nep-bec New Economics Papers
on Business Economics
Issue of 2008‒09‒20
twenty-two papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. The Impact of Workplace Conditions on Firm Performance By Sebastian Buhai; Elena Cottini; Niels Westergård-Nielsen
  2. Training, Job Satisfaction and Workplace Performance in Britain: Evidence from WERS 2004 By Jones, Melanie K.; Jones, Richard J.; Latreille, Paul L.; Sloane, Peter J.
  3. Reciprocity and Incentive Pay in the Workplace By Robert Dur; Arjan Non; Hein Roelfsema
  4. Financial Structure and Corporate Growth: Evidence from Italian Panel Data By Silvia Giannangeli; Giorgio Fagiolo; Massimo Molinari
  5. Wage Posting Without Full Commitment By Jacob Wong; Matthew Doyle
  6. Trade, Wages, and Productivity By Kristian Behrens; Giordano Mion; Yasusada Murata; Jens Sudekum
  7. The elasticity of substitution: evidence from a UK firm-level data set By Barnes, Sebastian; Price, Simon; Sebastia Barriel, Maria
  8. Strategic Interaction Among Heterogeneous Price-Setters In An Estimated DSGE Model By Olivier Coibion; Yuriy Gorodnichenko
  9. The Impact of Firm Collateral on Knowledge Intensive Consulting Firms By Martinsson, Gustav
  10. Heterogeneous Firms, the Structure of Industry & Trade under Oligopoly By Eddy Bekkers; Joseph Francis Francois
  11. Fringe Benefits and Job Satisfaction By Benjamin Artz
  12. Wage Formation between Newly Hired Workers and Employers: Survey Evidence By Robert E. Hall; Alan B. Krueger
  13. Firm Collateral and the Cyclicality of Knowledge Intensity By Martinsson, Gustav
  14. Start-ups, New Business Employment, and the Effects on Incumbents: Who Contributes the Larger Share? By Michael Fritsch; Florian Noseleit
  15. Identifying Adjustment Costs of Net and Gross Employment Changes By Joao Miguel Ejarque; Oivind Anti Nilsen
  16. The Effects of Labor Market Conditions on Working Time: the US-EU Experience By Claudio Michelacci; Josep Pijoan-Mas
  17. Managerial Incentives and Value Creation: Evidence from Private Equity By Phillip Leslie; Paul Oyer
  18. A comment on efficiency gains and myopic antitrust authority in a dynamic merger game By Pedro Cosme da Costa Vieira
  19. Management Compensation and Firm-Level Income Inequality By Frederiksen, Anders; Poulsen, Odile
  20. Leadership, Coordination and Mission-Driven Management By Patrick Bolton; Markus K. Brunnermeier; Laura Veldkamp
  21. International Financial Remoteness and Macroeconomic Volatility By Andrew K. Rose; Mark M. Spiegel
  22. The cyclicality of mark-ups and profit margins for the United Kingdom: some new evidence By Macallan, Clare; Millard, Stephen; Parker, Miles

  1. By: Sebastian Buhai (University of Aarhus, and Erasmus University Rotterdam); Elena Cottini (University of Aarhus, and Cath. University Milan); Niels Westergård-Nielsen (University of Aarhus)
    Abstract: This paper estimates the impact of work environment health and safety practice on firm performance, and examines which firm-characteristic factors are associated with good work conditions. We use Danish longitudinal register matched employer-employee data, merged with firm business accounts and detailed cross-sectional survey data on workplace conditions. This enables us to address typical econometric problems such as omitted variables bias or endogeneity in estimating i) standard production functions augmented with work environment indicators and aggregate employee characteristics and ii) firm mean wage regressions on the same explanatory variables. Our findings suggest that improvement in some of the physical dimensions of the work health and safety environment (specifically, “internal climate” and “repetitive and strenuous activity”) strongly impacts the firm productivity, whereas “internal climate” problems are the only workplace hazards compensated for by higher mean wages.
    Keywords: occupational health and safety; work environment; production function estimation; firm performance; compensating wage differentials
    JEL: J28 J31 L23
    Date: 2008–08–28
  2. By: Jones, Melanie K. (University of Wales, Swansea); Jones, Richard J. (University of Wales, Swansea); Latreille, Paul L. (University of Wales, Swansea); Sloane, Peter J. (University of Wales, Swansea)
    Abstract: This paper analyses the relationship between training, job satisfaction and workplace performance using the British 2004 Workplace Employee Relations Survey (WERS). Several measures of performance are analysed including absence, quits, financial performance, labour productivity and product quality. While there is clear evidence that training is positively associated with job satisfaction, and job satisfaction in turn is positively associated with most measures of performance, the relationship between training and performance is complex, depending on both the particular measures of training and of performance used in the analysis.
    Keywords: training, job satisfaction, absence, quits, financial performance, labour market, product quality
    JEL: J0 J2 J3
    Date: 2008–09
  3. By: Robert Dur (Erasmus University Rotterdam, and CESifo); Arjan Non (Erasmus University Rotterdam); Hein Roelfsema (Utrecht University)
    Abstract: We study optimal incentive contracts for workers who are reciprocal to management attention. When neither worker's effort nor manager's attention can be contracted, a double moral-hazard problem arises, implying that reciprocal workers should be given weak financial incentives. In a multiple-agent setting, this problem can be resolved using promotion incentives. We test these predictions using German Socio-Economic Panel data. We find that workers who are more reciprocal are significantly more likely to receive promotion incentives, while there is no such relation for individual bonus pay.
    Keywords: reciprocity; social exchange; incentive contracts; double moral hazard; GSOEP
    JEL: D86 J41 M51 M52 M54 M55
    Date: 2008–09–03
  4. By: Silvia Giannangeli; Giorgio Fagiolo; Massimo Molinari
    Abstract: We study the relationships between firm financial structure and growth for a large sample of Italian firms (1998-2003). We expand upon existing analyses testing whether liquidity constraints affect firm performance by considering among growth determinants also firm debt structure. Panel regression analyses show that more liquid firms tend to grow more. However, firms do not use their capital to expand, but rather to increase debt. We also find that firm growth is highly fragile as it is positively correlated with non-financial liabilities and it is not sustained by a long-term debt maturity. Finally, quantile regressions suggest that fast-growing firms are characterized by higher growth/cash-flow sensitivities and heavily rely on external debt, but seem to be less bank-backed than the rest of the sample. Overall, our findings suggest that the link between firms’ investment and expansion decisions is far more complicated than postulated by standard tests of investment/cash-flow sensitivities.
    Keywords: Firm growth; Financial structure; Cash flow; Financial constraints; Gibrat law; Quantile regressions
    Date: 2008–09–11
  5. By: Jacob Wong (School of Economics, University of Adelaide); Matthew Doyle
    Abstract: Wage posting models of job search typically assume that firms can commit to paying workers the posted wage. This paper investigates the consequences of relaxing this assumption. Under ``downward'' commitment, ¯rms can commit only to paying at least their advertised wage. We show that wage posting is always an equilibrium, although in special cases other equilibria can exist. Surprisingly, the wage posting equilibrium in our economy is identical to the equilibrium when firms can commit to paying exactly their posted wage. When firms cannot even commit to paying at least their advertised wage, equilibrium exhibits job auctions with wage dispersion which generally is not constrained efficient.
    JEL: E24 J64
    Date: 2008–09
  6. By: Kristian Behrens; Giordano Mion; Yasusada Murata; Jens Sudekum
    Abstract: We develop a new general equilibrium model of trade with heterogeneous firms, variable demand elasticities and endogenously determined wages. Trade integration favors wage convergence, intensifies competition, and forces the least efficient firms to leave the market, thereby affecting aggregate productivity. Since wage and productivity responses are endogenous, our model is well suited to study the impacts of trade integration on aggregate productivity and factor prices. Using Canada-U.S. interregional trade data, we first estimate a system of theory-based gravity equations under the general equilibrium constraints generated by the model. Doing so allows us to measure "border effects" and to decompose them into a "pure" border effect, relative and absolute wage effects, and a selection effect. Using the estimated parameter values, we then quantify the impacts of removing the Canada-U.S. border on wages, productivity, markups, the share of exporters, the mass of varieties produced and consumed, and welfare. We finally provide a similar quantification with respect to regional population changes.
    Keywords: Heterogeneous firms, gravity equations, general equilibrium, monopolistic competition, variable demand elasticities
    JEL: F12 F15 F17
    Date: 2008
  7. By: Barnes, Sebastian (OECD); Price, Simon (Bank of England); Sebastia Barriel, Maria (Bank of England)
    Abstract: Using a panel of UK firms spanning three decades, we provide estimates of the long-run elasticity of substitution between capital and other factors of production, the (negative of the) elasticity of capital and investment with respect to the user cost. The parameter is estimated using 'time averages' (with data differenced over long periods) and pooled mean group panel methods. The robust result is that the elasticity is in the region of 0.4. This is consistent with previous results obtained using aggregate UK data, and is also in line with some recent results using US firm-level data. Estimated returns to scale exceed unity. When constant returns are imposed, the estimated elasticity of substitution is not substantially changed.
    Keywords: Investment; firm-level data; elasticity of substitution; panel.
    Date: 2008–04
  8. By: Olivier Coibion; Yuriy Gorodnichenko
    Abstract: We consider a DSGE model in which firms follow one of four price-setting regimes: sticky prices, sticky-information, rule-of-thumb, or full-information flexible prices. The parameters of the model, including the fractions of each type of firm, are estimated by matching the moments of the observed variables of the model to those found in the data. We find that sticky-price firms and sticky-information firms jointly account for over 95% of firms in the model, with the two receiving approximately equal shares. We compare the performance of our hybrid model to pure sticky-price and sticky-information models along various dimensions, including monetary policy implications.
    JEL: E3 E5
    Date: 2008–09
  9. By: Martinsson, Gustav (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: This paper explores how sales and employment for knowledge intensive consulting firms are correlated. I apply theory on cash flow-investment sensitivities, mostly applied to manufacturing firms, to a less capital intensive part of the economy. Therefore the knowledge intensive consulting sector is investigated but instead of analyzing the investment in plant and machinery this analysis regards the investment in skilled employees. The argument of Kaplan & Zingales (1997) regarding low cash flow-investment sensitivity being a sign of financial distress is applied. The main result is that firms less likely to be financially constrained display 60 percent higher sales-employment sensitivities than firms more likely to be financially constrained. The results are estimated from a sample comprising 23,500 Swedish knowledge intensive consulting firms.
    Keywords: Incomplete markets; asymmetric information; knowledge intensive business services; economic development
    JEL: D52 D82 L84 O16
    Date: 2008–09–09
  10. By: Eddy Bekkers (Department of Economics, Johannes Kepler University Linz, Austria); Joseph Francis Francois (Department of Economics, Johannes Kepler University Linz, Austria)
    Abstract: We develop a model with endogeneity in key features of industrial structure linked to heterogeneous cost structures under Cournot competition. We use the model to explore issues related to cross-country differences in industry structure and the impact of globalization on markups and pricing, concentration, and productivity. The model nests two workhorse trade models, the Brander & Krugman reciprocal dumping model and the Ricardian technology-based trade model, as special cases. We examine both free entry and limited entry (free exit) cases. The model generates clear testable predictions on the probability of zero trade flows and the pattern of export prices, and on cross-country and industry variations in industrial structure controlling for openness. Market prices decline as a result of trade liberalization, the least productive firms get squeezed out of the market, exporting firms gain market share, and more firms become trade oriented. In addition, depending on the strength of underlying cost heterogeneity, falling prices are consistent with both increasing and falling industry concentration following episodes of integration. Welfare rises with trade liberalization, unless trade costs decline from a prohibitive level in the short run free exit case. Variation across industries and markets in markups, concentration, and pricing structures is otherwise a function of market size and the variation in cost heterogeneity across industries.
    Keywords: Firm heterogeneity, Cournot competition, Composition effects of trade liberalization
    JEL: L11 L13 F12
    Date: 2008–09
  11. By: Benjamin Artz (Department of Economics, University of Wisconsin - Milwaukee)
    Abstract: Fringe benefits stand as an important part of compensation but confirming their role in determining job satisfaction has been mixed at best. The theory suggesting this role is ambiguous. Fringe benefits represent a desirable form of compensation but might result in decreased earnings and reduced job mobility. Using a pooled cross-section of five NLSY waves, fringe benefits are established as significant positive determinants of job satisfaction, even after controlling for individual fixed effects and testing for the endogeneity of fringe benefits.
    JEL: C23 J28 J32
    Date: 2008–09
  12. By: Robert E. Hall; Alan B. Krueger
    Abstract: Some workers bargain with prospective employers before accepting a job. Others could bargain, but find it undesirable, because their right to bargain has induced a sufficiently favorable offer, which they accept. Yet others perceive that they cannot bargain over pay; they regard the posted wage as a take-it-or-leave-it opportunity. Theories of wage formation point to substantial differences in labor-market equilibrium between bargained and posted wages. The fraction of workers hired away from existing jobs is another key determinant of equilibrium, because a worker with an existing job has a better outside option in bargaining than does an unemployed worker. Our survey measures the incidences of wage posting, bargaining, and on-the-job search. We find that about a third of workers had precise information about pay when they first met with their employers, a sign of wage posting. We find that another third bargained over pay before accepting their current jobs. And about 40 percent of workers could have remained on their earlier jobs at the time they accepted their current jobs.
    JEL: E24 J3 J64
    Date: 2008–09
  13. By: Martinsson, Gustav (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: The Schumpeterian view on Business cycles treats recessions as a cleansing mechanism and a state where firms can regroup and innovate. Firms need to access finance externally in order to compensate declining cash flow in recessions. Due to financial frictions, the literature proposes that firms need to post collateral in order to mitigate problems of information asymmetries. In this paper I view knowledge within a firm as a prerequisite for it to be innovative. Combining financial frictions and firm knowledge intensity the overall hypothesis of this paper is: Firms which have collateral can retain its knowledge intensity when cash flow declines. This enables firms with collateral to benefit from recessions like Schumpeter proposed. In this paper I explore the impact of firm collateral on the cyclicality of knowledge intensity. This is conducted through using firm level data on 14,500 Swedish manufacturing firms over the period 1997-2004. The main results are: (i) the knowledge intensity of a firm without collateral is pro-cyclical. I.e. its share of highly educated employees is positively correlated with sales variation; (ii) on the other hand, the knowledge intensity of firms with collateral is counter-cyclical. Through retaining their knowledge intensity even as sales drops firms with collateral can benefit from recessions as Schumpeter proposed.
    Keywords: incomplete markets; asymmetric information; business fluctuations; business cycles; corporate finance; innovation
    JEL: D52 D82 E32 O16 O31
    Date: 2008–09–09
  14. By: Michael Fritsch (Friedrich Schiller University Jena, School of Economics and Business Administration); Florian Noseleit (Friedrich Schiller University Jena, School of Economics and Business Administration)
    Abstract: We investigate the effects that new business formation has on employment in incumbent firms and compare it to the development in the start-ups. The analysis is performed for West German regions over the 1984-2002 period. It shows that the employment effects of new businesses on the incumbents are significantly positive. Moreover, we find indication that these effects on incumbents are considerably larger than the employment that is directly generated in the start-ups. We draw conclusions for policy and for further research.
    Keywords: Entrepreneurship, new business formation, regional development, direct and indirect effects
    JEL: L26 M13 O1 O18 R11
    Date: 2008–09–10
  15. By: Joao Miguel Ejarque; Oivind Anti Nilsen
    Abstract: A relatively unexplored question in dynamic labour demand regards the source of adjustment costs, whether they depend on net or gross changes in employment. We estimate a structural model of dynamic labour demand where the firm faces adjustment costs related to gross and net changes in its workforce. We focus on matching quarterly moments of hiring and of net changes in employment from a panel of establishments. The main component of adjustment costs in our panel is quadratic adjustment costs to gross changes in employment. We also estimate that adjustment costs have a large economic cost, roughly cutting the value of our establishments in half.
    Date: 2008–09–16
  16. By: Claudio Michelacci (CEMFI and CEPR, Spain and The Rimini Centre for Economic Analysis, Italy); Josep Pijoan-Mas (CEMFI and CEPR, Spain)
    Abstract: We consider a labor market search model where, by working longer hours, individuals acquire greater skills and thereby obtain better jobs. We show that job inequality, which leads to within-skill wage differences, gives incentives to work longer hours. By contrast, a higher probability of losing jobs, a longer duration of unemployment, and in general a less tight labor market discourage working time. We show that the different evolution of labor market conditions in the US and in Continental Europe over the last three decades can quantitatively explain the diverging evolution of the number of hours worked per employee across the two sides of the Atlantic. It can also explain why the fraction of prime age male workers working very long hours has increased substantially in the US, after reverting a trend of secular decline.
    Keywords: working hours, wage inequality, unemployment, search, human capital filtering
    JEL: G31 J31 E24
    Date: 2008–01
  17. By: Phillip Leslie; Paul Oyer
    Abstract: We analyze the differences between companies owned by private equity (PE) investors and similar public companies. We document that PE-owned companies use much stronger incentives for their top executives and have substantially higher debt levels. However, we find little evidence that PE-owned firms outperform public firms in profitability or operational efficiency. We also show that the compensation and debt differences between PE-owned companies and public companies disappear over a very short period (one to two years) after the PE-owned firm goes public. Our results raise questions about whether and how PE firms and the incentives they put in place create value.
    JEL: G3 J33 L20 M52
    Date: 2008–09
  18. By: Pedro Cosme da Costa Vieira (Faculdade de Economia, Universidade do Porto)
    Abstract: This paper relaxes the Motta & Vasconcelos’ (2005) short-term assumption that firms’ capital is fixed. We demonstrate that, contrary to the conclusion of that article, in the best interest of consumers, even when firms have large economies of scale, long-term forward-looking Antitrust Authorities must block firms’ merger plans whenever profits of firms are positive.
    Keywords: Antitrust policy, Economies of scale
    JEL: D43 L13 L25 L41
    Date: 2008–09
  19. By: Frederiksen, Anders (Aarhus School of Business); Poulsen, Odile (University of East Anglia)
    Abstract: In recent decades, most developed countries have experienced a simultaneous increase in income inequality and management compensation. In this paper, we study the relation between management compensation and firm-level income dynamics in a general equilibrium model. Empirical estimation, of the model’s key parameters show that the rising management premium is indeed the main driving force behind the observed increase in income inequality. This is the case even when other potential sources such as technological progress and skill-biased technological change are taken into account. We also show that a rising management premium produces income distribution dynamics at the firm level which are similar to those observed at the market level, i.e. rising income inequality overall as well as within and between education groups.
    Keywords: income inequality, two-sector search model, skill-biased technological change, personnel data
    JEL: J3 J6 M5 O3
    Date: 2008–09
  20. By: Patrick Bolton; Markus K. Brunnermeier; Laura Veldkamp
    Abstract: What makes a good leader? A good leader is able to coordinate his followers around a credible mission statement, which communicates the future course of action of the organization. In practice, leaders learn about the best course of action for the organization over time. While learning helps improve the organization's goals it also creates a time-consistency problem. Leader resoluteness is a valuable attribute in such a setting, since it slows down the leader's learning and thus improves the credibility of the mission statement. But resolute leaders also inhibit communication with followers and leader resoluteness is costly when followers have sufficiently valuable signals.
    JEL: D21 D23 D7
    Date: 2008–09
  21. By: Andrew K. Rose; Mark M. Spiegel
    Abstract: This paper shows that proximity to major international financial centers seems to reduce business cycle volatility. In particular, we show that countries that are further from major locations of international financial activity systematically experience more volatile growth rates in both output and consumption, even after accounting for political institutions, trade, and other controls. Our results are relatively robust in the sense that more financially remote countries are more volatile, though the results are not always statistically significant. The comparative strength of this finding is in contrast to the more ambiguous evidence found in the literature.
    JEL: E32 F32
    Date: 2008–09
  22. By: Macallan, Clare (Bank of England); Millard, Stephen (Bank of England); Parker, Miles (Bank of England)
    Abstract: In this paper, we assess the cyclicality of mark-ups and profit margins within the United Kingdom, at both the aggregate and industry level. We find that the private sector labour share moves countercyclically, suggesting that the aggregate mark-up moves procyclically. This result survives when we consider more sophisticated measures of the mark-up. And this result is also supported by industry-level data. We find that the aggregate market sector profit share moves procyclically and that the cyclical behaviour of profit margins is largely homogenous across industries. Nevertheless, there is some evidence that margins moved against the cycle in the late 1990s, starting to fall in 1997, whereas GDP growth did not peak until 2000. In tandem with these cyclical movements, we also find that the market sector profit share has trended upwards since 1970, in contrast to the aggregate mark-up, which fell over the same period.
    Keywords: Mark-ups; profit margins.
    JEL: E31 L11
    Date: 2008–08

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