nep-bec New Economics Papers
on Business Economics
Issue of 2008‒04‒29
eighteen papers chosen by
Christian Calmes
University of Quebec in Ottawa

  1. Business cycle evidence on firm entry By Lewis, Vivien
  2. Internationalization and Firm Performance: The S-Curve Hypothesis under the Eurozone context By Vilas-Boas, Ricardo; Suárez-González, Isabel
  3. On the mechanics of firm growth By Erzo G.J. Luttmer
  4. Executive Compensation and Macroeconomic Fluctuations By Oxelheim, Lars; Wihlborg, Clas; Zhang, Jianhua
  5. Institutions and Contract Enforcement By Armin Falk; David Huffman; W. Bentley MacLeod
  6. Are CEOs in Family Firms Paid Like Bureaucrats? Evidence from Bayesian and Frequentist Analyses By Jörn Hendrich Block
  7. Production Stages and the Transmission of Technological Progress By Louis Phaneuf; Nooman Rebei
  8. The role of investment wedges in the Carlstrom-Fuerst economy and business cycle accounting By Masaru, Inaba; Kengo, Nutahara
  9. Settlement in Merger Cases: Remedies and Litigation By Bertrand Chopard; Thomas Cortade; Andreea Cosnita
  10. A solution to the default risk-business cycle disconnect By Enrique G. Mandoza; Vivian Z. Yue
  11. Aftermarket Power and Basic Market Competition By Cabral, Luís M B
  12. Bank integration and financial constraints: evidence from U.S. firms By Ricardo Correa
  13. A look at the relationship between industrial dynamics and aggregate fluctuations By Domenico Delli Gatti; Edoardo Gaffeo; Mauro Gallegati
  14. Technology capital and the U.S. current account By Ellen R. McGrattan; Edward C. Prescott
  15. Delegation with Incomplete and Renegotiable Contracts By Levent Koçkesen; Emanuele Gerratana
  16. An Examination of Canadian Firms Delisting from U.S. Exchanges By Jonathan Witmer
  17. To Bind or Not to Bind Collectively? Decomposition of Bargained Wage Differences Using Counterfactual Distributions By Wolf Dieter Heinbach; Markus Spindler
  18. The Frequency Analysis of the Business Cycle By Prof D.S.G. Pollock

  1. By: Lewis, Vivien
    Abstract: Business cycle models with sticky prices and endegenous firm entry make novel predictions on the transmission of shocks through the extensive margin of investment. This paper tests some of these predictions using a vector autoregression with model-based sign restrictions. We find a positive and significant response of firm entry to expansionary shocks to productivity, aggregate spending, monetary policy and entry costs. The estimated response to a monetary expansion does not support the monetary policy transmission mechanism proposed by the model. Insofar as firm startups require labour services, wage stickiness is needed to make the signs of the model responses consistent with the estimated ones. The shapes of the empirical responses suggest that congestion effects in entry make it harder for new firms to survive when the number of startups rises.
    Keywords: firm entry, business cycles, VAR
    JEL: E30 E32
    Date: 2008
  2. By: Vilas-Boas, Ricardo (Departamento de Administración y Economía de la Empresa, Facultad de Economía y Empresa, Universidad de Salamanca); Suárez-González, Isabel (Departamento de Administración y Economía de la Empresa, Facultad de Economía y Empresa, Universidad de Salamanca)
    Abstract: In this article, we analyse the gains in performance of international diversified firms applied to the Eurozone, taking into account the impact of the interactive effect of both product and international diversification on this performance. We test all the conflicting relations explored in the literature of international diversification (linear, quadratic and cubic), and found that the S-curve is a more complete approach, since it considers different stages of different firms, regarding the international diversification-performance relation. Another important contributions of this article are: i) the fact we take into consideration not only account based measures of performance, but also market based measures; ii) different from previous studies, our sample is multi country and European; iii) we take into account not only manufacturing or service firms exclusively, but both together.
    Keywords: International Diversification, Multinational, Internationalization, Globalization.
    JEL: F23
    Date: 2007–12
  3. By: Erzo G.J. Luttmer
    Abstract: Given a common technology for replicating blueprints, high-quality blueprints will be replicated more quickly than low-quality blueprints. If quality begets quality, and firms are identifed with collections of blueprints derived from the same initial blueprint, then, along a balanced growth path, Gibrat’s Law holds for every type of firm. A firm size distribution with the thick right tail observed in the data can then arise only when the number of blueprints in the economy grows over time, or else firms cannot grow at a positive rate on average. But when calibrated to match the observed firm entry rate and the right tail of the size distribution, this model implies that the median age among firms with more than 10,000 employees is about 750 years. The problem is Gibrat’s Law. If the relative quality of a firm’s blueprints depreciates as the firm ages, then the firm’s growth rate slows down over time. By allowing for rapid and noisy initial growth, this version of the model can explain high observed entry rates, a thick-tailed size distribution, and the relatively young age of large U.S. corporations.
    Date: 2008
  4. By: Oxelheim, Lars (Lund University and Research Institute of Industrial Economics); Wihlborg, Clas (Chapman University and Copenhagen Business School); Zhang, Jianhua (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: Macroeconomic fluctuations affect corporations’ performance through demand and cost conditions. Incentive effects of performance-based compensation schemes for management may be weakened or biased by macroeconomic influences if management is unable to forecast macroeconomic fluctuations or unable to adjust operations in response to changes in macroeconomic conditions. In this paper we analyze the impact of macroeconomic, industry and firm-specific factors on salaries and bonus of CEOs in 131 Swedish corporations during the period 2001-2006. A distinction is made between anticipated and unanticipated macroeconomic fluctuations. The macroeconomic influences on performance and compensation can be expected to vary from firm to firm in terms of magnitude of effects, as well as in terms of relevant macroeconomic variables. The estimates obtained in this paper refer to the average impact across the sample of firms. We find that the average Swedish CEOs’ compensation is explained to a substantial extent by macroeconomic factors; less so by unanticipated factors alone.<p>
    Keywords: executive compensation; macroeconomic factors; cash compensation
    JEL: L14 L16 M14 M21 M52
    Date: 2008–04–21
  5. By: Armin Falk; David Huffman; W. Bentley MacLeod
    Abstract: We provide evidence on how two important types of institutions -- dismissal barriers, and bonus pay -- affect contract enforcement behavior in a market with incomplete contracts and repeated interactions. Dismissal barriers are shown to have a strong negative impact on worker performance, and market efficiency, by interfering with firms' use of firing threat as an incentive device. Dismissal barriers also distort the dynamics of worker effort levels over time, cause firms to rely more on the spot market for labor, and create a distribution of relationship lengths in the market that is more extreme, with more very short and more very long relationships. The introduction of a bonus pay option dramatically changes the market outcome. Firms are observed to substitute bonus pay for threat of firing as an incentive device, almost entirely offsetting the negative incentive and efficiency effects of dismissal barriers. Nevertheless, contract enforcement behavior remains fundamentally changed, because the option to pay bonuses causes firms to rely less on long-term relationships. Our results show that market outcomes are the result of a complex interplay between contract enforcement policies and the institutions in which they are embedded.
    JEL: C9 D01 J3 J41
    Date: 2008–04
  6. By: Jörn Hendrich Block
    Abstract: The relationship between CEO pay and performance has been much analyzed in the management and economics literature. This study analyzes the structure of executive compensation in family and non-family firms. In line with predictions of agency theory, it is found that the share of base salary is higher with family-member CEOs than it is with nonfamily member CEOs. Furthermore, family-member CEOs receive a lower share of option pay. The paper’s findings have implications for family business research and the executive compensation literature. To make the findings robust, the statistical analysis is performed with both Bayesian and classical frequentist methods.
    Keywords: Executive compensation, family firms, stock options, agency theory, Bayesian analysis
    JEL: G30 J30 M52
    Date: 2008–04
  7. By: Louis Phaneuf; Nooman Rebei
    Abstract: We develop and estimate a DSGE model which realistically assumes that many goods in the economy are produced through more than one stage of production. Firms produce differentiated goods at an intermediate stage and a final stage, post different prices at both stages, and face stage-specific technological change. Wage-setting households are imperfectly competitive with respect to labor skills. Intermediate-stage technology shocks explain most of short-run output fluctuations, whereas final-stage technology shocks only have a small impact. Despite the dominance of technology shocks, the model predicts a near-zero correlation between hours worked and the return to work and mildly procyclical real wages. The factors mainly responsible for these findings are an input-output linkage between firms operating at the different stages and movements in the relative price of goods. We show that, depending the source, a technology improvement may either have a contractionary or expansionary impact on employment.
    Keywords: Business Cycles, Production Stages, Technological Change, Nominal Rigidities
    JEL: E32
    Date: 2008
  8. By: Masaru, Inaba; Kengo, Nutahara
    Abstract: Many researches that apply business cycle accounting (hereafter, BCA) to actual data conclude that models with investment frictions or investment wedges are not promising for modeling business cycle dynamics. In this paper, we apply BCA to artificial data generated by a variant model of Carlstrom and Fuerst (1997, American Economic Review), which is one of representative models with investment frictions. We find that BCA leads us to conclude that models of investment wedges are not promising according to the criteria of BCA, although the true model contains investment frictions.
    Keywords: Business cycle accounting; investment wedge; investment friction; wedge decompsition
    JEL: C68 E32 E13
    Date: 2008–04–19
  9. By: Bertrand Chopard; Thomas Cortade; Andreea Cosnita
    Abstract: This paper performs a pre-trial settlement analysis for the negotiation of asset divestitures in merger control cases. Taking into account the asymmetric information between the competition agency and the merging firms concerning the true competition impact of the merger, we examine the impact on the likelihood of settlement divestiture and the divestiture amount in equilibrium of various factors, such as the transfer rate of the merger’s cost savings, the severity of the appeal court, as well as the bargaining power of the merging partners in the sale of the divested assets.
    Keywords: out-of-court settlement, merger control, divestitures, asymmetric information
    JEL: K21 L41 D82
    Date: 2008
  10. By: Enrique G. Mandoza; Vivian Z. Yue
    Abstract: Models of business cycles in emerging economies explain the negative correlation between country spreads and output by modeling default risk as an exogenous interest rate on working capital. Models of strategic default explain the cyclical properties of sovereign spreads by assuming an exogenous output cost of default with special features, and they underestimate debt-output ratios by a wide margin. This paper proposes a solution to this default risk-business cycle disconnect based on a model of sovereign default with endogenous output dynamics. The model replicates observed V-shaped output dynamics around default episodes, countercyclical sovereign spreads, and high debt ratios, and it also matches the variability of consumption and the countercyclical fluctuations of net exports. Three features of the model are key for these results: (1) working capital loans pay for imported inputs; (2) imported inputs support more efficient factor allocations than when these inputs are produced internally; and (3) default on the foreign obligations of firms and the government occurs simultaneously.
    Date: 2008
  11. By: Cabral, Luís M B
    Abstract: I revisit the relation between aftermarket power and basic market competition. I consider an infinite period model with overlapping consumers: in each period, one consumer is born and joins one of the existing installed bases, then aftermarket payoffs are received by sellers and consumers, then finally one consumer dies. I derive the unique symmetric Markov equilibrium of this game and the resulting stationary distribution over states (each firm's installed base). I show that an increase in aftermarket power increases the extent of increasing dominance (i.e., a large firm is increasingly more likely to capture a new consumer than a small firm). This in turn leads to several implications of aftermarket power. First, the stationary distribution places greater weight on asymmetric states. Second, social welfare is greater. Third, under some conditions consumer welfare is also greater. Fourth, the value of a firm with zero installed base is lower, and so barriers to entry are higher.
    Keywords: aftermarkets; dynamic price competition; market power
    JEL: L1 L4
    Date: 2008–04
  12. By: Ricardo Correa
    Abstract: This paper uses data on publicly-traded firms in the U.S. to analyze the effect of interstate bank integration on the financial constraints borrowers face. A firm-level investment equation is estimated in order to test if bank integration reduces the sensitivity of capital expenditures to the level of internal funds. The staggered deregulation of cross-state bank acquisitions that took place in the U.S. between 1978 and 1994 helps estimate the model. Integration decreases financing constraints for bank-dependent firms. The change in firms' access to external finance is explained by an increase in the share of locally headquartered geographically diversified banks.
    Date: 2008
  13. By: Domenico Delli Gatti; Edoardo Gaffeo; Mauro Gallegati
    Abstract: The firmly established evidence of right-skewness of the firms’ size distribution is generally modelled recurring to some variant of the Gibrat’s Law of Proportional Effects. In spite of its empirical success, this approach has been harshly criticized on a theoretical ground due to its lack of economic contents and its unpleasant long-run implications. In this chapter we show that a right-skewed firms’ size distribution, with its upper tail scaling down as a power law, arises naturally from a simple choice-theoretic model based on financial market imperfections and a wage setting relationship. Our results rest on a multi-agent generalization of the prey-predator model, firstly introduced into economics by Richard Goodwin forty years ago.
    Keywords: Firm size; Prey-predator model; Business Fluctuations
    JEL: L11 D92 E32
    Date: 2008
  14. By: Ellen R. McGrattan; Edward C. Prescott
    Abstract: The U.S. Bureau of Economic Analysis (BEA) estimates the return on investments of foreign subsidiaries of U.S. multinational companies over the period 1982–2006 averaged 9.4 percent annually after taxes; U.S. subsidiaries of foreign multinationals averaged only 3.2 percent. Two factors distort BEA returns: technology capital and plant-specific intangible capital. Technology capital is accumulated know-how from intangible investments in R&D, brands, and organizations that can be used in foreign and domestic locations. Used abroad, it generates profits for foreign subsidiaries with no foreign direct investment (FDI). Plant-specific intangible capital in foreign subsidiaries is expensed abroad, lowering current profits on FDI and increasing future profits. We develop a multicountry general equilibrium model with an essential role for FDI and apply the BEA’s methodology to construct economic statistics for the model economy. We estimate that mismeasurement of intangible investments accounts for over 60 percent of the difference in BEA returns.
    Date: 2008
  15. By: Levent Koçkesen (Koç University); Emanuele Gerratana
    Abstract: It is well known that delegating the play of a game to an agent via incentive contractsmay serveas a commitment device and hence provide a strategic advantage. Previous literature has shown that any Nash equilibrium outcome of an extensive-form principals-only game can be supported as a sequential equilibrium outcome of the induced delegation game when contracts are unobservable and non-renegotiable. In this paper we characterize equilibriumoutcomes of delegation games with unobservable and incomplete contractswith andwithout renegotiation opportunities under the assumption that the principal cannot observe every history in the game when played by her agent. We show that incompleteness of the contracts restricts the set of outcomes to a subset of Nash equilibrium outcomes and renegotiation imposes further constraints. Yet, there is a large class of games in which non-subgame perfect equilibrium outcomes of the principals-only game can be supported even with renegotiable contracts, and hence delegation still has a bite.
    Keywords: Strategic Delegation, Incomplete Contracts, Renegotiation.
    JEL: C72 C78 D86 L13
    Date: 2008–04
  16. By: Jonathan Witmer
    Abstract: This paper examines Canadian and other foreign firms that have been involuntarily delisted from major U.S. exchanges. I find that, for most countries, less than 10% of firms get delisted from a U.S. exchange during my sample period. For Canada, more than 25% of firms listed in the United States get involuntarily delisted. This effect is more pronounced in Nasdaq-listed firms, where more than 40% of Canadian firms eventually get delisted, compared to about 15% of other foreign firms. After controlling for firm characteristics that have an impact on involuntary delistings, such as size, exchange listing, previous year's return, volatility, and leverage, Canadian firms still have a higher propensity to get delisted than other foreign cross-listed firms. However, in a comparison to a U.S. matched sample, there is no statistically significant difference in the likelihood of Canadian firms being delisted, relative to these U.S. firms. These results suggest that Canadian firms may have been treated more similarly to U.S. firms under the U.S. exchanges' rules and enforcement of their continued listing criteria, and that the bonding provided by U.S. exchanges may be stronger for Canadian and U.S. firms. Also, Canadian firms may have fewer impediments to listing in the United States such that small, high-growth Canadian firms have been more able to access U.S. markets compared to foreign firms.
    Keywords: Financial markets; International topics
    JEL: G30 G38
    Date: 2008
  17. By: Wolf Dieter Heinbach; Markus Spindler
    Abstract: Collective bargaining agreements still play an important role in the German wage setting system. Both existing theoretical and empirical studies find that collective bargaining leads to higher wages compared to individually agreed ones. However, the impact of collective bargaining on the wage level may be very different along the wage distribution. As unions aim at compressing the wage distribution, one might expect that for covered workers' wages in the lower part of the distribution workers' individual characteristics may be less important than the coverage by a collective contract. In contrast, the relative importance of workers' individual characteristics may rise in the upper part of the wage distribution, whereas the overall wage difference might decline. Using the newly available German Structure of Earnings Survey (GSES) 1995 and 2001, a cross-sectional linked employer-employee-dataset from German official statistics, this study analyses the difference between collectively and individually agreed wages using a Machado/Mata (2005) decomposition type technique.
    Keywords: collective bargaining; wage structure; wage decomposition; quantile regression
    JEL: J31 J51 C13
    Date: 2007–12
  18. By: Prof D.S.G. Pollock
    Abstract: An account is given of some techniques of linear filtering that can be used for extracting the business cycle from economic data sequences of limited duration. It is argued that there can be no definitive definition of the business cycle. Both the definition of the business cycle and the methods that are used to extract it must be adapted to the purposes of the analysis; and different definitions may be appropriate to different eras.
    Keywords: Linear filtering; Frequency-domain analysis; Flexible trends
    JEL: C22
    Date: 2008–04

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