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on Business Economics |
| By: | Jean-Pierre Danthine (Swiss Finance Institute, University of Lausanne and CEPR); John B. Donaldson (Columbia University) |
| Abstract: | We reexamine the issue of executive compensation within a gen- eral equilibrium production context. Intertemporal optimality places strong restrictions on the form of a representative manager's compen- sation contract, restrictions that appear to be incompatible with the fact that the bulk of many high-proffile managers' compensation is in the form of various options and option-like rewards. We therefore measure the extent to which a convex contract alone can induce the manager to adopt near-optimal investment and hiring decisions. To ask this question is essentially to ask if such contracts can effectively align the stochastic discount factor of the manager with that of the shareholder-workers. We detail exact circumstances under which this alignment is possible and when it is not. |
| Keywords: | corporate governance, optimal contracting, business cycles |
| JEL: | E32 E44 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp0813&r=bec |
| By: | Michelacci, Claudio; Schivardi, Fabiano |
| Abstract: | Financial market imperfections can prevent entrepreneurs from diversifying away the idiosyncratic risk of their business. As a result idiosyncratic risk discourages entrepreneurial activity and hinders growth, with the effects being stronger in economies with lower risk diversification opportunities. In accordance with this prediction we find that OECD countries with low levels of risk diversification opportunities (as measured by the relevance of family firms or of widely held companies) perform relatively worse (in terms of productivity, investment, and business creation) in sectors characterized by high idiosyncratic volatility. Given that volatility is endogenous with respect to risk diversification opportunities, we instrument its value at the country-sector level with the corresponding sectoral volatility in the US, a country where financial imperfections are less relevant than elsewhere. Diversification measures are instrumented using demographic changes induced by World War II. We also provide firm-level evidence suggesting that firms controlled by less diversified owners display lower mean and dispersion of productivity growth. |
| Keywords: | Entrepreneurship; financial frictions; growth |
| JEL: | F3 G1 O4 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6910&r=bec |
| By: | Juri Marcucci (Bank of Italy, Economic Research Department); Mario Quagliariello (Bank of Italy, Banking and Financial Supervision) |
| Abstract: | In the recent banking literature on the relationship between credit risk and the business cycle, the presence of asymmetric effects both across credit risk regimes and through the business cycle has been generally neglected. Employing threshold regression models both at the aggregate and the bank level and exploiting a unique dataset on Italian bank borrowersÂ’ default rates, this paper analyzes whether this relationship is characterized by regime switches and thus by asymmetries, determining the thresholds endogenously. Our results show that not only are the effects of the business cycle on credit risk more pronounced during downturns but also when credit risk conditions are poor. |
| Keywords: | Credit Risk, Panel Threshold Regression Models, Regime Switching, Default Rate, Business Cycle, Cyclicality, Basel 2 |
| JEL: | C22 C23 G21 G28 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_670_08&r=bec |
| By: | Benoit Dostie; Rajshri Jayaraman |
| Abstract: | Using a large longitudinal, nationally representative workplace-level dataset, we explore the productivity gains associated with computer use and organizational redesign. The empirical strategy involves the estimation of a production function, augmented to account for technology use and organizational design, correcting for unobserved heterogeneity. We find large returns associated with computer use. We also find that computer use and organizational redesign may be complements or substitutes in production, and that the productivity gains associated with organizational redesign are industry-specific. |
| Keywords: | Productivity, information technologies, linked employer-employee data, workplace practices, complementarities |
| JEL: | D20 L20 M54 O33 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:0813&r=bec |
| By: | Stefano Eusepi; Bruce Preston |
| Abstract: | This paper develops a theory of expectations-driven business cycles based on learning. Agents have incomplete knowledge about how market prices are determined and shifts in expectations of future prices affect dynamics. In a real business cycle model, the theoretical framework amplifies and propagates technology shocks. Improved correspondence with data arises from dynamics in beliefs being themselves persistent and because they generate strong intertemporal substitution effects in consumption and leisure. Output volatility is comparable with a rational expectations analysis with a standard deviation of technology shock that is 20 percent smaller, and has substantially more volatility in investment and hours. Persistence in these series is captured, unlike in standard models. Inherited from real business cycle theory, the benchmark model suffers a comovement problem between consumption, hours, output and investment. An augmented model that is consistent with expectations-driven business cycles, in the sense of Beaudry and Portier (2006), resolves these counterfactual predictions. |
| JEL: | D83 D84 E32 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14181&r=bec |
| By: | Raouf Boucekkine; Patricia Criffo; Claudio Mattalia |
| Abstract: | Innovative workplace practices based on multi-tasking and ICT that have been diffusing in most OECD countries since the 1990s have strong consequences on working conditions. Available data show together with the emergence of new organizational forms like multi-tasking, the increase in the proportion of workers employed in managerial occupation and the increase in skill requirements. This paper proposes a theoretical model to analyze the optimal number of tasks per worker when switching to multi-tasking raises coordination costs between workers and between tasks. Firms can reduce coordination costs by assigning more workers to human resources management. Human capital is endogenously accumulated by workers. The model reproduces pretty well the regularities observed in the data. In particular, exogenous technological accelerations tend to increase both the number of tasks performed and the skill requirements, and to raise the fraction of workers devoted to management. |
| Keywords: | Information Technology, Organizational Change, Human Capital, Multi-Tasking |
| JEL: | J22 J24 L23 O33 C62 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2008_20&r=bec |
| By: | Schwerdt Guido (ifo Institut für Wirtschaftsforschung e.V. (ifo Institute for Economic Research)); Andrea Ichino (University of Bolognia); Oliver Ruf (University of Zurich, Switzerland); Rudolf Winter-Ebmer (Department of Economics, Johannes Kepler University Linz, Austria); Josef Zweimüller (University of Zurich, Switzerland) |
| Abstract: | We investigate whether the costs of job displacement differ between blue collar and white collar workers. In the short run earnings and employment losses are substantial for both groups but stronger for white collar workes. In the long run, there are only weak effects for blue collar workers but strong and persistent effects for white collars. This is consistent with the idea that firm-specific human capital and internal labor markets are more important in white-collar than in blue collar jobs. |
| Keywords: | Firm Specific Human Capital, Plant Closures, Matching |
| JEL: | J14 J65 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:jku:econwp:2008_09&r=bec |
| By: | Marco Cucculelli (Faculty of Economics ‘Giorgio Fuà ’, Marche Polytechnic University); Giacinto Micucci (Bank of Italy, Ancona Branch, Economic Research Unit) |
| Abstract: | This article contributes to the growing empirical literature on family firms by studying the impact of the founder–chief executive officer (CEO) succession in a sample of Italian firms. We contrast firms that continue to be managed within the family by the heirs to the founders with firms in which the management is passed on to outsiders. Family successions, that is, successions by the founder’s heirs, are further analyzed by assessing the impact of the sectoral intensity of competition on the post-succession performance. This analysis also addresses the endogeneity in the timing of the CEO succession by controlling for a pure mean-reversion effect in the firm’s performance. We find that the maintenance of management within the family has a negative impact on the firm’s performance, and this effect is largely borne by the good performers, especially in the more competitive sectors. These results indicate that there is no inherent superiority of the family-firm structure and emphasize the importance of conducting an analysis of governance in a variety of institutional settings. |
| Keywords: | Family successions; Family firms; Founder-run firms |
| JEL: | G3 G32 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_680_08&r=bec |
| By: | Harold L. Cole (Department of Economics, University of Pennsylvania) |
| Abstract: | We study the incentive issues associated with self-enforcing stochastic monitoring in a model of investment and production. The efficient contract features a debt-like payment with a threshold in terms of the reported output in which all of the reported output is taken up to the threshold if monitoring doesn’t occur and all of the output is taken if monitoring does occur. An output report above the threshold leads to zero probability of monitoring and just the threshold amount being paid out. The efficiency gap between the self-enforcing contract and the commitment constraint is minimized when the monitors holds no part of the residual claim on the firm, which we associate with equity. Misreporting by the manager is an important component of the efficient contract. |
| Keywords: | Capital Structure, Monitoring, Incentives, Self-Fulfilling |
| JEL: | G32 D82 D86 |
| Date: | 2008–07–14 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:08-025&r=bec |
| By: | Ekholm, Karolina; Moxnes, Andreas; Ulltveit-Moe, Karen-Helene |
| Abstract: | Empirical analyses of the impact of real exchange rate (RER) fluctuations on employment and economic performance do not take heterogeneity with respect to trade exposure into account. In this paper we use detailed Norwegian firm-level data on exports and imports to calculate firm-specific measures of trade exposure. This allows us to provide a more accurate assessment of the adjustment to real exchange rate shocks. We treat the sharp real appreciation of the Norwegian Krone in the early 2000s as a natural experiment to identify firms' response to an RER shock with respect to employment, productivity, and offshoring. We find that the relative cost shock that hit the Norwegian economy led to a significant decline in the more exposed firms' employment. But the RER shock also appears to have contributed to a process of manufacturing restructuring that boosted productivity of firms exposed to foreign markets. A sizable increase in offshoring can also be attributed to the RER shock. |
| Keywords: | Employment; Productivity; Real Exchange Rates; Trade |
| JEL: | F14 F16 F4 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6904&r=bec |
| By: | Dario Sacco (Socioeconomic Institute, University of Zurich) |
| Abstract: | We argue that, in a simple setting, the relation between the intensity of competition and cost-reducing investment is U-shaped. We consider a two-stage game with cost-reducing investments followed by a linear differentiated Cournot duopoly. We first show that, except for firms that are much less efficient than the competitor, investment in the subgame-perfect equilibrium is minimal for intermediate levels of competition, which is inversely parameterized by the extent of product differentiation. An extensive set of laboratory experiments also provides support for the U-shape, both for symmetric firms and for leaders. Also consistent with predictions, the relation is negative for firms that are lagging behind. |
| Keywords: | Investment, intensity of competition, experiment |
| JEL: | C92 L13 O31 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:soz:wpaper:0808&r=bec |
| By: | Geishecker, Ingo (University of Göttingen); Görg, Holger (Kiel Institute for the World Economy) |
| Abstract: | This paper investigates the effects of services offshoring on wages using individual level data combined with industry information on offshoring. Our results show that services offshoring affects the real wage of low and medium skilled individuals negatively. By contrast, skilled workers benefit from services offshoring in terms of higher real wages. Hence, offshoring has contributed to a widening of the wage gap between skilled and less skilled workers. This result is obtained while controlling for individual and sectoral observed and unobserved heterogeneity. In particular, our empirical model also controls for the impact of technological change and offshoring of materials. |
| Keywords: | services offshoring, individual wages |
| JEL: | F16 J31 C23 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3593&r=bec |
| By: | Steven N. Kaplan; Mark M. Klebanov; Morten Sorensen |
| Abstract: | We study the characteristics and abilities of CEO candidates for companies involved in buyout (LBO) and venture capital (VC) transactions and relate them to hiring decisions, investment decisions, and company performance. Candidates are assessed on more than thirty individual abilities. The abilities are highly correlated; a factor analysis suggests there are two primary factors with intuitive characterizations – one for general ability and one that contrasts team-related, interpersonal skills with execution skills. Both LBO and VC firms are more likely to hire and invest in CEOs with greater general abilities, both execution- and team-related. Success, however, is more strongly related to execution skills than to team-related skills. Success is, at best, only marginally related to incumbency, holding observable talent and ability constant. |
| JEL: | D21 D23 G24 G3 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14195&r=bec |
| By: | Kaarboe, Oddvar Martin; Siciliani, Luigi |
| 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 verifiable (dimension 1) and one dimension is not verifiable (dimension 2). We show that the power of the incentive scheme for the verifiable dimension depends critically on the extent to which quality 1 increases or decreases the provider's marginal disutility and the patients' marginal benefit from quality 2 (i.e. substitutability or complementarity). Our main result is that under some circumstances a high-powered incentive scheme can be optimal even when the two quality dimensions are substitutes. |
| Keywords: | altruism; pay for performance; quality |
| JEL: | D82 I11 I18 L51 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6911&r=bec |
| By: | Marisa Ratto (Université Paris-Dauphine (SDFi)); Wendelin Schnedler (University of Heidelberg, Department of Economics) |
| Abstract: | How can a manager influence workers' activity while knowing little about it? This paper examines a situation where production requires several tasks, and the manager wants to direct production to achieve a preferred allocation of effort across tasks. However, the effort that is required for each task cannot be observed, and the production result is the only indicator of worker activity. This paper illustrates that in this situation, the manager cannot implement the preferred allocation with a single worker. On the other hand, the manager is able to implement the preferred allocation by inducing a game among several workers. Gains to workers from collusion may be eliminated by an ability-dependent, but potentially inefficient, task assignment. These findings provide a new explanation for the division of labor, and bureaucratic features such as "over"-specialization and "wrong" task allocation. |
| Keywords: | specialization, job design, moral hazard, multitasking |
| JEL: | D02 D86 M54 D23 L23 J23 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0468&r=bec |
| By: | Castro, Vítor (University of Warwick, University of Coimbra and NIPE) |
| Abstract: | One widespread idea in the business cycles literature is that the older is an expansion or contraction, the more likely it is to end. This paper tries to provide further empirical support for this idea of positive duration dependence and, at the same time, control for the effects of other factors like leading indicators, the duration of the previous phase, investment, price of oil and external influences on the duration of expansions and contractions. This study employs for the first time a discrete-time duration model to analyse the impact of those variables on the likelihood of an expansion and contraction ending for a group of industrial countries over the last fifty years. The evidence provided in this paper suggests that the duration of expansions and contractions is not only dependent on their actual age: the duration of expansions is also positively dependent on the behaviour of the variables in the OECD composite leading indicator and on private investment, and negatively affected by the price of oil and by the occurrence of a peak in the US business cycle ; the duration of a contraction is negatively affected by its actual age and by the duration of the previous expansion. |
| Keywords: | Business cycles ; Expansions ; Contractions ; Duration dependence ; Duration models |
| JEL: | C41 E32 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:860&r=bec |
| By: | Leonid Kogan; Dmitry Livdan; Amir Yaron |
| Abstract: | We document a new stylized fact regarding the term-structure of futures volatility. We show that the relationship between the volatility of futures prices and the slope of the term structure of prices is non-monotone and has a "V-shape". This aspect of the data cannot be generated by basic models that emphasize storage while this fact is consistent with models that emphasize investment constraints or, more generally, time-varying supply-elasticity. We develop an equilibrium model in which futures prices are determined endogenously in a production economy in which investment is both irreversible and is capacity constrained. Investment constraints affect firms' investment decisions, which in turn determine the dynamic properties of their output and consequently imply that the supply-elasticity of the commodity changes over time. Since demand shocks must be absorbed either by changes in prices, or by changes in supply, time-varying supply-elasticity results in time-varying volatility of futures prices. Estimating this model, we show it is quantitatively consistent with the aforementioned "V-shape" relationship between the volatility of futures prices and the slope of the term-structure. |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:mee:wpaper:0803&r=bec |
| By: | Pedro S. Martins |
| Abstract: | In the context of the debate on the labour-market consequences of globalisation, we examine worker mobility in order to identify the wage differences between foreign and domestic firms. Using matched employer-employee panel data for Portugal, we consider virtually all spells of interfirm mobility over a period of ten years. We find that foreign firms offer significantly more generous wage policies, although there is also a (smaller) selection effect. The results are robust to the consideration of wage growth differences, the case of displaced workers and different subsets of workers. |
| Keywords: | Foreign Direct Investment, Worker Displacement, Wage Growth |
| JEL: | J31 J63 F23 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:cgs:wpaper:17&r=bec |
| By: | Jara-Bertin, Mauricio; López-Iturriaga, Félix J. |
| Abstract: | This paper analyzes the influence of large shareholders on earnings management in family-owned firms using a sample of firms from 11 European countries. We consider how the contest to the control of the largest shareholder and the existence of a controlling coalition in family-owned firms affect earnings management in these firms. We find that increased contestability of the control of the largest shareholder reduces earnings management in family-owned firms. Our results also show that in firms in which the largest shareholder is a family, a second or third family shareholder increases discretionary accruals. |
| Keywords: | corporate control; discretionary accruals; earnings management; family firms |
| JEL: | M41 G32 |
| Date: | 2008–07–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9660&r=bec |
| By: | Marina-Eliza Spaliara (Dept of Economics, Loughborough University) |
| Abstract: | This paper investigates the nexus between financial factors and the capital-labour ratio using a rich firm-level data set. It is common in the literature to examine the impact of financial constraints on hiring and firing decisions separately from their impact on decisions related to investment in physical capital. We argue that as long as firms use both inputs in production and there is some substitutability between them, the two decisions need to be jointly analyzed. When we differentiate across firms that are more or less financially constrained, we find that the former group exhibits higher sensitivi¬ties of the capital-labour ratio to firm-specific characteristics, compared to the latter. |
| Keywords: | Financial constraints, Firm-specific characteristics, Capital-Labour ratio. |
| JEL: | E22 D92 E44 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2008-02&r=bec |
| By: | BOBTCHEFF Catherine |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:ler:wpaper:08.16.260&r=bec |
| By: | Edward L. Glaeser; Joseph Gyourko; Albert Saiz |
| Abstract: | Like many other assets, housing prices are quite volatile relative to observable changes in fundamentals. If we are going to understand boom-bust housing cycles, we must incorporate housing supply. In this paper, we present a simple model of housing bubbles that predicts that places with more elastic housing supply have fewer and shorter bubbles, with smaller price increases. However, the welfare consequences of bubbles may actually be higher in more elastic places because those places will overbuild more in response to a bubble. The data show that the price run-ups of the 1980s were almost exclusively experienced in cities where housing supply is more inelastic. More elastic places had slightly larger increases in building during that period. Over the past five years, a modest number of more elastic places also experienced large price booms, but as the model suggests, these booms seem to have been quite short. Prices are already moving back towards construction costs in those areas. |
| JEL: | G12 R1 R31 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14193&r=bec |
| By: | Kalckreuth, Ulf von |
| Abstract: | Following a positive shock, financing constraints will prolong or impede economic expansion that would have been optimal in an unconstrained environment. The study of dynamic adjustment therefore offers a direct way of verifying the presence of financing constraints and assessing their consequences for economic allocation. This paper compares the speed of adjustment of constrained and unconstrained firms using categorical information from survey data on the restrictions under which adjustment takes place. A set of moment conditions for the use in GMM estimation is developed, to cope with the problem of time varying speed of adjustment when the target level is partially unobserved. After estimating the micro-dynamics of capital demand, I show that the changing composition of the population makes for a time-varying sensitivity of the aggregate with respect to macroeconomic shocks. Wegen informationeller Friktionen, Unteilbarkeiten und Irreversibilitäten ist die Reaktion der aggregierten Faktornachfrage auf sektorale Schocks im Zeitablauf nicht unveränderlich. Sie wird vielmehr von der Verteilung der Firmen abhängen. Wenn viele Unternehmen sich in einem Zustand befinden, der eine rasche Reaktion erlaubt oder erzwingt, ist die Sensitivität hinsichtlich expansiver Schocks besonders groß. Aus diesem Grund sind direkte Informationen über die Position der Unternehmen von hohem Wert, da sie einen Aufschluss über die Sensitivität des Unternehmenssektors als Ganzem geben können. Diese Arbeit stellt heraus, dass Umfragedaten eine wichtige und zeitnahe Informationsquelle hinsichtlich der relevanten Beschränkungen für Individuen sein können. Es wird spezifisch die Bedeutung von Finanzierungsrestriktionen für die Anpassungsgeschwindigkeit auf der Mikroebene und deren Folgen für das Aggregat behandelt. |
| Keywords: | Financing constraints, adjustment, dynamic panel data models |
| JEL: | C23 D21 D24 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:7338&r=bec |
| By: | Alexander Ljungqvist; Matthew Richardson; Daniel Wolfenzon |
| Abstract: | This paper analyzes the determinants of buyout funds' investment decisions. In a model in which the supply of capital is "sticky" in the short run, we link the timing of funds' investment decisions, their risk-taking behavior, and the returns they subsequently earn on their buyouts to changes in the demand for private equity, conditions in the credit market, and funds' ability to influence their perceived talent in the market. Using a proprietary dataset of 207 buyout funds that invested in 2,274 buyout targets over the last two decades, we then investigate the implications of the model. Our dataset contains precisely dated cash inflows and outflows in every portfolio company, links every buyout target to an identifiable buyout fund, and is free from reporting and survivor biases. Thus, we are able to characterize every buyout fund's precise investment choices. Our empirical findings are consistent with the model. First, established funds accelerate their investment flows and earn higher returns when investment opportunities improve, competition for deal flow eases, and credit market conditions loosen. Second, the investment behavior of first-time funds is less sensitive to market conditions. Third, younger funds invest in riskier buyouts, in an effort to establish a track record. Fourth, following periods of good performance, funds become more conservative, and this effect is stronger for younger funds. |
| JEL: | G11 G23 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14180&r=bec |
| By: | Mathias Hoffmann; Thomas Nitschka |
| Abstract: | We study the impact of global asset price fluctuations on the international allocation of consumption risk at the business cycle frequency in a cross-section of 16 industrialized countries. International risk sharing increases when global equity prices are high and decreases when they are low. In explaining this finding, we focus on the differential degree of international integration of residential housing and equity markets. We argue that globally high equity prices increase the effective international diversification of the average country's national portfolio. Conversely, relatively high housing prices increase the weight of domestic assets in national portfolios - they literally worsen the home bias. In line with this mechanism, we find that global equity prices are good predictors of major portfolio shifts between housing and equity in most of the economies we study. In addition, the dependence of international risk sharing on the global equity price cycle is much less pronounced in countries where the securitization of mortgage-related debt is widely used: securitization seems to play an important role in improving international risk sharing by making mortgage-related risks internationally tradeable. |
| Keywords: | Asset prices, portfolio shifts, wealth effects, housing, equity, international risk sharing, securitization, mortgages. |
| JEL: | F36 F37 F41 G15 G21 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:376&r=bec |