nep-bec New Economics Papers
on Business Economics
Issue of 2008‒07‒20
twenty-two papers chosen by
Christian Calmes
University of Quebec in Ottawa

  1. Evolution and sources of manufacturing productivity growth - evidence from a panel of European countries By Silvia Giannangeli; Ram?n G?mez-Salvador
  2. On the amplification role of collateral constraints By Mendicino, Caterina
  3. Technology shocks, structural breaks and the effects on the business cycle By Vincenzo Atella; Marco Centoni; Gianluca Cubadda
  4. Information Sharing Networks in Oligopoly By Sergio Currarni; Francesco Feri
  5. Optimal CEO compensation and stock options By Arantxa Jarque
  6. Quelle est l’influence des négociations d’entreprise sur la structure des salaires ? By Michael Rusinek; François Rycx
  7. Common Shocks, Common Dynamics, and the International Business Cycle By Marco Centoni; Gianluca Cubadda; Alain Hecq
  8. Job quality and wages in duopsony By Jürgen Figerl; Thomas Grandner
  9. Assessing Credit Risk of Companies with Mean-Reverting Leverage Ratios By C. F. Lo; T. C. Wong; C. H. Hui; M. X. Huang
  10. The Spirit of Capitalism, Stock Market Bubbles, and Output Fluctuations By Takashi Kamihigashi
  11. Is Entrepreneurial Success Predictable? - An Ex-Ante Analysis of the Character-Based Approach By Alexander S. Kritikos; Marco Caliendo
  12. Are Antitrust Fines Friendly to Competition? An Endogenous Coalition Formation Approach to Collusive Cartels By Alberto ZAZZARO; David BARTOLINI
  13. Funding Self-Employment – The Role of Consumer Credit By Christoph Kneiding; Alexander S. Kritikos
  14. Rating systems, procyclicality and Basel II: an evaluation in a general equilibrium framework By Chiara Pederzoli; Costanza Torricelli; Dimitrios P. Tsomocos
  15. Corporate Social Responsibility and Wage Discrimination in Unionized Oligopoly By Minas Vlassis; Nick Drydakis
  16. Competition Policy, Corporate Saving and China's Current Account Surplus By Rod Tyers
  17. Rollover risk in commercial paper markets and firms‘ debt maturity choice By Thierfelder, Felix
  18. The Impact of Risk Attitudes on Entrepreneurial Survival By Marco Caliendo; Frank Fossen; Alexander S. Kritikos
  19. Wage growth dispersion across the euro area countries - some stylised facts By Malin Andersson; Arne Gieseck; Beatrice Pierluigi; Nick Vidalis
  20. Entrepreneurship and the Barrier to Exit: How Does an Entrepreneur-Friendly Bankruptcy Law Affect Entrepreneurship Development at a Societal Level? By Seung-Hyun Lee; Yasuhiro Yamakawa; Mike W. Peng
  21. Global liquidity glut or global savings glut? A structural VAR approach By Thierry Bracke; Michael Fidora
  22. Medium run redux - technical change, factor shares and frictions in the euro area By Peter McAdam; Alpo Willman

  1. By: Silvia Giannangeli (Sant’Anna School of Advanced Studies, Martiri della Libertà, 33, 56127 Pisa, Italy.); Ram?n G?mez-Salvador (Corresponding author: Directorate General Economics, Directorate General Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: The study aims at describing productivity growth in the manufacturing sector for a selected panel of five European countries using firm-level data. The paper explores the empirical regularities of firm productivity distribution across countries. In particular, we assess the degree of persistence of firm relative productivity and consider its effect on aggregate productivity improvements. Moreover, the paper analyses the impact of the competitive forces on aggregate productivity growth by disentangling the role of firm learning and market selection. Finally, we estimate the relationship between labour productivity growth and firm-specific factors such as size, age and capital intensity across countries. The paper uses annual account data over the period 1993-2003 from Amadeus dataset (Bureau van Dijk) for a balanced panel of manufacturing firms. In line with previous evidence, our analysis shows that firm relative productivity levels are both highly heterogeneous across firms and very persistent over time in all the countries in the sample. With reference to aggregate productivity growth, we find that both labour productivity and total factor productivity changes are mostly driven by firm learning, i.e. within-firm productivity improvements, in most European countries. Conversely, the reallocation of resources spurred by the competitive selection process is found to play a minor role in fostering aggregate productivity growth. Finally, in line with macroeconomic trends, gains in productivity seem to be associated with capital deepening, but also with employment losses. JEL Classification: D24, L11, L60.
    Keywords: Productivity growth, microdata, cross-country comparison.
    Date: 2008–06
  2. By: Mendicino, Caterina
    Abstract: Following the seminal contribution of Kiyotaki and Moore (1997), the role of collateral constraints for business cycle fluctuations has been highlighted by several authors and collateralized debt is becoming a popular feature of business cycle models. In contrast, Kocherlakota (2000) and Cordoba and Ripoll (2004) demonstrate that collateral constraints per se are unable to propagate and amplify exogenous shocks, unless unorthodox assumptions on preferences and production technologies are made. The aim of this paper is to examine the contribution of costly debt enforcement procedures in the amplification of business cycle fluctuations through collateral constraints. We show that for realistic degrees of inefficiency, collateral constraints can significantly amplify the effects of productivity shocks on output even under standard assumptions on preferences and technology.
    Keywords: business cycle; debt enforcement procedures; credit frictions.
    JEL: E32 E30 E21
    Date: 2008–01
  3. By: Vincenzo Atella (CEIS & Dipartimento SEFEMEQ - Università di Roma "Tor Vergata"); Marco Centoni (Dipartimento SEGES - Università del Molise); Gianluca Cubadda (Dipartimento SEFEMEQ - Università di Roma "Tor Vergata")
    Abstract: This paper contributes to the literature on the role of technology shocks as source of the business cycle in two ways. First, we document that time-series of US productivity and hours are apparently affected by a structural break in the late 60’s, which is likely due to a major change in the monetary policy. Second, we show that the importance of demand shocks over the business cycle has sharply increased after the break.
    Keywords: Business cycle, technology shocks, structural breaks
    JEL: C32 E32
    Date: 2007–10–17
  4. By: Sergio Currarni (Department of Economics, University Of Venice Cà Foscari); Francesco Feri (University of Innsbruck)
    Abstract: We study the incentives of oligopolistic firms to share private information on demand parameters. Differently from previous studies, we consider bilateral sharing agreements, by which firms commit at the ex-ante stage to truthfully share information. We show that if signals are i.i.d., then pairwise stable networks of sharing agreements are either empty or made of fully connected components of increasing size. When linking is costly, non complete components may emerge, and components with larger size are less densly connected than components with smaller size. When signals have different variances, incomplete and irregular network can be stable, with firms observing high variance signals acting as "critical nodes". Finally, when signals are correlated, the empty network may not be pairwise stable when the number of firms and/or correlation are large enough.
    Keywords: Information sharing, oligopoly, networks, Bayesian equilibrium
    JEL: D43 D82 D85 L13
    Date: 2008
  5. By: Arantxa Jarque (Universidad Carlos III de Madrid)
    Abstract: We study the incentive problem between the owners of a firm and its CEO's due to the unobservability of the manager's actions. Our model departs from the literature in two ways. First, we acknowledge that, in contrast with standard repeated moral hazard models, actions taken by CEO's have a persistent effect in time. Second, we derive the effect of effort on stock prices from primitives; i.e., effort affects directly the conditional distribution of profits, and not the distribution of prices. The stock market determines the price of the stock of the firm using information about past profits. A complete characterization of the Second Best contract assuming limited liability is given as a benchmark. Allowing for an arbitrary number of option grants to be awarded, sufficient conditions are given for the implementation of the Second Best contract by an Options Scheme. For a stylized scheme with a unique option grant, the characteristics of the solution are analyzed. We find that the optimal time of exercise balances the increase in quality of information of waiting one extra period with the cost of the poorer smoothing of incentives of doing so. The number of options in the grant, the constant wage, and especially the exercise price are used to best exploit the correlation between the changes in prices and in the likelihood ratios of the histories of profits generating them. As an example, whenever low prices are poorly correlated with the likelihood ratios, the optimal option scheme implies a positive exercise price, which allows for a better use of a higher correlation over the high stock price range than a simple restricted stock scheme. Our results suggest caution regarding regulations that influence the setting of exercise prices. Este artículo estudia el problema de incentivos que surge entre los dueños de una empresa y el ejecutivo que la dirige, fruto de la imposibilidad de observar directamente las acciones del directivo. El modelo difiere del modelo estándar en la literatura en dos puntos clave. En primer lugar, tiene en cuenta que las acciones que toma el directivo tienen un efecto persistente en el tiempo; esta persistencia no la consideran los modelos estándar de riesgo moral repetido. En segundo lugar, el efecto del esfuerzo del directivo en el precio de las acciones de la empresa se deriva de los primitivos del modelo: el esfuerzo determina la distribución de probabilidad de los beneficios de la empresa, y no directamente la distribución de precios. Los compradores en el mercado de valores determinan el precio de las acciones basándose en la información disponible sobre los beneficios pasados. El artículo presenta, como marco de referencia, una caracterización del contrato óptimo asumiendo responsabilidad limitada por parte del directivo. Para el caso en que se pueden emitir múltiples paquetes de opciones, se presentan condiciones suficientes para la implementación del contrato óptimo. Para un caso simplificado en el que la compensación se realiza con un solo paquete de opciones, se analizan las características del mismo. Los resultados del análisis indican que la fecha de ejercicio óptima se determina balanceando los beneficios y los costes de esperar un periodo más: por un lado, aumenta la calidad de información; por el otro, aumenta el coste de proveer incentivos, por tener que estar estos concentrados en un horizonte temporal menor. El número de opciones en el paquete, el salario, y especialmente el precio de ejercicio se usan para explotar la correlación entre los cambios en precios y los cocientes de probabilidad relativa correspondientes a las historias de beneficios que generan esos precios. Por ejemplo, cuando los precios bajos están débilmente correlacionados con los correspondientes cocientes, el paquete óptimo de opciones tiene un precio de ejercicio positivo, que permite explotar la correlación existente en el rango de precios alto mejor que un paquete que incluyera simplemente acciones (i.e, acciones de venta restringida). Estos resultados sugieren cautela a la hora de aprobar regulación que pueda distorsionar la elección de los precios de ejercicio de las opciones en los paquetes de compensación de directivos de empresa.
    Keywords: Riesgo Moral, Contratos Óptimos, Persistencia, Compensación de Directivos, Opciones Moral Hazard, Optimal Contracts, Persistence, CEO Compensation, Stock
    JEL: D30 D31 D80 D82
    Date: 2008–04
  6. By: Michael Rusinek (DULBEA, Université libre de Bruxelles, Brussels); François Rycx (DULBEA, Université libre de Bruxelles, Brussels, and IZA, Bonn)
    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. This paper provides a critical survey of the effects of this two-tier bargaining system on the structure of wages in Europe and more particularly in Belgium. Empirical findings almost always show that firm-level agreements have a positive and significant effect on workers’ wages. The impact on the dispersion of wages, however, is ambiguous. This is partially due to the varying degree of centralisation of collective bargaining across countries and industries.
    Keywords: Collective bargaining, decentralisation, wage structure, Europe.
    JEL: J31 J51
    Date: 2008–07
  7. By: Marco Centoni (Dipartimento SEGES - Università del Molise); Gianluca Cubadda (Dipartimento SEFEMEQ - Università di Roma "Tor Vergata"); Alain Hecq (University of Maastricht)
    Abstract: This paper proposes an econometric framework to assess the importance of common shocks and common transmission mechanisms in generating international business cycles. Then we show how to decompose the cyclical effects of permanent-transitory shocks into those due to their domestic and those due to foreign components. Our empirical analysis reveals that the business cycles of the US, Japan, Canada are clearly dominated by their domestic components. The Euro area is more sensitive to foreign shocks compared to the other three countries of our analysis.
    Keywords: International business cycles; Permanent-transitory decomposition; Serial correlation common features; Frequency domain analysis.
    JEL: C32 E32
    Date: 2008–07–07
  8. By: Jürgen Figerl (Department of Economics, Vienna University of Economics & B.A.); Thomas Grandner (Department of Economics, Vienna University of Economics & B.A.)
    Abstract: In a simple oligopsonistic model, firms compete for labour through wages and job qualities. We modify the product market model developed by Vandenbosch/Weinberg 1995 and apply it to the job market with jobs being defined by two vertically differentiated non-wage characteristics. Workers differ in their valuation of these two characteristics but do not differ in their productivity. In equilibrium firms offer different wages and differ in only one of these non-wage characteristics. Whereas our labour market model is based on firms, we apply subclasses according to the UK SIC(2003) in our empirical analysis. When comparing subclasses within selected sectors (WERS) we found evidence that firms compete in both wages and job qualities.
    JEL: J30
    Date: 2008–06
  9. By: C. F. Lo (The Chinese University of Hong Kong, Hong Kong Institute for Monetary Research); T. C. Wong (Hong Kong Monetary Authority); C. H. Hui (Hong Kong Monetary Authority); M. X. Huang (University of Technology, Sydney)
    Abstract: Empirical findings and theoretical studies suggest that firms adjust towards time-varying target leverage ratios. This paper studies the performances of the default probabilities generated from two stationaryleverage models with time-dependent and constant target ratios respectively. The time-dependent model consistently performs better in terms of discriminatory power of differentiating firms' default risk and capability for predicting default rates over the period 1996 to 2006. The model provides appropriate measures of credit risk of firms and evidence to support the existence of a time-varying target leverage ratio.
    Keywords: Leverage, Default probabilities, Credit risk
    JEL: C60 G13 G32
    Date: 2008–04
  10. By: Takashi Kamihigashi (Research Institute for Economics and Business Administration, Kobe University)
    Abstract: This paper presents a representative agent model in which stock market bubbles cause output fluctuations. Assuming that utility depends directly on wealth, we show that stock market bubbles arise if the marginal utility of wealth does not decline to zero as wealth goes to infinity. Bubbles may affect output positively or negative depending on whether the production function exhibits increasing or decreasing returns to scale. In sunspot equilibria, the bursting of a bubble is followed by a sharp decline in output one period later. Various numerical examples are given to illustrate the behavior of stochastic bubbles and the relationship between bubbles and output.
    Keywords: Spirit of capitalism, stock market bubbles, output fluctuations, wealth in utility, sunspot equilibria
    JEL: E20 E32
    Date: 2007–07
  11. By: Alexander S. Kritikos; Marco Caliendo
    Abstract: This paper empirically analyzes whether the character-based approach, which focuses on the personality structure and the human capital of business founders, allows prediction of entrepreneurial success. A unique data set is used consisting of 414 persons whose personal characteristics were analyzed by different methods, namely an one-day assessment center (AC) and a standardized questionnaire, before they launched their business. Results are partly unexpected and weaker than previous ex-post findings: first, we found correlations between the AC data and the questionnaire in one subgroup only. Second, the predictive power of the AC data is slightly better than that of the questionnaire, but lower than expected in theory. Interestingly, for those subgroups where the AC data have low predictive power, the questionnaire does better. Third, when success is measured in terms of employees hired, the character-based approach is a poor predictor.
    Date: 2008–01
  12. By: Alberto ZAZZARO (Universita' Politecnica delle Marche, Dipartimento di Economia); David BARTOLINI ([n.a.])
    Abstract: A well-established result of the theory of antitrust policy is that it might be optimal to tolerate some degree of collusion among firms if the Authority in charge is constrained by limited resources and imperfect information. However, few doubts are cast on the common opinion by which stricter enforcement of antitrust laws definitely makes market structure more competitive and prices lower. In this paper we challenge this presumption of effectiveness and show that the introduction of a positive (expected) antitrust fine may drive firms from partial cartels to a monopolistic cartel. Moreover, introducing uncertainty on market demand, we show that the social optimal competition policy can call for a finite or even zero antitrust penalty even if there are no enforcement costs. We first show our results in a Cournot industry with five symmetric firms and equilibrium binding agreements. Then we extend the analysis to the case of n symmetric firms and a generic rule of coalition formation. Finally, we consider the case of asymmetric firms and show that our results still hold for an industry populated by one Stackelberg leader and two followers.
    Keywords: antitrust policy, coalition formation, collusive cartels
    JEL: C70 L40 L41
    Date: 2008–07
  13. By: Christoph Kneiding; Alexander S. Kritikos
    Abstract: In this paper we investigate whether consumer loans are used to finance business activities. We show that self-employed households particularly use personal overdrafts significantly more often than employee households. The difference remains when controlling for financial and non-financial household variables. Our findings are corroborated when analyzing the correlation between consumer loan take-ups and consumption of self-employed households. Intermingling of personal and business resources is more likely when the household is credit constrained; when the household head is younger; when the household head’s partner is employed; and when financial assets within the household are lower.
    Date: 2008–03
  14. By: Chiara Pederzoli; Costanza Torricelli; Dimitrios P. Tsomocos
    Abstract: The introduction of Basel II has raised concerns about the potential impact of risk-sensitive capital requirements on the business cycle. Several approaches have been proposed to assess the procyclicality issue. In this paper, we adopt a general equilibrium model and conduct comprehensive analysis of different proposals. We set out a model that allows to evaluate different rating systems in relation to the procyclicality issue. Our model extends previous models by analysing the effects of different rating systems on banks’ portfolios (as in Catarineu-Rabell et al. 2005) and the contagion effects relevant to financial stability (as in Goodhart et al. 2005). The paper presents comparative statics results comparing a cycle-dependent and a neutral rating system from the point of view of banks profit maximization. Our results suggest that banks’ preferences about point in time or through the cycle rating systems depend on the banks’ characteristics and on the business cycle conditions in terms of expectations and realizations.
    Date: 2008
  15. By: Minas Vlassis (Department of Economics, University of Crete, Greece); Nick Drydakis (Department of Economics - University of Crete, Greece)
    Abstract: The European labour markets are characterized by the existence of trade unions with extensive coverage whereas wage contracts are typically determined through decentralized firm-union bargaining. On the other hand, as it particularly refers to migrant and ethnic minority groups, equally-skilled workers often face lower reservation wages. We argue that these facts may lead unions to opt for discriminatory wage contracts across groups of employees. At the same time firms may nonetheless opt for non-discrimination in wages insofar as they would profitably “advertise” it as an exertion of corporate social responsibility (csr). We show that, if the consumers’ valuation of non-discrimination is sufficiently high, the latter strategies would as well be compatible with the unions’ best interest in the equilibrium. Otherwise, we propose that to efficiently combat wage discrimination policy makers should instead of firms undertake csradvertisement in the event of non-discrimination. Yet, such an antidiscrimination policy would always entail a net loss in social welfare.
    Keywords: Unions, Oligopoly, Discriminatory Wage Contracts, Antidiscrimination Policy, Corporate Social Responsibility.
    JEL: C72 L15 L21 L22
    Date: 2008
  16. By: Rod Tyers
    Abstract: China’s industrial reforms have left many key industries dominated by single or small numbers of firms, most of which remain state owned. Until recently, these firms have not been required to pay dividends to the state and the recent surge in China’s growth has made them very profitable, with their economic profits adding 20% of GDP to corporate saving. This bolsters the overall saving-investment gap and hence China’s controversial current account surplus. In other countries, oligopolistic industries tend to be taxed more heavily and they are commonly subjected to price regulation. This study offers an economy-wide analysis of approaches to oligopoly rents in China. The results suggest that, while policy changes targeting national saving, including increased corporate taxation, expansionary fiscal policy and SOE privatisation all help to control the external imbalance, they tend also to turn demand inward, inducing higher oligopoly rents and slower growth. Competition policy, embodying both price cap regulation and free entry, proves more effective both in controlling the external imbalance and in fostering continued growth.
    JEL: D43 D58 F32 L13 L43 L51
    Date: 2008–07
  17. By: Thierfelder, Felix
    Abstract: By using short-term direct finance firms of the highest credit quality expose themselves to rollover risk in the public debt markets. Firms insure themselves against this risk by securing backup lines of credit from banks that they may use should market liquidity dry up. In a first step, this paper explains why high quality firms introduce a maturity mismatch into their balance sheets and do not simply use long-term direct finance. It also highlights why banks may be willing to roll over a firm’s debt while direct investors may not. In a second step, I extend the model to allow for different levels of firm’s publicly observable credit quality. Under plausible assumptions about the cost of bank borrowing the model generates a maturity structure choice broadly consistent with observed financing patterns: Low quality firms issue short-term direct debt, medium quality firms issue long-term direct debt, and high quality firms use short-term direct debt in normal times and bank debt in adverse times. The paper suggests that better publicly available information about firm quality and the moderation of the business cycle over the past decade help to explain the decrease in nonfinancial commercial paper outstanding since the beginning of the decade. Kapitalmarktfähige Unternehmen können sich nur dann durch die Ausgabe von kurzfristigen Geldmarktpapieren (Commercial Paper - CP) refinanzieren, wenn sie eine vernachlässigbare Ausfallwahrscheinlichkeit aufweisen. Gleichwohl ist es diesen Firmen bisweilen nicht m¨oglich, eine Anschlussfinanzierung vorzunehmen. In solchen Situationen können CP-Emittenten auf Kreditlinien ausweichen, sofern sie diese zuvor mit Banken vereinbart haben und sich ihre Kreditqualität bei Inanspruchnahme der Kreditlinie nicht verschlechtert hat. In dem vorliegenden Papier werden zunächst zwei Fragenkomplexe näher untersucht. Erstens, warum bekommen Firmen von höchster Kreditqualität zu bestimmten Zeiten keinen Kredit, obwohl ihre tatsächliche Ausfallwahrscheinlichkeit nahe null liegt? Zweitens, warum wählen diese Firmen eine Finanzierungsform, bei der sie sich in guten Zeiten über die Ausgabe von Geldmarktpapieren finanzieren und in schlechten Zeiten einen Bankkredit in Anspruch nehmen? Warum nehmen sie eine Inkongruenz der Laufzeiten zwischen Aktiv- und Passivseite in Kauf, anstatt lang laufende Anleihen zu emittieren und sich somit keinem Refinanzierungsrisiko auszusetzen?
    Keywords: Rollover risk, Liquidity, Asymmetric Information, Debt maturity
    JEL: D82 G21 G32
    Date: 2008
  18. By: Marco Caliendo; Frank Fossen; Alexander S. Kritikos
    Abstract: Risk attitudes have an impact on not only the decision to become an entrepreneur but also on the survival and failure rates of entrepreneurs. Whereas recent research underpins the theoretical proposition of a positive correlation between risk attitudes and the decision to become an entrepreneur, the effects on survival are not as straightforward. Psychological research posits an inverse U-shaped relationship between risk attitudes and entrepreneurial survival. On the basis of recent waves of the German Socio-Economic Panel (SOEP), we examine the extent to which risk attitudes influence survival rates of entrepreneurs. The empirical results confirm that persons whose risk attitudes are in the medium range survive significantly longer as entrepreneurs than do persons with particularly low or high risks.
    Date: 2008–06
  19. By: Malin Andersson (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Arne Gieseck (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Beatrice Pierluigi (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Nick Vidalis (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This study presents some stylised facts on wage growth differentials across the euro area countries in the years before and in the first eight years after the introduction of Economic and Monetary Union (EMU) in 1999. The study shows that wage growth dispersion, i.e. the degree of difference in wage growth at a given point in time, has been on a clear downward trend since the early 1980s. However, wage growth dispersion across the euro area countries still appears to be higher than the degree of wage growth dispersion within West Germany, the United States, Italy and Spain. Differences in wage growth rates between individual euro area countries and the euro area in the years before and in the first eight years after the introduction of EMU appear to be positively related to the respective differences between their Harmonised Index of Consumer Prices (HICP) inflation and average HICP inflation in the euro area. Conversely, relative wage growth differentials across euro area countries have been somewhat unrelated to relative productivity growth differentials. Some countries combine positive wage growth differentials and negative productivity growth differentials vis-à-vis the euro area average over an extended period – and hence positive unit labour cost growth differentials. These countries run the risk of accumulating competitiveness losses and it is therefore a challenge to ensure that the necessary adjustment mechanisms operate fully, in the sense that wage developments are sufficiently flexible and reflect productivity developments. Wage growth persistence within individual euro area countries – largely reflecting inflation persistence and certain institutional factors – might also have contributed somewhat to wage growth differentials across the euro area countries. Moreover, wage level convergence has also played a role in explaining wage growth patterns in the 1980s and the 1990s. However, since 1999, the link between the initial compensation level and the subsequent growth rate of compensation per employee appears barely significant. The study also shows a limited co-movement of wage growth across countries, even in the context of a high degree of business cycle synchronisation seen in the last few years. This suggests that the impact on wage growth of country-specific developments across euro area countries has been larger than the impact of common cyclical developments and external shocks. This could reflect the normal and desirable working of adjustment mechanisms, which – in an optimally functioning currency union with synchronised business cycles – would take place via price and cost and wage developments. On the other hand, structural impediments, for example a relatively low degree of openness in domestically-oriented sectors in some countries, might prevent a stronger link between the degree of synchronisation of wage growth rates and business cycles. JEL Classification: E24, E31, C10.
    Keywords: Cross-country wage dispersion, wage and productivity levels across countries and sectors.
    Date: 2008–07
  20. By: Seung-Hyun Lee; Yasuhiro Yamakawa; Mike W. Peng
    Abstract: Does an entrepreneur-friendly bankruptcy law encourage more entrepreneurship development at a societal level? How does bankruptcy law affect entrepreneurship development around the world? Drawing on a real options perspective, we argue that if bankrupt entrepreneurs are excessively punished for failure, they may pass potentially high-return but inherently high-risk opportunities. Amassing a longitudinal, cross-country data base from 35 countries spanning ten years, we find that a lenient, entrepreneur-friendly bankruptcy law encourages entrepreneurs to take risks and thus let entrepreneurship prosper. Components of an entrepreneur-friendly bankruptcy law are: (1) the availability of a reorganization bankruptcy option, (2) the time spent on bankruptcy procedure, (3) the cost of bankruptcy procedure, (4) the opportunity to have a fresh start in liquidation bankruptcy, (5) the opportunity to have an automatic stay of assets, (6) the opportunity for managers to remain on the job after filing for bankruptcy, and (7) the protection of creditors at the time of bankruptcy.
    Date: 2008
  21. By: Thierry Bracke (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Michael Fidora (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Since the late-1990s, the global economy is characterised by historically low risk premia and an unprecedented widening of external imbalances. This paper explores to what extent these two global trends can be understood as a reaction to three structural shocks in different regions of the global economy - (i) monetary shocks (“excess liquidity” hypothesis), (ii) preference shocks (“savings glut” hypothesis), and (iii) investment shocks (“investment drought” hypothesis). In order to uniquely identify these shocks in an integrated framework, we estimate structural VARs for the two main regions with widening imbalances, the United States and emerging Asia, using sign restrictions that are compatible with standard New Keynesian and Real Business Cycle models. Our results show that monetary shocks potentially explain the largest part of the variation in imbalances and financial market prices. We find that havings shocks and investment shocks explain less of the variation. Hence, a “liquidity glut” may have been a more important driver of real and financial imbalances in the US and emerging Asia than a “savings glut”. JEL Classification: E2, F32, F41, G15.
    Keywords: Global imbalances, global liquidity, savings glut, investment drought, current account, structural VARs.
    Date: 2008–06
  22. By: Peter McAdam (Corresponding author: Directorate General Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Alpo Willman (Directorate General Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We develop a framework for analyzing “medium-run” departures from balanced growth, and apply it to the economies of continental Europe. A time-varying factor-augmenting production function (mimicking “directed” technical change) with a below-unitary substitution elasticity coupled with supporting short-run factor demands (and price setting) is shown to account for the observed dynamics of factor incomes shares, capital deepening and the capital-output ratio. Based on careful data accounting, we also identify a rising mark-up, which we ascribe to the rise of Services. The balanced growth path emerges as a special (and testable) case of our framework, as do existing strands of medium-run debates. JEL Classification: C22, E23, E25, O30, O51.
    Keywords: Medium Run, Euro Area, Elasticity of Substitution, Factor-Augmenting Technical Progress, Productivity, Income Distribution, Adjustment Costs, Effective Labor Hours.
    Date: 2008–06

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