nep-bec New Economics Papers
on Business Economics
Issue of 2008‒05‒05
sixteen papers chosen by
Christian Calmes
University of Quebec in Ottawa

  1. "Old Wine in a New Bottle: Subprime Mortgage Crisis—Causes and Consequences" By Michael Mah-Hui Lim
  2. International evidence on sticky consumption growth. By Christopher D. Carroll; Jiri Slacalek; Martin Sommer
  3. The Determinants of Capital Structure: Some Evidence from Banks By Gropp, Reint Eberhard; Heider, Florian
  4. Union Density and Varieties of Coverage: The Anatomy of Union Wage Effects in Germany By Fitzenberger, Bernd; Kohn, Karsten; Lembcke, Alexander C.
  5. Imperfect predictability and mutual fund dynamics. How managers use predictors in changing systematic risk. By Gianni Amisano; Roberto Savona
  6. Multitasking, quality and pay for performance By Oddvar Martin Kaarboe; Luigi Siciliani
  7. Hedge Portfolios in Markets with Price Discontinuities By Gerald H.L. Cheang; Carl Chiarella
  8. Stochastic Discount Factor Approach to International Risk-Sharing: Evidence from Fixed Exchange Rate Episodes By Metodij Hadzi-Vaskov; Clemens J.M. Kool
  9. Interview with the Laureates in Economics Eric S. Maskin and Roger B. Myerson, 6 December 2007 By Maskin, Eric S.; Myerson, Roger B.
  10. Leonid Hurwicz, Eric S. Maskin and Roger B. Myerson: Mechanism Design Theory By Committee, Nobel Prize
  11. But Who Will Guard the Guardians? By Hurwicz, Leonid
  12. The Evaluation of American Option Prices Under Stochastic Volatility and Jump-Diffusion Dynamics Using the Method of Lines By Carl Chiarella; Boda Kang; Gunter H. Meyer; Andrew Ziogas
  13. A Unique Orthogonal Variance Decomposition By Wong, Woon K
  14. Assessing Intergenerational Earnings Persistence Among German Workers By Eisenhauer, Philipp; Pfeiffer, Friedhelm
  15. A complex systems methodology to transition management By Malte Schwoon; Floortje Alkemade; Koen Frenken; Marko P. Hekkert
  16. An Analysis Study to the problems of financing small projects With reference to experience Libyan Development Bank in Darna city By Alrubaie, falah.K.Ali

  1. By: Michael Mah-Hui Lim
    Abstract: This paper seeks to explain the causes and consequences of the United States subprime mortgage crisis, and how this crisis has led to a generalized credit crunch in other financial sectors that ultimately affects the real economy. It postulates that, despite the recent financial innovations, the financial strategies—leveraging and financial risk mismatching—that led to the present crisis are similar to those found in the United States savings-and-loan debacle of the late 1980s and in the Asian financial crisis of the late 1990s. However, these strategies are based on market innovations that have heightened, not reduced, systemic risks and financial instability. They are as the title implies: old wine in a new bottle. Going beyond these financial practices, the underlying structural causes of the crisis are located in the loose monetary policies of central banks, deregulation, and excess liquidity in financial markets that is a consequence of the kind of economic growth that produces various imbalances—trade imbalances, financial sector imbalances, and wealth and income inequality. The consequences of excessive risk, moral hazards, and rolling bubbles are discussed.
    Date: 2008–04
  2. By: Christopher D. Carroll (Johns Hopkins University, Department of Economics, 440 Mergenthaler Hall 3400 N. Charles Street, Baltimore, MD 21218, USA.); Jiri Slacalek (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Martin Sommer (International Monetary Fund, 700 19th Street, N.W., Washington, D.C. 20431, USA.)
    Abstract: We estimate the degree of ‘stickiness’ in aggregate consumption growth (sometimes interpreted as reflecting consumption habits) for thirteen advanced economies. We find that, after controlling for measurement error, consumption growth has a high degree of autocorrelation, with a stickiness parameter of about 0.7 on average across countries. The sticky-consumption-growth model outperforms the random walk model of Hall (1978), and typically fits the data better than the popular Campbell and Mankiw (1989) model. In several countries, the sticky-consumption- growth and Campbell–Mankiw models work about equally well. JEL Classification: E21, F41.
    Keywords: Sticky Expectations, Consumption Dynamics, Habit Formation.
    Date: 2008–03
  3. By: Gropp, Reint Eberhard; Heider, Florian
    Abstract: This paper documents that standard cross-sectional determinants of firm leverage also apply to the capital structure of large banks in the United States and Europe. We find a remarkable consistency in sign, significance and economic magnitude. Like non-financial firms, banks appear to have stable capital structures at levels that are specific to each individual bank. The results suggest that capital requirements may only be of second-order importance for banks’ capital structures and confirm the robustness of current corporate finance findings in a holdout sample of banks.
    Keywords: capital structure, corporate finance, leverage, bank capital, banking regulation
    JEL: G21 G32
    Date: 2008
  4. By: Fitzenberger, Bernd; Kohn, Karsten; Lembcke, Alexander C.
    Abstract: Collective bargaining in Germany takes place either at the industry level or at the firm level; collective bargaining coverage is much higher than union density; and not all employees in a covered firm are necessarily covered. This institutional setup suggests to explicitly distinguish union power as measured by net union density (NUD) in a labor market segment, coverage at the firm level, and coverage at the individual level. Using linked employer-employee data and applying quantile regressions, this is the first empirical paper which simultaneously analyzes these three dimensions of union influence on the structure of wages. Ceteris paribus, a higher share of employees in a firm covered by industry-wide or firm-level contracts is associated with higher wages. Yet, individual bargaining coverage in a covered firm shows a negative impact both on the wage level and on wage dispersion. A higher union density reinforces the effects of coverage, but the effect of union density is negative at all points in the wage distribution for uncovered employees. In line with an insurance motive, higher union density compresses the wage structure and, at the same time, it is associated with a uniform leftward movement of the distribution for uncovered employees. Tarifverhandlungen in Deutschland finden entweder auf Branchenebene oder auf Firmenebene statt; die Tarifbindung ist wesentlich höher als der Organisationsgrad der Gewerkschaften; und nicht alle Beschäftigten in einer tarifgebundenen Firma sind tarifgebunden. Diese institutionelle Aspekte legen es nahe, die Effekte der gewerkschaftlichen Macht – gemessen am Organisationsgrad in einem Arbeitsmarktsegment – von der Tarifbindung auf Firmenebene und der Tarifbindung auf individueller Ebene zu unterscheiden. Standardergebnisse in der Theorie und empirische Ergebnisse in der Literatur lassen erwarten, dass eine Tarifbindung mit höheren Löhnen und geringerer Lohndispersion einhergeht. Jedoch kann es auch Spillover-Effekte (Übertragungseffekte) aus dem tarifgebundenen Bereich in den nicht tarifgebundenen Bereich geben. Einerseits mögen nicht tarifgebundene Firmen höhere Löhne zahlen, um die Organisation einer Gewerkschaft zu verhindern (’union threat effect’). Andererseits mag die Reduktion der Beschäftigung durch höhere Löhne im tarifgebundenen Bereich zu einem erhöhten Arbeitsangebot im nicht tarifgebundenen Bereich führen. Letzteres mag dort einen Lohndruck nach unten auslösen.
    Keywords: Union density, collective bargaining coverage, wage structure, quantile regression, linked employer-employee data
    JEL: J31 J51 J52
    Date: 2008
  5. By: Gianni Amisano (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Roberto Savona (Department of Business Studies, University of Brescia. Address: Dipartimento di Economia Aziendale, Università degli Studi di Brescia, c/da S. Chiara n° 50, 25122 Brescia, Italy.)
    Abstract: Suppose a fund manager uses predictors in changing portfolio allocations over time. How does predictability translate into portfolio decisions? To answer this question we derive a new model within the Bayesian framework, where managers are assumed to modulate the systematic risk in part by observing how the benchmark returns are related to some set of imperfect predictors, and in part on the basis of their own information set. In this portfolio allocation process, managers concern themselves with the potential benefits arising from the market timing generated by benchmark predictors and by private information. In doing this, we impose a structure on fund returns, betas, and benchmark returns that help to analyse how managers really use predictors in changing investments over time. The main findings of our empirical work are that beta dynamics are significantly affected by economic variables, even though managers do not care about benchmark sensitivities towards the predictors in choosing their instrument exposure, and that persistence and leverage effects play a key role as well. Conditional market timing is virtually absent, if not negative, over the period 1990-2005. However such anomalous negative timing ability is offset by the leverage effect, which in turn leads to an increase in mutual fund extra performance. JEL Classification: C11, C13, G12, G13.
    Keywords: Equity mutual funds, conditional asset pricing models, time-varying beta, Bayesian analysis.
    Date: 2008–03
  6. By: Oddvar Martin Kaarboe; Luigi Siciliani
    Abstract: We present a model of optimal contracting between a purchaser and a provider of health services when quality has two dimensions. We assume that one dimension of quality is contractible (dimension 1) and one dimension is not contractible (dimension 2). We show that the optimal incentive scheme for the contractible dimension depends critically on the extent to which quality 1 increases or decreases the marginal cost and marginal bene?t of quality 2 (i.e. substitutability or complementarity). If the two quality dimensions are substitutes, three possible solutions arise: a) the optimal incentive scheme is high powered: the incentive is equal to the marginal bene?t of quality dimension 1 and the optimal quality in dimension 2 is zero; b) the optimal incentive scheme is low powered: both quality dimensions are positive; the incentive is below the marginal bene?t of quality dimension 1; c) it is not optimal to introduce pay for performance as the gain of welfare from an increase in quality dimension 1 is lower than the loss of welfare from an increase in quality dimension 2. If the two quality dimensions are complements the incentive scheme is always high powered: the incentive is above the marginal bene?t of dimension 1 and both quality dimensions are positive.
    Keywords: quality, altruism, incentives
    JEL: D82 I11 I18 L51
    Date: 2008–04
  7. By: Gerald H.L. Cheang (Division of Banking and Finance, Nanyang Business School, Nanyang Technology University,); Carl Chiarella (School of Finance and Economics, University of Technology, Sydney)
    Abstract: We consider a market consisting of multiple assets under jump-diffusion dynamics with European style options written on these assets. It is well-known that such markets are incomplete in the Harrison and Pliska sense. We derive a pricing relation by adopting a Radon-Nikodym derivative based on the exponential martingale of a correlated Brownian motion process and a multivariate compound Poisson process. The parameters in the Radon-Nikodym derivative de¯ne a family of equivalent martingale measures in the model, and we derive the corresponding integro-partial differential equation for the option price. We also derive the pricing relation by setting up a hedge portfolio containing an appropriate number of options to "complete" the market. The market prices of jump-risks are priced in the hedge portfolio and we relate these to the choice of the parameters in the Radon-Nikodym derivative used in the alternative derivation of the integro-partial differential equation.
    Keywords: incomplete markets; equivalent martingale measure; compound Poisson processes; Radon-Nikodym derivative; multi-asset options; integro-partial differential equation
    JEL: C00 G12 G13
    Date: 2008–03–01
  8. By: Metodij Hadzi-Vaskov; Clemens J.M. Kool
    Abstract: This paper presents evidence of the stochastic discount factor approach to international risk-sharing applied to fixed exchange rate regimes. We calculate risk-sharing indices for two episodes of fixed or very rigid exchange rates: the Eurozone before and after the introduction of the Euro, and several emerging economies in the period 1993-2005. This approach suggests almost perfect bilateral risk-sharing among all countries from the Eurozone. Moreover, it implies that emerging markets with fixed/rigid nominal exchange rates against the US dollar in the period achieved almost perfect risk-sharing with the US. We conclude that risk-sharing measures crucially depend on the behavior of the nominal exchange rate, implying almost perfect risk-sharing among countries with fixed/rigid nominal exchange rates. Second, a counterintuitive ranking of the risk-sharing levels under different nominal exchange rate regimes suggests a limited use of this approach for cross-country risk-sharing comparisons. Real exchange rates might be very smooth, but risk-sharing across countries is not necessarily perfect.
    Keywords: International Risk-Sharing, Stochastic Discount Factor, Fixed Exchange Rates, Exchange Rate Regimes
    JEL: F31 F33 G12 G15
    Date: 2008–03
  9. By: Maskin, Eric S. (Institute for Advanced Studies); Myerson, Roger B. (University of Chicago)
    Abstract: Interview with the Laureates in Economics Eric S. Maskin and Roger B. Myerson, 6 December 2007. The interviewer is Adam Smith, Editor-in-Chief of
    Keywords: Mechanism Design;
    JEL: D02
    Date: 2007–12–06
  10. By: Committee, Nobel Prize (Nobel Prize Committee)
    Abstract: Scientific Background, The Nobel Prize in Economic Sciences 2007. Economic transactions take place in markets, within firms and under a host of other institutional arrangements. Some markets are free of government intervention while others are regulated. Within firms, some transactions are guided by market prices, some are negotiated, and yet others are dictated by management. Mechanism design theory provides a coherent framework for analyzing this great variety of institutions, or "allocation mechanisms", with a focus on the problems associated with incentives and private information.
    Keywords: Mechanism Design; Asymmetric Information
    JEL: D02
    Date: 2007–10–15
  11. By: Hurwicz, Leonid (University of Minnesota)
    Abstract: A pre-recorded version of Leonid Hurwicz' Prize Lecture was presented on 8 December 2007 at Aula Magna, Stockholm University. The lecture was introduced by Professor Jorgen Weibull, Chairman of the Economics Prize Committee.
    Keywords: Mechanism design;
    JEL: D02
    Date: 2007–12–08
  12. By: Carl Chiarella (School of Finance and Economics, University of Technology, Sydney); Boda Kang (School of Finance and Economics, University of Technology, Sydney); Gunter H. Meyer (School of Mathematics, Georgia Institute of Technology, Atlanta); Andrew Ziogas (Integral Energy, Australia)
    Abstract: This paper considers the problem of numerically evaluating American option prices when the dynamics of the underlying are driven by both stochastic volatility following the square root process of Heston (1993), and by a Poisson jump process of the type originally introduced by Merton (1976). We develop a method of lines algorithm to evaluate the price as well as the delta and gamma of the option, thereby extending the method developed by Meyer (1998) for the case of jump-diffusion dynamics. The accuracy of the method is tested against two numerical methods that directly solve the integro-partial differential pricing equation. The first is an extension to the jump-diffusion situation of the componentwise splitting method of Ikonen & Toivanen (2007). The second method is a Crank-Nicolson scheme that is solved using projected successive over relaxation which is taken as the benchmark. The relative efficiency of these methods for computing the American call option price, delta, gamma and free boundary is analysed. If one seeks an algorithm that gives not only the price but also the delta and gamma to the same level of accuracy for a given computational effort then the method of lines seems to perform best amongst the methods considered.
    Keywords: American options; stochastic volatility; jump-diffusion processes; Volterra integral equations; free boundary problem; method of lines
    JEL: C61 D11
    Date: 2008–03–01
  13. By: Wong, Woon K (Cardiff Business School)
    Abstract: Let e and Σ be respectively the vector of shocks and its variance covariance matrix in a linear system of equations in reduced form. This article shows that a unique orthogonal variance decomposition can be obtained if we impose a restriction that maximizes the trace of A, a positive definite matrix such that Az = e where z is vector of uncorrelated shocks with unit variance. Such a restriction is meaningful in that it associates the largest possible weight for each element in e with its corresponding element in z. It turns out that A = Σ<sup>1/2</sup>, the square root of Σ.
    Keywords: Variance decomposition; Cholesky decomposition; unique orthogonal decomposition and square root matrix
    JEL: C01
    Date: 2008–04
  14. By: Eisenhauer, Philipp; Pfeiffer, Friedhelm
    Abstract: In this study we assess the relationship between father and son earnings among (West) German Workers. To reduce the lifecycle and attenuation bias a novel sampling procedure is developed and applied to the German Socio-Economic Panel (SOEP) 1984-2006. Our preferred point estimate indicates that about 1/3 of the earnings dierential in the labor market has been passed on from the generation of fathers to their sons.
    Keywords: Intergenerational Mobility, Lifecycle, Permanent Earnings, Wages
    JEL: J21 J31 J62
    Date: 2008
  15. By: Malte Schwoon; Floortje Alkemade; Koen Frenken; Marko P. Hekkert
    Abstract: There is a general sense of urgency that major technological transitions are required for sustainable development. Such transitions are best perceived as involving multiple transition steps along a transition path. Due to the path dependent and irreversible nature of innovation in complex technologies, an initial transition step along some preferred path may cut off paths that later may turn out to be more desirable. For these reasons, initial transition steps should allow for future flexibility, where we define flexibility as robustness regarding changing evidence and changing preferences. We propose a technology assessment methodology that identifies the flexibility of initial transition steps in complex technologies. We illustrate our methodology by an empirical application to 2646 possible future car systems.
    Keywords: NK-model, complexity, flexibility, irreversibility, path dependence, transition path, transition management, sustainable development, car technology
    JEL: C15 D83 O32 Q01 Q42 Q55
    Date: 2008–04
  16. By: Alrubaie, falah.K.Ali
    Abstract: Despite the strategic importance of small projects in the development process in developing countries, including the Libyan economy, but they face many economic problems, administrative and organizational productivity, marketing and other problems related to lack of information, working to reduce their access to formal finance in general and banking in particular. Libyan Development Bank Branch Darna Try to financing small projects, but, faced many problems, most notably, routine and repetition of ideas projects proposed for funding and low lack creativity and marketing management skills of officials to manage projects and lack of coordination between the real and meaningful support institutions for small-scale projects and the lack of correlation Lending to small projects, training programmes, including working on improving their performance and reduce the risk of failure did not succeed, the finance small projects in creating a genuine development, the high incidence of default and lack of seriousness in fulfilling borrowers recruited him, and sought some borrowers to obtain funds through fraud and provide Invoices and forged documents to devise several ways to exploit legal loopholes, lack of safety instruments provided for the payment of installments by borrowers and these problems have led to the erosion of capital for lending led to a change in its funding , To ensure the continuation of the work necessary to support the Bank of Development Bank Branch Darna by granting loans for projects in small elements to raise the level of efficient performance, and forming committees to study the problem of bad loans and to diagnose those responsible for the continuation of this faltering and strengthening the role of the bank and granting greater powers of the branches to resolve such Problem, and recruitment of investment portfolios amounts deposited with commercial banks and investment companies for use in the areas of development and development projects, small and medium enterprises, reduce the cost of obtaining loans to loans, especially new graduates to help them to form projects that fit with the Academy of competences to reduce unemployment, the need to accelerate the establishment of an Credit Guarantee Fund OF Small And Very Small Enterprises To ensure the link between the banks and small projects, in view of the role of this institution in securing access for small enterprises to formal credit, to encourage the entry of small and medium enterprises in partnership with banks and governmental and non-governmental organizations and branches of large enterprises
    Keywords: دراسة تحليله لمشكلات تمويل المشروعات الصغيرة مع الإشارة لتجربة مصرف التنمية في درنة
    JEL: F36
    Date: 2006–06–03

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