nep-bec New Economics Papers
on Business Economics
Issue of 2008‒04‒04
seventeen papers chosen by
Christian Calmes
University of Quebec in Ottawa

  1. Rent-Sharing under Different Bargaining Regimes: Evidence from Linked Employer-Employee Data By Rusinek, Michael; Rycx, Francois
  2. The Virtues and Vices of Equilibrium and the Future of Financial Economics By J. Doyne Farmer; John Geanakoplos
  3. Transparency of Regulation and Cross-Border Bank Mergers By Köhler, Matthias
  4. Strategic Outsourcing, Profit Sharing and Equilibrium Unemployment By Koskela, Erkki; König, Jan
  5. Legitimacy of Control By Schnedler, Wendelin; Vadovic, Radovan
  6. Managerial perceptions of works councils' effectiveness in the Netherlands By Annette van den Berg; Yolanda Grift; Michael Arjen van Witteloostuijn
  7. Firm Reputation and Horizontal Integration By Hongbin Cai; Ichiro Obara
  8. Lower Salaries and No Options: The Optimal Structure of Executive Pay By Maug, Ernst; Dittmann, Ingolf
  9. Executive Stock Options when Managers are Loss-Averse By Dittmann, Ingolf; Maug, Ernst; Spalt, Oliver
  10. Self-Promoting Investments By Carolyn Pitchik
  11. Optimal Mortgage Refinancing: A Closed Form Solution By Sumit Agarwal; John C Driscoll; David Laibson
  12. Rewiring Business Firms through an Entrepreneurial-Oriented Strategy Making By R. LAMADRID; A. HEENE; X. GELLYNCK
  13. One-Way Compatibility, Two-Way Compatibility and Entry in Network Industries By Fabio Maria Manenti; Ernesto Somma
  14. Learning in the Credit Card Market By Sumit Agarwal; John C Driscoll; Xavier Gabaix; David Laibson
  15. Service Oligopolies and Australia's Economy-Wide Performance By Rod Tyers; Lucy Rees
  16. Tobacco and Alcohol: Complements or Substitutes? A Structural Model Approach By Tauchmann, Harald; Göhlmann, Silja; Requate, Till; Schmidt, Christoph M.
  17. Job Satisfaction and Happiness: New Evidence from Japanese Union Workers By Adrian de la Garza; Atsushi Sannabe; Katsunori Yamada

  1. By: Rusinek, Michael (ECARES, Free University of Brussels); Rycx, Francois (Free University of Brussels)
    Abstract: In many European countries, the majority of workers have their wages directly defined by industry-level agreements. In addition, for some workers, industry agreements are complemented by firm-specific agreements. Yet, the relative importance of firm and industry agreements (in other words, the degree of centralization) differs drastically across industries. The authors of this paper use unique linked employer-employee data from a 2003 survey in Belgium to examine how these bargaining features affect the extent of rent-sharing. Their results show that there is substantially more rent-sharing in decentralized than in centralized industries, even when controlling for the endogeneity of profits, for heterogeneity among workers and firms and for differences in characteristics between bargaining regimes. Moreover, in centralized industries, rent-sharing is found only for workers that are covered by a firm agreement. Finally, results indicate that within decentralized industries, both firm and industry bargaining generate rent-sharing to the same extent.
    Keywords: rent-sharing, collective bargaining, propensity score matching
    JEL: J31 J51
    Date: 2008–03
  2. By: J. Doyne Farmer (Sante Fe Institute); John Geanakoplos (Cowles Foundation, Yale University)
    Abstract: The use of equilibrium models in economics springs from the desire for parsimonious models of economic phenomena that take human reasoning into account. This approach has been the cornerstone of modern economic theory. We explain why this is so, extolling the virtues of equilibrium theory; then we present a critique and describe why this approach is inherently limited, and why economics needs to move in new directions if it is to continue to make progress. We stress that this shouldn’t be a question of dogma, but should be resolved empirically. There are situations where equilibrium models provide useful predictions and there are situations where they can never provide useful predictions. There are also many situations where the jury is still out, i.e., where so far they fail to provide a good description of the world, but where proper extensions might change this. Our goal is to convince the skeptics that equilibrium models can be useful, but also to make traditional economists more aware of the limitations of equilibrium models. We sketch some alternative approaches and discuss why they should play an important role in future research in economics.
    Keywords: Equilibrium, Rational expectations, Efficiency, Arbitrage, Bounded rationality, Power laws, Disequilibrium, Zero intelligence, Market ecology, Agent based modeling
    JEL: A10 A12 B0 B40 B50 C69 C9 D5 D1 G1 G10 G11 G12 G13 G14
    Date: 2008–03
  3. By: Köhler, Matthias
    Abstract: Although there is anecdotal evidence that merger control may constitute a barrier to the integration of European retail banking markets, systematic empirical evidence is missing until now. This paper aims to fill this gap. Based on a unique dataset on the transparency on merger control in the EU banking sector, we estimate the probability that a bank is taken over as a function of its characteristics, country characteristics and the transparency of merger control in the banking sector. The results indicate that a bank is systematically more likely to be taken over by foreign credit institutions if the regulatory process is transparent. Particularly large banks are less likely to be taken over by foreign credit institutions if merger control lacks transparency. This is in line with the hypothesis that governments may block crossborder bank merger because they want the largest institution in the country to be domestically owned. Domestic mergers are not affected. This suggests that merger control may therefore constitute an important barrier to cross-border consolidation and that further integration of EU banking markets requires a higher degree of transparency of the regulatory process.
    Date: 2008
  4. By: Koskela, Erkki (University of Helsinki); König, Jan (Free University of Berlin)
    Abstract: We analyze the following questions associated with outsourcing and profit sharing under imperfect labour markets. How does strategic outsourcing influence wage formation, profit sharing and employee effort when firms commit to optimal profit sharing before wage formation or decide for profit sharing after wage formation? What is the relationship between outsourcing, profit sharing, and equilibrium unemployment when profit sharing is also a part of a compensation scheme in all industries? We find that if firms will decide on profit sharing before the wage formation, higher outsourcing decreases wage whereas profit sharing has an ambiguous effect. Under flexible profit sharing wage is smaller than in the case of committed profit sharing. For equilibrium unemployment, we find that if there is also profit sharing in other industries, the effects of outsourcing and profit sharing on the unemployment rate is ambiguous both in the committed and flexible case.
    Keywords: outsourcing, profit sharing, labour market imperfection, employee effort, equilibrium unemployment
    JEL: E23 E24 J23 J33 J82
    Date: 2008–03
  5. By: Schnedler, Wendelin (Department of Economics, University of Heidelberg); Vadovic, Radovan (ITAM)
    Abstract: What is the motivational effect of imposing a minimum effort requirement? Agents may no longer exert voluntary effort but merely meet the requirement. Here, we examine how such hidden costs of control change when control is considered legitimate. We study a principal-agent model where control signals the expectations of the principal and the agent meets these expectations because he is guilt-averse. We conjecture that control is more likely to be considered legitimate (i) if it is not exclusively aimed at a specific agent or (ii) if it protects the endowment of the principal. Given the conjecture, the model predicts that hidden costs are lower when one of the two conditions is met. We experimentally test these predictions and find them confirmed.
    Date: 2007–09–05
  6. By: Annette van den Berg; Yolanda Grift; Michael Arjen van Witteloostuijn
    Abstract: Although works councils have, by and large, equally extensive legal rights in Germany and the Netherlands, this is the first econometric analysis that investigates the influence of works councils on firm performance for the Netherlands. We use a nation-wide Dutch dataset with information on management's perceptions of the works council's impact on their firms' efficiency and innovation. Following Jirjahn and Smith (2006), we find that managerial perceptions crucially depend on the firm's human resource management policies and market strategies. Additionally, we argue that managerial perceptions are related to the works council's role attitude and management's leadership style. For this argument, we find support, too.
    Keywords: works councils, managerial response, effectiveness, efficiency, innovation
    JEL: J53 M54
    Date: 2008–03
  7. By: Hongbin Cai; Ichiro Obara
    Date: 2008–03–21
  8. By: Maug, Ernst (Chair for Corporate Finance, University of Mannheim and Sonderforschungsbereich 504); Dittmann, Ingolf (Erasmus School of Economics Rotterdam)
    Abstract: We estimate a standard principal agent model with constant relative risk aversion and lognormal stock prices for a sample of 598 US CEOs. The model is widely used in the compensation literature, but it predicts that almost all of the CEOs in our sample should hold no stock options. Instead, CEOs should have lower base salaries and receive additional shares in their companies. For a typical value of relative risk aversion, almost half of the CEOs in our sample would be required to purchase additional stock in their companies from their private savings. The model predicts contracts that would reduce average compensation costs by 20% while providing the same incentives and the same utility to CEOs. We investigate a number of extensions and modi.cations of the standard model, but .nd none of them to be satisfactory. We conclude that the standard principal agent model typically used in the literature cannot rationalize observed contracts. One reason may be that executive pay contracts are suboptimal.
    Date: 2007–06–26
  9. By: Dittmann, Ingolf (Erasmus School of Economics Rotterdam); Maug, Ernst (Chair for Corporate Finance, University of Mannheim and Sonderforschungsbereich 504); Spalt, Oliver (Chair for Corporate Finance, University of Mannheim and Sonderforschungsbereich 504)
    Abstract: This paper analyzes optimal executive compensation contracts when managers are loss averse. We establish the general optimal contract analytically and parameterize the model using data on compensation contracts for 595 CEOs. Parameters for preferences are based on the experimental literature. Overall, the Loss Aversion-model dominates an equivalent Risk Aversion-model, especially with respect to its ability to predict options as part of the optimal contract. The Loss Aversion-model performs well in terms of predicting observed compensation contracts if the reference wage is assumed to lie not too far above previous year’s fixed wage. Our results suggest that loss aversion is a better paradigm for analyzing design features of stock options and for developing preference-based valuation models than the conventional model used in the literature.
    Date: 2007–06–26
  10. By: Carolyn Pitchik
    Abstract: When human capital skills differ in their ability to attract offers from alternative employers, a potential inefficiency in human capital investment arises. If a worker's output is observed by the labour market only when the worker invests in self-promoting activities, then high-ability workers overinvest in self-promotion. No bond is posted in the contract that both attains efficient investment and minimizes the bond subject to individual rationality constraints and the zero profit condition. The contract is one in which the firm (i) offers to match outside offers strategically and (ii) guarantees a minimum wage. The model predicts that, under both the spot market contract and the efficient contract, wage declines with seniority even when conditioning on high ability. This prediction is consistent with the stylized fact regarding the decline of wages with seniority in academia. The model can also explain how the seniority wage premium may vary across disciplines, time, and schools.
    Keywords: negative seniority wage premium, spot market contract, efficient contract, general human capital
    JEL: C7 C72 L1
    Date: 2008–03–25
  11. By: Sumit Agarwal; John C Driscoll; David Laibson
    Date: 2008–03–21
    Abstract: Strategic entrepreneurship which merges strategic management and entrepreneurship is an essential formula for a good business. An entrepreneurial mindset (opportunity seeking) augurs well for effective strategy making (advantage seeking) to caution against uncertainty. Hence, companies must align their business along strategic entrepreneurship. Companies can sustain their business by plotting a strategy making that pays off on their entrepreneurial orientation. This research aims to provide answer to such by looking at strategy making along 5Ps: plan, position, pattern, perspective and ploy and mapping them out with the dimensions of entrepreneurial orientation to wit: innovativeness, proactiveness, risk taking, competitive aggressiveness, and autonomy. Thereby, propositions of relational constructs that stand on a firm grounding of literature are presented.
    Date: 2008–01
  13. By: Fabio Maria Manenti (University of Padua); Ernesto Somma (University of Bari)
    Abstract: We study the strategic choice of compatibility between two initially incompatible network goods in a two-stage game played by an incumbent and an entrant firm. Compatibility may be achieved by means of a converter. We derive a number of results under different assumptions about the nature of the converter (one-way vs two-way), the existence of property rights and the possibility of side payments. With incompatibility, entry deterrence occurs for sufficiently strong network effects. In the case of a two-way converter, which can only be supplied by the incumbent, incompatibility will result in equilibrium unless side payments are allowed and the network externalities are sufficiently low. When both firms can build a one-way converter and there are no property rights on the necessary technical specifications, the unique equilibrium involves full compatibility. Finally, when each firm has property rights on its technical specifications, full incompatibility is observed at the equilibrium with no side payments; when these are allowed the entrant sells access to its network to the incumbent which refuses to do the same and asymmetric one-way compatibility results in equilibrium. The welfare analysis shows that the equilibrium compatibility regime is socially inefficient for most levels of the network effects.
    Keywords: network externalities, one-way compatibility, two-way compatibility, entry
    JEL: L13 L15 D43
    Date: 2008
  14. By: Sumit Agarwal; John C Driscoll; Xavier Gabaix; David Laibson
    Date: 2008–03–21
  15. By: Rod Tyers; Lucy Rees
    Abstract: The retreat from public ownership of service firms and industries has left behind numerous private monopolies and oligopolies supervised by regulatory agencies. Services industries in government and private ownership generate two-thirds of Australia's value added and employ three quarters of its workforce. This study offers an economy-wide approach that represents monopoly and oligopoly behaviour explicitly. It examines the implications of oligopoly rents for factor markets and the real exchange rate, the extent of sectoral interactions and the potential economy wide gains from tighter price cap regulation, with the results confirming the merit of an economy-wide approach. External shocks, like the present "China boom", are also simulated. Such positive shocks are shown to expand the potential for oligopoly rents and therefore to raise the bar for regulatory agencies. Moreover, less than tight price caps are shown to exacerbate entry-exit hysteresis in boom and bust cycles.
    JEL: C68 D43 D58 L13 L43 L51 L80
    Date: 2008–03
  16. By: Tauchmann, Harald (RWI Essen); Göhlmann, Silja (RWI Essen); Requate, Till (University of Kiel); Schmidt, Christoph M. (RWI Essen)
    Abstract: The question of whether two drugs – namely alcohol and tobacco – are used as complements or substitutes is of crucial interest if side-effects of anti-smoking policies are considered. Numerous papers have empirically addressed this issue by estimating demand systems for alcohol and tobacco and subsequently calculating cross-price effects. However, this traditional approach often is seriously hampered by insufficient price-variation observed in survey data. We therefore suggest an alternative instrumental variables approach that statistically mimics an experimental study and does not rely on prices as explanatory variables. This approach is applied to German survey data. Our estimation results suggest that a reduction in tobacco consumption results in a moderate reduction in alcohol consumption. It is shown theoretically that this implies that alcohol and tobacco are complements. Hence, we conclude that successful anti-smoking policies will not result in the unintended side-effect of an increased (ab)use of alcohol.
    Keywords: complements or substitutes, interdependence in consumption, tobacco and alcohol, insufficient price-variation, instrumental variables approach
    JEL: C31 D12 I12
    Date: 2008–03
  17. By: Adrian de la Garza (Yale University); Atsushi Sannabe (Kyoto University); Katsunori Yamada (Japan Society for the Promotion of Science and Osaka University)
    Abstract: This paper utilizes survey data of Japanese union workers to pro- vide new insights to the \happiness and economics" literature. A cru- cial item that distinguishes our empirical analyses from previous stud- ies is the use of data on workers' expectations of their peers' wages. With our data, we conrm that individuals report higher levels of subjective well-being (SWB) when they perceive that their wages are higher relative to their peers'. On the other hand, the traditional ap- proach in the literature constructs relative wages from Mincer equa- tions, thus presuming that individuals infer their peers' wages the way econometricians do. We argue that this method may be inappropriate. Moreover, we address the issue of endogeneity of our subjective refer- ence income measure employing an instrumental variables approach, and corroborate the causality from relative income to SWB. Addition- ally, we study the relationship between SWB measures and workers' individual characteristics, and compare our results with standard nd- ings in the literature for U.S. and European workers. In agreement with these studies, women and married individuals seem to be happier than their counterparts, men and single workers. However, we observe a U-shaped relationship between education and happiness, which con- trasts with ndings for U.S. and British workers. Finally, we attempt to explain these relationships in the context of the Japanese social background.
    Keywords: subjective well-being; relative utility; sub- jective reference income
    JEL: C25 D00 J28
    Date: 2008–03

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