nep-bec New Economics Papers
on Business Economics
Issue of 2008‒04‒15
27 papers chosen by
Christian Calmes
University of Quebec in Ottawa

  1. Performance Pay and Within-Firm Wage Inequality By Erling Barth, Bernt Bratsberg, Torbjørn Hægeland and Oddbjørn Raaum
  2. Competition, Takeovers and Gender Discrimination By Heyman, Fredrik; Svaleryd, Helena; Vlachos, Jonas
  3. Performance Pay, Sorting and Social Motivation By Eriksson, Tor; Villeval, Marie-Claire
  4. Returns to Tenure or Seniority? By Buhai, Sebastian; Portela, Miguel; Teulings, Coen; van Vuuren, Aico
  5. Does Product Market Competition Decrease Employers’ Training Investments? – Evidence from German Establishment Panel Data By Katja Görlitz; Joel Stiebale
  6. Imperfect Competition, Nominal Wage Contracts and the Business Cycle By Zuzana Janko
  7. Will Privatization Reduce Costs? By Lindqvist, Erik
  8. Adjustment Costs in a Real Business Cycle Model By Zuzana Janko
  9. What Drives the Productive Efficiency of a Firm? - the importance of industry, location, R&D, and size By Badunenko, Oleg; Fritsch, Michael; Stephan, Andreas
  10. Real-Time Measurement of Business Conditions, Second Version By S. Boragan Aruoba; Francis X. Diebold; Chiara Scotti
  11. Entry, Exit and Investment-Specific Technical Change By Roberto M. Samaniego
  12. Job protection, industrial relations and employment By Giulio Piccirilli
  13. Enabling managers to achieve work-family balance: a demands-control model of housework behavior and By MARGARITA MAYO; JUAN CARLOS PASTOR
  14. International Differences in Wage Inequality: A New Glance with European Matched Employer-Employee Data By Hipolito , Simon
  15. Managerial Risk Accounting and Control – A German perspective By Winter, Peter
  16. Why Are Companies Offshoring Innovation? The Emerging Global Race for Talent By Arie Y. Lewin; Silvia Massini; Carine Peeters
  17. Consumption risk sharing over the business cycle: the role of small firms' access to credit markets By Mathias Hoffmann; Iryna Shcherbakova
  18. Expectation Damages, Divisible Contracts, and Bilateral Investment By Susanne Ohlendorf
  19. Input Price Variation Across Locations and a Generalized Measure of Cost Efficiency By Subhash C. Ray; Lei Chen; Kankana Mukherjee
  20. Assessing Job Flows Across Countries: The Role of Industry, Firm Size and Regulations By John Haltiwanger; Stefano Scarpetta; Helena Schweiger
  21. Never the same after the first time: The satisfaction of the second-generation self-employed. By Andrew E. Clark; Nathalie Colombier; David Masclet
  22. Bank Incentives, Contract Design, and Bank Runs By Andolfatto, David
  23. Effects of Learning-by-doing, technology-adoption costs and wage inequality By Rui Leite; Óscar Afonso
  24. Investment-specific Technological Change and Labor Composition: Evidence from the U.S. Manufacturing By Chun- Yu Ho
  25. Persistent Business Cycles and High Economic Growth: How to Explain Their Long Concurrence in Modern Capitalism? By Victor Zarnowitz
  26. On The Preferences of Principals and Agents By Marco Castillo; Ragan Petrie; Maximo Torero
  27. The Dynamic Effects of Adjustment Costs and Leisure Habit in a Model with Stochastic Wage Staggering By Zuzana Janko

  1. By: Erling Barth, Bernt Bratsberg, Torbjørn Hægeland and Oddbjørn Raaum (Statistics Norway)
    Abstract: This paper examines the impact of performance-related pay on wage differentials within firms. Our theoretical framework predicts that, compared to a fixed pay system, pay schemes based on individual effort increase within-firm wage inequality, while group-based bonuses have minor effects on wage dispersion. Theory also predicts an interaction between performance-related pay and union bargaining, where union power reduces the impact of performance pay on wage dispersion. The empirical contribution utilizes two recent Norwegian employer surveys, linked to a full set of employee records. A longitudinal sub-sample allows for identification based on fixed establishment effects. Introduction of performance-related pay is shown to raise residual wage inequality in nonunion firms, but not in firms with high union density. Our findings suggest that even though performance-related pay appears to be on the rise, the overall impact on wage dispersion is likely to be small, particularly in European countries with strong unions.
    Keywords: Performance related pay; wage inequality; union bargaining
    JEL: J31 J33
    Date: 2008–04
  2. By: Heyman, Fredrik (Research Institute of Industrial Economics (IFN)); Svaleryd, Helena (Research Institute of Industrial Economics (IFN)); Vlachos, Jonas (Stockholm University)
    Abstract: Theories of taste-based discrimination predict that competitive pressures will drive discriminatory behavior out of the market. Using detailed matched employer-employee data, we analyze how firm takeovers and product market competition are related to the gender composition of the firm’s workforce and the gender wage gap. Using a difference-in-difference framework and dealing with several endogeneity concerns, we find that the share of female employees increases as a result of an ownership change, in particular when product market competition is weak. Further, increased competition reduces the gender wage gap, especially among highly educated employees. While the estimated wage effect is quite small, the results support the main theoretical predictions.
    Keywords: Discrimination; Competition; Takeovers; Wages
    JEL: J20 J31 J70
    Date: 2008–02–21
  3. By: Eriksson, Tor (Department of Economics, Aarhus School of Business); Villeval, Marie-Claire (Department of Economics, Aarhus School of Business)
    Abstract: Variable pay creates a link between pay and performance but may also help firms in attracting more productive employees. Our experiment investigates the impact of performance pay on both incentives and sorting and analyzes the influence of repeated interactions between firms and employees on these effects. We show that (i) the opportunity to switch from a fixed wage to variable pay scheme increases the average effort level and its variance; (ii) high skill employees concentrate under the variable pay scheme; (iii) however, in repeated interactions, efficiency wages reduce the attraction of performance pay. Social motivation and reputation influence both the provision of incentives and their sorting effect.
    Keywords: Performance pay; incentives; sorting; social motivation; experiment
    JEL: C91 J31 J33 M52
    Date: 2008–04–04
  4. By: Buhai, Sebastian (Department of Economics, Aarhus School of Business); Portela, Miguel (University of Minho); Teulings, Coen (CPB Netherlands Bureau for Economic Analysis); van Vuuren, Aico (Free University)
    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 e¤ects of Employment Protection Legislation and risk aversion.
    Keywords: irreversible investment; efficient bargaining; seniority; LIFO
    JEL: J31 J41 J63
    Date: 2008–01–18
  5. By: Katja Görlitz; Joel Stiebale
    Abstract: Using a large panel data set of German manufacturing establishments, this paper investigates the impact of competition on training incidence as well as on the number of trained workers. According to theory, one would expect a negative relationship between product market competition and firms’ incentives to invest in employees’ general skills (Gersbach and Schmutzler 2006). In our empirical analysis, product market competition is approximated by various measures of competition such as the Herfindahl Index, the number of firms at the 3-digit industry level and the price cost margin. After controlling for unobserved heterogeneity across industries and establishments, there is no significant effect of competition on training. This result is robust towards different samples, model specifications and estimation techniques.
    Keywords: Training, human capital, product market competition
    JEL: J24 L22 D43 C23
    Date: 2008–03
  6. By: Zuzana Janko
    Date: 2008–01–11
  7. By: Lindqvist, Erik (Research Institute of Industrial Economics (IFN))
    Abstract: I develop a model of public sector contracting based on the multitask framework by Holmström and Milgrom (1991). In this model, an agent can put effort into increasing the quality of a service or reducing costs. Being residual claimants, private owners have stronger incentives to cut costs than public employees. However, if quality cannot be perfectly measured, providing a private firm with incentives to improve quality forces the owner of the firm to bear risk. As a result, private firms will always be cheaper for low levels of quality but might be more expensive for high levels of quality. Extending the model to allow for differences in task attractiveness, I find that public firms shun unattractive tasks, whereas private firms undertake them if incentives are strong enough.
    Keywords: Privatization; Public Sector Contracting; Incomplete Contracts; Contracting Out
    JEL: H11 H40 L32 L33
    Date: 2008–03–17
  8. By: Zuzana Janko
    Date: 2008–01–11
  9. By: Badunenko, Oleg (DIW Berlin); Fritsch, Michael (Friedrich Schiller University Jena, Max Planck Institute of Economics Jena and DIW); Stephan, Andreas (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: This paper investigates the factors that explain the level and dynamics of manufacturing firm productive efficiency. In our empirical analysis, we use a unique sample of about 39,000 firms in 256 industries from the German Cost Structure Census over the years 1992-2005. We estimate the efficiencies of the firms and relate them to firm-specific and environmental factors. We find that (1) about half the model’s explanatory power is due to industry effects, (2) firm size accounts for another 20 percent, and (3) location of headquarters explains approximately 15 percent. Interestingly, most other firm characteristics, such as R&D intensity, outsourcing activities, or the number of owners, have extremely little explanatory power. Surprisingly, our findings suggest that higher R&D intensity is associated with being less efficient, though higher R&D spending increases a firm’s efficiency over time.
    Keywords: Frontier analysis; determinants of efficiency; firm performance; industry effects; regional effects; firm size
    JEL: D24 L10 L25
    Date: 2008–04–02
  10. By: S. Boragan Aruoba (Department of Economics, University of Maryland); Francis X. Diebold (Department of Economics, University of Pennsylvania and NBER); Chiara Scotti (Federal Reserve Board, Division of International Finance)
    Abstract: We construct a framework for measuring economic activity at high frequency, potentially in real time. We use a variety of stock and flow data observed at mixed frequencies (including very high frequencies), and we use a dynamic factor model that permits exact filtering. We illustrate the framework in a prototype empirical example and a simulation study calibrated to the example.
    Keywords: Business cycle, Expansion, Recession, State space model, Macroeconomic forecasting, Dynamic factor model, Contraction, Turning point
    JEL: E32 E37 C01 C22
    Date: 2007–03–01
  11. By: Roberto M. Samaniego (Department of Economics, George Washington University)
    Abstract: Across industries, this paper finds that the rate of investment-specific technical change (ISTC) is positively related to rates of entry and exit. This finding is consistent with industry dynamics along the balanced growth path of a general equilibrium, multi-industry model of the plant lifecycle, in which technology adoption is costly and the rate of ISTC varies across industries. Results are robust to allowing for structural change induced by technological progress. The model also generates lumpy investment as a result of technology adoption by incumbents.
    Keywords: Entry, exit, turnover, investment-specific technical change, entry costs, vintage capital, embodied technical change, selection, obsolescence, structural change, lumpy investment.
    JEL: L16 O33 O41
    Date: 2008–04–02
  12. By: Giulio Piccirilli (DISCE, Università Cattolica)
    Abstract: In a dynamic stochastic monopoly union model we show that firing costs have a small and ambiguous impact on the level of employment if the union precommits to future wages. Further, in comparison with the commitment equilibrium and for very general union preferences, the no-commitment equilibrium exhibits higher wages and a lower employment level. Since commitment-like equilibria are more likely in cooperative bargain environments, these results suggest that, coeteris paribus, the interaction between employment protection and the quality of industrial relations reduces unemployment. We provide evidence on OECD countries which is consistent with this predictions.
    Keywords: Firing costs, unemployment, industrial relations.
    JEL: J23 J51 J63
    Date: 2007–10
  13. By: MARGARITA MAYO (Instituto de Empresa); JUAN CARLOS PASTOR (Instituto de Empresa)
    Abstract: The interplay between work and family has received a great deal of attention in the last two decades. We know very little, however, about the organizational factors that enable managers achieve a good balance between their work and family lives. Following Karasek (1979) demands-control model, we hypothesized that managerial workload will interact with time flexibility and task autonomy to predict the division of household labor, which in turn will influence family satisfaction. A sample of 103 managers reported their workload and their spouses reported the division of housework activities and their level of satisfaction with family life.
    Date: 2008–03
  14. By: Hipolito , Simon
    Abstract: Using unique international harmonized matched employer-employee microdata from the European Structure of Earnings Survey for nine representative European countries, this comparative study examines the origin of international differences in wage inequality. Our novel evidence uncovers that global wage inequality is highly correlated with the magnitude of inter-firm wage differentials and that workplace- and job-related factors generally have a more significant impact on within-country wage inequality than individual characteristics. On the whole, European countries exhibit considerably different wage structures: they differ significantly not only in the extent of wage inequality but also in the relative influence of factors shaping wage inequality. Comparative analyses reveal that although cross-country differences in labour force composition play a part in the explanation, differences in distribution and, very specially, in labour market prices of workplace and job characteristics are primary reasons contributing to international differences in wage inequality.
    Keywords: Wage inequality; matched employer-employee data.
    JEL: J31 J30
    Date: 2008
  15. By: Winter, Peter
    Abstract: Recent developments have sparked a renewed interest concerning risk related topics in nonfinancial companies. Risk management issues directly touch the domain of management accounting and control. In Germany, topics related to the support of corporate or enterprise risk management are commonly discussed under the label of “Risikocontrolling”, which will be translated as Managerial Risk Accounting and Control. However, the conceptual foundation of a risk oriented management accounting respectively managerial accounting for the purpose of decision-facilitation and decision-influence pertaining to risk management is neither well developed nor well diffused and integrated. Therefore, the development of special risk oriented management accounting instruments is considered necessary. The paper aims at giving an overview of the subject and development of “Risikocontrolling” in Germany as well as discussing the necessity and (measurement and behavioural) problems of managerial risk accounting. Finally, a proposal for the design of managerial risk accounting systems will be presented.
    Keywords: Controlling; Germany; Management Accounting; Risk; Risk Management; Risk Measurement
    JEL: M41
    Date: 2007–08–21
  16. By: Arie Y. Lewin (Duke University – The Fuqua School of Business, US.); Silvia Massini (Manchester Business School, University of Manchester, UK.); Carine Peeters (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels and ECARES, Université Libre de Bruxelles.)
    Abstract: This paper empirically studies the determinants of firms’ decision to offshore product development activities (i.e. R&D, product design and engineering services). A logit model is estimated using survey data from the Offshoring Research Network on offshore implementations initiated by US firms between 1990 and 2006. It relates the probability of offshoring product development to differences in companies’ strategic objectives (managerial intentionality), past experience (path dependence), and in environmental factors. The results show that offshoring of product development is partially explained by the emerging shortage of high skilled technical talent in the US, which drives the need to access talent globally. The data also suggest that firms use offshore cost savings opportunities to improve the efficiency of the innovation process, although not through labor arbitrages. Finally, increasing speed to market is another major reason underlying product development offshoring decisions.
    Keywords: offshoring, innovation, product development, global talent.
    JEL: O32
    Date: 2008–03
  17. By: Mathias Hoffmann; Iryna Shcherbakova
    Abstract: Consumption risk sharing among U.S. federal states increases in booms and decreases in recessions. We find that small firms' access to financial markets plays an important role in explaining this stylized fact: business cycle fluctuations in aggregate risk sharing are more pronounced in states in which small firms account for a large share of output. In addition, better access of small firms to credit markets in the wake of state-level banking deregulation during the 1980s seems to have loosened the dependence of aggregate risk sharing on the business cycle. Not only do our result support that better access to credit markets may have made it easier for the owners of small firms to smooth income in the face of adverse cash-flows shocks to their business. They also suggest an additional welfare benefit from banking deregulation: access to financial markets has become more reliable and is more easily available when households and firms need it most urgently - in economic downturns. A possible implication of these findings is that the welfare costs of a monetary tightening could have been substantially reduced as a result of the financial liberalization at the state level.
    Keywords: Interstate risk sharing, regional business cycle, proprietary income, state banking deregulation
    JEL: E32 E44 F3
    Date: 2008–03
  18. By: Susanne Ohlendorf (University of Bonn, Wirtschaftspolitische Abteilung, Adenauer Alle 24-42, 53113 Bonn, Germany, email:
    Abstract: This paper examines the efficiency of expectation damages as a breach remedy in a bilateral trade setting with renegotiation and relationship-specific investment by the buyer and the seller. As demonstrated by Edlin and Reichelstein (1996), no contract that specifies only a fixed quantity and a fixed per-unit price can induce efficient investment if marginal cost is constant and deterministic. We show that this result does not extend to more general payoff functions. If both parties face the risk of breaching, the first best becomes attainable with a simple price-quantity contract.
    Keywords: breach remedies, renegotiation, hold-up
    JEL: K12 D86 L14
    Date: 2008–03
  19. By: Subhash C. Ray (University of Connecticut); Lei Chen (University of Connecticut); Kankana Mukherjee (Worcester Polytechnic Institute)
    Abstract: We propose a nonparametric model for global cost minimization as a framework for optimal allocation of a firm's output target across multiple locations, taking account of differences in input prices and technologies across locations. This should be useful for firms planning production sites within a country and for foreign direct investment decisions by multi-national firms. Two illustrative examples are included. The first example considers the production location decision of a manufacturing firm across a number of adjacent states of the US. In the other example, we consider the optimal allocation of US and Canadian automobile manufacturers across the two countries.
    Keywords: Cost minimization; Data Envelopment Analysis; Heterogeneous technology; Location efficiency
    Date: 2008–03
  20. By: John Haltiwanger; Stefano Scarpetta; Helena Schweiger
    Abstract: This paper analyzes job flows in a sample of 16 industrial and emerging economies over the past decade, exploiting a harmonized firm-level dataset. It shows that industry and firm size effects (and especially firm size) account for a large fraction in the overall variability in job flows. However, large residual differences remain in the job flow patterns across countries. To account for the latter, the paper explores the role of differences in employment protection legislation across countries. Using a difference-in-difference approach that minimizes possible endogeneity and omitted variable problems, our findings show that hiring and firing costs tend to curb job flows, particularly in those industries and firm size classes that require more frequent labor adjustment.
    JEL: J23 J53 K31
    Date: 2008–04
  21. By: Andrew E. Clark; Nathalie Colombier; David Masclet
    Abstract: Previous empirical work has shown that the self-employed are generally more satisfied than salaried workers. This paper contributes to the existing literature in two ways. First, using French data from the ECHP and British data from the BHPS, we investigate the domains over which this differential operates. We show that, after controlling for occupation, self-employed workers are generally more satisfied with working conditions and pay, but less satisfied than employees with respect to job security. We then consider the differences between the first- and second-generation self-employed. The first-generation self-employed (those whose parents were not self-employed) are more satisfied overall than are the second-generation self-employed. We argue that this finding is consistent with the self-employed partly comparing their labor market outcomes with those of their parents, as well as parental transfers which loosen the self-employment participation constraint. This result is found in both pooled and panel analysis.
    Date: 2008
  22. By: Andolfatto, David
    Abstract: We study a version of the Diamond-Dybvig Green-Lin model with a strategic banker.
    JEL: E5
    Date: 2007–06
  23. By: Rui Leite (Faculdade de Economia, Universidade do Porto, Portugal); Óscar Afonso (CEMPRE and Faculdade de Economia, Universidade do Porto, Portugal)
    Abstract: In the dominant literature, the technological-knowledge bias that drives wage inequality is determined by the market-size channel. We develop an endogenous growth model with two technologies in which: a specific quality of labour, low or high-skilled, is combined with a specific set of quality-adjusted intermediate goods; the market-size channel is practically removed; adoption costs and learning-by-doing are linked with labour endowments. By solving transitional dynamics numerically, we show that changes in the supply of labour affect learning-by-doing and technology-adoption costs, which, in turn, influence the technological-knowledge bias and thus wage inequality. The proposed mechanisms can accommodate facts not explained by the previous literature.
    Keywords: Learning-by-doing; Adoption costs; Technological-knowledge bias; Wage inequality; Numerical simulations
    JEL: C61 J31 O31 O33
    Date: 2008–04
  24. By: Chun- Yu Ho (Department of Economics, Boston University)
    Abstract: This paper examines the impact of investment-specific technological change on labor composition in U.S. manufacturing industries from 1974 to 1994. I show that investmentspecific technological change increases the relative demand of non-production workers to production workers, while TFP growth does not change labor composition. Moreover, I find that the demand of skilled labor is stronger in the durable goods sector whereas the deskilling effect is stronger in the non-durable goods sector.
    Keywords: Employment Structure, Equipment Investment, Technological Change
    JEL: J21 O33
    Date: 2007–09
  25. By: Victor Zarnowitz (The Conference Board)
    Abstract: Prior to the second half of the twentieth century, the economy of the United States was distinguished by cyclical instability and low growth; however, since the end of WWII, business cycles have moderated, coupled with relatively higher economic growth. Characteristically, in the second half of the twentieth century, periods of expansion were on average six times as long as periods of contraction, with growth cycles being more symmetric in nature. This paper addresses several internal dynamics behind business cycles (mainly endogenous constructs) and outside impulses or disturbances (theories with major exogenous and stochastic elements) that can be attributed to modern business cycle depth and duration. Reasons outlined for this observed business cycle moderation include more effective countercyclical policy by the Federal Reserve, the lack of financial crises and major depressions marked by big business and bank failures, a shift in the structure of global market economies and the employment of automatic stabilizers.
    Date: 2007–11
  26. By: Marco Castillo; Ragan Petrie; Maximo Torero
    Abstract: One of the reasons why market economies are able to thrive is that they exploit the willingness of entrepreneurs to take risks that laborers might prefer to avoid. Markets work because they remunerate good judgement and punish mistakes. Indeed, modern contract theory is based on the assumption that principals are less risk averse than agents. We investigate if the risk preferences of entrepreneurs are different from those of laborers by implementing experiments with a random sample of the population in a fast-growing, small-manufacturing, economic cluster. As assumed by theory, we find that entrepreneurs are more likely to take risks than hired managers. These results are robust to the inclusion of a series of controls. This lends support to the idea that risk preferences are an important determinant of selection into occupations. Finally, our lotteries are good predictors of financial decisions, thus giving support to the external validity of our risk measures and experimental methods.
    Date: 2007–12
  27. By: Zuzana Janko
    Date: 2008–01–11

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.
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.