order to control for selectivity bias without relying on a specific functional form of the relations of interest. In line with the literature, our results point to confirm a general, although weak, skill bias effect of production offshoring on the labor-force composition of Italian manufacturing: in particular, we find that firms farming out production stages in 1998-2000 show an upward shift in the skill ratio with respect to the counterfactual of firms not moving their production abroad. However, when we look at the single components of the skill ratio, we find that the skill bias effect is primarily driven by a fall in the employment of production workers, while a weak or not significant effect is found with respect to the employment of skilled personnel.
    Keywords: Production Offshoring, Skill Bias, Difference-in-Differences, Propensity
    JEL: J24 F16 L24
    Date: 2007–11
  12. By: de Blas, Beatriz (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid.)
    Abstract: This paper analyzes the international transmission of shocks in economies with financial frictions. In a two-country flexible price monetary model with distribution costs in the imported good I study the transmission of shocks to productivity, money supply, government spending and to entrepreneurs' net worth. Financial frictions amplify the effects of shocks both at the domestic and at the international level. In the model, international business cycle comovement, measured as cross-country output correlations, is increasing in the degree of openness and distribution costs, and as in previous literature, decreasing in the degree of financial frictions. Finally, fiscal shocks play an important role in international business cycle comovement in the presence of financial frictions. First, because the crowding out effect is stronger on private consumption and weaker on investment if there are financial frictions, and second, because fiscal shocks may reduce the cross-country correlation of output.
    Keywords: international business cycles; distribution costs; financial frictions; flexible prices
    JEL: E32 E44 F41 F42
    Date: 2008–02
  13. By: Øivind A. Nilsen, Arvid Raknerud, Marina Rybalka and Terje Skjerpen (Statistics Norway)
    Abstract: Most studies of heterogeneous labor inputs use classifications of high skilled and low skilled based on workers' educational attainment. In this study we explore a wage-based skill measure using information from a wage equation. Evidence from matched employer--employee data show that skill is attributable to many variables other than educational length, for instance experience and type of education. Applying our wage-based skill measure to a TFP growth analysis, we find that the TFP residual decreases, indicating that more of the change in value-added is picked up by our skill measure than when using a purely education-based measure of skill
    Keywords: Skill composition; wages; TFP
    JEL: J31 D24 C23
    Date: 2008–02
  14. By: Manuel Willington (ILADES-Georgetown University, Universidad Alberto Hurtado); Roy Costilla
    Abstract: In the context of a principal-agent model where verification of an agent’s effort is endogenously determined through strategic interactions between contracting parties, we derive a necessary and suficient condition to achieve the first best with a non-contingent or incomplete contract. These conditions relate the Principal’s benefit, the Agent’s cost, the probability of winning and the cost of litigation. Also, these conditions are found to be more general than the ones established in Ishiguro (2002) within a similar setup.
    Keywords: incomplete contracts, endogenous verifiability, expectation damages.
    JEL: D20 D86 K41 M52
    Date: 2007–09
  15. By: René Böheim (Department of Economics, Johannes Kepler University Linz, Austria); Alfred Stiglbauer (Oesterreichische Nationalbank (National Bank of Austria)); Rudolf Winter-Ebmer (Department of Economics, Johannes Kepler University Linz, Austria)
    Abstract: We suggest a new method to analyze the success of firm creation by looking at the persistence of new jobs created in old and in new firms. Compared to survival rates of new versus old firms, this measure has the advantage that the sustainability of job creation in different circumstances is investigated. We analyze 21 years of job creation in Austria and find that new jobs last significantly longer in new than in old firms. Moreover, the survival of new jobs depends upon the state of the business cycle at the time of job creation, on the number of jobs created, and, for existing firms, on firm age.
    Keywords: job creation, new firms, reallocation, persistence
    JEL: J23 J63 E24 E32
    Date: 2008–03
  16. By: Alfredo Minerva (Università di Bologna); Lorenzo Casaburi (Università di Bologna); Valeria Gattai (Università di Bologna, ISESAO, Università Commerciale “L. Bocconi”)
    Abstract: This paper revisits the empirical evidence about the link between firms’ performance and their international status, based on a large sample of Italian enterprises. To this purpose, we merged two waves of the Capitalia survey (1998-2000, and 2001-2003) retrieving firm level data for roughly 7,000 units. Three results stand out from our empirical exercise. First, firms that engage in the foreign production of final goods, in addition to export activities, are more productive than firms that only export abroad. Second, firms that engage in final goods off-shoring are more productive than firms that engage in inputs off-shoring. Third, in terms of the productivity dynamics over the period 1998-2003, exporters’ performance in Italy was not any better than the non-exporters’ one. Our results support the view that the better performance (in static terms) of globally engaged firms is chiefly due to the selection caused by the fixed costs associated to international operations.
    Keywords: Export, Heterogeneous Firms, Italy, Off-shoring, Productivity
    JEL: F10 F20 L10 L20 L60
    Date: 2008–01
  17. By: Alfarano, Simone; Milakovic, Mishael
    Abstract: We express the idea of classical competition in a statistical equilibrium model, where the tendency for competition to equalize profit rates results in an exponential power (or Subbotin) distribution. The model supports and extends recent evidence on the Laplace distribution of growth rates in firm size. We also find tent-shaped distributions in the size growth rates of Forbes Global 2000 companies, which we interpret as preliminary evidence in favor of the hypothesis that classical competition is a globally operating mechanism.
    Keywords: Statistical equilibrium, classical competition, maximum entropy, profit rates, firm growth rates, Subbotin distribution, Laplace distribution
    JEL: C16 D21 E10 F01 L10
    Date: 2008
  18. By: Raff, Horst; Ryan, Michael; Stähler, Frank
    Abstract: We use Japanese firm-level data to examine how a firm’s productivity affects its choice of foreign-market entry strategy. We study a sequence of decisions, starting with the choice between exporting and foreign direct investment (FDI). In the case of FDI, the firm faces two options: greenfield investment or merger and acquisition (M&A). If it selects greenfield investment, it has two ownership choices: whole ownership or a joint venture. Controlling for industry- and country-specific characteristics, we find that the more productive a firm is, the more likely it is to choose FDI rather than exporting, greenfield investment rather than M&A, and whole ownership rather than a joint venture. We also find that the assumed sequence of decisions fits the data better than alternative specifications.
    Keywords: Foreign direct investment, merger and acquisition, joint venture, greenfield investment, firm heterogeneity, productivity
    JEL: F12 F15
    Date: 2008
  19. By: Fabio TRAMONTANA (Universita' Politecnica delle Marche, Dipartimento di Economia); Laura GARDINI (Universit… degli Studi di Urbino, Istituto di Scienze Economiche); Puu TONU (CERUM, Umea University, Sweden)
    Abstract: This article considers a Cournot duopoly under an isoelastic demand function and cost functions with built-in capacity limits. The special feature is that each firm is assumed to operate multiple plants, which can be run alone or in combination. Each firm has two plants with different capacity limits, so it has three cost options, the third being to run both plants, dividing the load according to the principle of equal marginal costs. As a consequence, the marginal cost functions come in three disjoint pieces, so the reaction functions, derived on basis of global profit maximization, as well can consist of disjoint pieces. We first analyze the case in which the firms are taken as identical, and then the generic case. It is shown that stable Cournot equilibria may coexist with several other stable cycles. Then we compare the coexistent periodic attractors in terms of the resulting profits. The main property is the non-existence of unstable cycles. This is reflected in a particular bifurcation structure, due to border collision bifurcations, and to particular basin frontiers, related to the discontinuities.
    Keywords: Border Collision Bifurcations, Capacity Limits, Cournot, Discontinuous Reaction Functions, Duopoly, Nonlinear Dynamics
    JEL: C61 C62 C72 C73 D21 D24 L13
    Date: 2008–02
  20. By: Otto, Anne (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany]); Fornahl, Dirk
    Abstract: "This paper explores how different levels of regional concentration and specialisation affect the long-term growth of young firms. The sample consists of knowledge-intensive and non-knowledge-intensive western German manufacturing firms which were set-up in 1992 and managed to survive 11 years. The paper examines the joint effect of regional, industrial and firm-specific determinants. The analysis of the concentration and specialisation factors takes into account the industrial and technological dimensions and the regional level of human capital. With regard to the concentration measures being located in an industrial or technological agglomeration slightly reduces the growth rates of start-ups. The same negative, but stronger, effect can be observed for competition measures. Furthermore, our results suggest that startups exhibit higher growth rates the higher specialised the region is in which they are located." (author's abstract, IAB-Doku) ((en))
    JEL: R11 L25 R12 O30
    Date: 2008–03–05
  21. By: Jens Mohrenweiser (Institute for Strategy and Business Economics, University of Zurich); Uschi Backes-Gellner (Institute for Strategy and Business Economics, University of Zurich)
    Abstract: Apprenticeship training in Germany is generally considered to be an investment of companies in the human capital of their apprentices. This view is mainly based on the German cost benefit studies which find that firms bear high net costs for their apprenticeships. But these results have not been confirmed by other types of data or methods so far. We derive an empirical method to distinguish between firms which train for investment reasons or which are driven by a substitution strategy. The data which are necessary for our approach are readily available in most company panel data bases. According to our classification, we find that 18.5 percent of all companies follow a substitution strategy and 43.75 percent follow an investment strategy; the rest is mixed or undetermined. In a second step we also estimate the determinants for a substitution strategy. We find sizeable differences between sectors with different skill requirements and between firms’ coverage of industrial relations. We conclude that only part of German apprenticeship training entails a human capital investment for the company and that this fact has to be adequately taken into account in any theoretical or empirical analysis of apprenticeship training.
    Keywords: Apprenticeship Training, Human Capital Investments, Substitution Effects
    JEL: I21 J24 J63
    Date: 2008–03
  22. By: Markus Reisinger (Department of Economics, University of Munich, Kaulbachstr. 45, 80539 Munich, Germany, e-mail:; Monika Schnitzer (Department of Economics, University of Munich, Akademiestr. 1/III, 80799 Munich, Germany, e-mail:
    Abstract: This paper develops a model of successive oligopolies with endogenous market entry, allowing for varying degrees of product differentiation and entry costs in both markets. Our analysis shows that the downstream conditions dominate the overall proï¬tability of the two-tier structure while the upstream conditions mainly affect the distribution of proï¬ts. We compare the welfare effects of upstream versus downstream deregulation policies and show that the impact of deregulation may be overvalued when ignoring feedback effects from the other market. Furthermore, we analyze how different forms of vertical restraints influence the endogenous market structure and show when they are welfare enhancing.
    Keywords: Deregulation, Free Entry, Price Competition, Product Differentiation, Successive Oligopolies, Two-Part Tariffs, Vertical Restraints
    JEL: L13 D43 L40 L50
    Date: 2008–02
  23. By: Olli Castrén (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Stéphane Dées (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Fadi Zaher (Financial Services Authority, 25 The North Colonnade, Canary Wharf, London E14 5HS, United Kingdom.)
    Abstract: Modelling the link between the global macro-financial factors and firms’ default probabilities constitutes an elementary part of financial sector stress-testing frameworks. Using the Global Vector Autoregressive (GVAR) model and constructing a linking satellite equation for the firm-level Expected Default Frequencies (EDFs), we show how to analyse the euro area corporate sector probability of default under a wide range of domestic and foreign macroeconomic shocks. The results show that, at the euro area aggregate level, the median EDFs react most to shocks to the GDP, exchange rate, oil prices and equity prices. There are some intuitive variations to these results when sector-level EDFs are considered. Overall, the Satellite-GVAR model appears to be a useful tool for analysing plausible global macrofinancial shock scenarios designed for financial sector stress-testing purposes. JEL Classification: C33, F47, G32, G33.
    Keywords: Credit risk, Global VAR, corporate default probability, macro stress testing.
    Date: 2008–02

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