nep-bec New Economics Papers
on Business Economics
Issue of 2008‒10‒28
nineteen papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Corporate Social Responsibility Through an Economic Lens By Robert N. Stavins; Forest L. Reinhardt; Richard H. K. Vietor
  2. Treasury cash flows in the enterprise By Caruntu, Genu Alexandru; Romanescu, Marcel Laurentiu
  3. The Evolution of the Returns to Human Capital in Canada, 1980-2006 By Riddell, Craig; Boudarbat, Brahim; Lemieux, Thomas
  4. Dynamics of Earnings and Hourly Wages in Germany By Myck, Michal; Ochmann, Richard; Qari, Salmai
  5. Privatization and Changes in the Wage Structure: Evidence from Firm Personnel Records By Melly, Blaise; Puhani, Patrick A.
  6. Sudden Stops, Financial Crises and Leverage: A Fisherian Deflation of Tobin's Q By Enrique G. Mendoza
  7. How Are Shocks to Trend and Cycle Correlated? A Simple Methodology for Unidentified Unobserved Components Models By Daisuke Nagakura
  8. Acquisition, Insolvency and Managers in UK Small Companies By Isachenkova, N.; Weeks, M.
  9. Are Structural VARs with Long-Run Restrictions Useful in Developing Business Cycle Theory? By V. V. Chari; Patrick J. Kehoe; Ellen R. McGrattan
  10. What Makes Them Tick? Employee Motives and Firm Innovation By Henry Sauermann; Wesley M. Cohen
  11. Financial Fragility, Heterogeneous Firms and the Cross Section of the Business Cycle By Holly , S.; Santoro, E.
  12. Performance Pay, Sorting and Social Motivation By Tor Eriksson; Marie-Claire Villeval
  13. Firms as Bundles of Discrete Resources - Towards an Explanation of the Exponential Distribution of Firm Growth Rates By Alex Coad
  14. Consistency in Organization By Schlicht, Ekkehart
  15. Financial Constraints and Firm Export Behavior By Flora Bellone; Patrick Musso; Lionel Nesta; Stefano Schiavo
  16. An Anatomy of Credit Booms: Evidence From Macro Aggregates and Micro Data By Marco Terrones; Enrique G. Mendoza
  17. Does Gender Matter for Firm Performance? Evidence from Eastern Europe and Central Asia By Sabarwal, Shwetlena; Terrell, Katherine
  18. Contracts and Motivations. The Case of Open Source By Marcello Basili; Antonio Nicita; Maria Alessandra Rossi
  19. Incorporation and Taxation: Theory and Firm-level Evidence By Peter Egger; Christian Keuschnigg; Hannes Winner

  1. By: Robert N. Stavins (Harvard University); Forest L. Reinhardt (Harvard Business School); Richard H. K. Vietor (Harvard Business School)
    Abstract: Business leaders, government officials, and academics are focusing considerable attention on the concept of "corporate social responsibility" (CSR), particularly in the realm of environmental protection. Beyond complete compliance with environmental regulations, do firms have additional moral or social responsibilities to commit resources to environmental protection? How should we think about the notion of firms sacrificing profits in the social interest? May they do so within the scope of their fiduciary responsibilities to their shareholders? Can they do so on a sustainable basis, or will the forces of a competitive marketplace render such efforts and their impacts transient at best? Do firms, in fact, frequently or at least sometimes behave this way, reducing their earnings by voluntarily engaging in environmental stewardship? And finally, should firms carry out such profit-sacrificing activities (i.e., is this an efficient use of social resources)? We address these questions through the lens of economics, including insights from legal analysis and business scholarship.
    Keywords: Corporate Social Responsibility, Voluntary Environmental Performance
    JEL: M14 L51 Q50
    Date: 2008–10
  2. By: Caruntu, Genu Alexandru; Romanescu, Marcel Laurentiu
    Abstract: Treasury allows to appreciate the enterprise's performance, having also a strategic role in terms of its training level and usage manners. Release (training) of treasury (cash-flow) is the proof of the strategic position of enterprise in relation to its products, its markets, its competitors and external constraints. This strategic satisfactory position generates significant financial flows that allow the company to procure foreign capital, particularly on the financial market, or placing the treasury surplus.
    Keywords: cash; payments; claims; investment; financing; treasury
    JEL: G1 G2 M1 G3 O3 P4
    Date: 2008–10–10
  3. By: Riddell, Craig; Boudarbat, Brahim; Lemieux, Thomas
    Abstract: This paper examines the evolution of the returns to human capital in Canada over the period 1980-2006. Most of the analysis is based on Census data, and on weekly wage and salary earnings of full-time workers. Our main finding is that the returns to education increased substantially for Canadian men between 1980 and 2000, in contrast to conclusions reached in previous studies. For example, the adjusted wage gap between men with exactly a bachelors’ degree and men with only a high school diploma increased from 34 percent to 43 percent during this period. Most of this rise took place in the early 1980s and late 1990s. Returns to education also rose for Canadian women, but the magnitudes of the increases were more modest. For instance, the adjusted BA-high school wage differential among women increased about 4 percentage points between 1980 and 1985 and remained stable thereafter. Results based on Labour Force Survey data show the upward trend in returns to education has recently been reversed for both men and women. Another important development is that after fifteen years of expansion (1980-1995), the return to work experience measured by the wage gap between younger and older workers declined between 1995 and 2000. Finally, we find little difference between measures based on means and those based on medians of log wages for both genders. Also, the use of broader earnings measures (such as including self-employment earnings, using weekly earnings of all workers, or using annual earnings of full-time workers) does not alter the main conclusions from the analysis based on weekly wage and salary earnings of full-time workers.
    Keywords: Human Capital, Wage Differentials, Returns to Education, Canada
    Date: 2008–10–22
  4. By: Myck, Michal (DIW Berlin); Ochmann, Richard (DIW Berlin); Qari, Salmai (WZB - Social Science Research Center Berlin)
    Abstract: There is by now a vast number of studies which document a sharp increase in cross-sectional wage inequality during the 2000s. It is often assumed that this inequality is of a "permanent nature" which in turn is used as an argument calling for government intervention. We examine these claims using a fully balanced panel of full-time employed individuals in Germany from the German Socio-Economic Panel for the years 1994–2006. In line with previous studies, our sample shows sharply rising inequality during the 2000s. Applying covariance structure models, we calculate the fraction of permanent and transitory wage and earnings inequality. From 1994 on, permanent inequality increases continuously, peaks in 2001 and then declines in subsequent years. Interestingly the decline in the permanent fraction of inequality occurs at the time of most rapid increases in cross-sectional inequality. It seems therefore that it is primarily the temporary and not the permanent component which has driven the strong expansion of cross-sectional inequality during the 2000s in Germany.
    Keywords: variance decomposition, covariance structure models, earnings inequality, wage dynamics
    JEL: C23 D31 J31
    Date: 2008–10
  5. By: Melly, Blaise (Brown University); Puhani, Patrick A. (University of Hannover)
    Abstract: We investigate the wage effects of privatization using person-level firm-based panel datasets from one privatized and one nonprivatized public sector firm in the same country for the years immediately before and after privatization. Thus, we can analyze the before-after effects of privatization while controlling for individual and time fixed effects and allowing for firm-specific trends. Because the change in wage regime coincides with substantial losses in the market share of the privatized but not the nonprivatized firm, the situation approximates a natural experiment in switching workers from the public to the private sector. We find significant changes in the wage structure of the privatized but not the nonprivatized firm. Specifically, wage and wage growth distributions widened significantly after privatization. Conditioning on worker characteristics, we find that younger employees and those with shorter tenure gained from privatization, while high-skilled workers gained relative to medium-skilled workers. Surprisingly, low-skilled workers also gained, although seemingly in the form of temporary compensation intended to increase acceptance of privatization.
    Keywords: privatization, liberalization, competition, labor markets, wage distributions
    JEL: J31 J45 L33
    Date: 2008–10
  6. By: Enrique G. Mendoza
    Abstract: This paper shows that the quantitative predictions of a DSGE model with an endogenous collateral constraint are consistent with key features of the emerging markets' Sudden Stops. Business cycle dynamics produce periods of expansion during which the ratio of debt to asset values raises enough to trigger the constraint. This sets in motion a deflation of Tobin’s Q driven by Irving Fisher’s debt-deflation mechanism, which causes a spiraling decline in credit access and in the price and quantity of collateral assets. Output and factor allocations decline because the collateral constraint limits access to working capital financing. This credit constraint induces significant amplification and asymmetry in the responses of macro-aggregates to shocks. Because of precautionary saving, Sudden Stops are low probability events nested within normal cycles in the long run.
    JEL: D52 E32 E44 F32 F41
    Date: 2008–10
  7. By: Daisuke Nagakura (Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: In this paper, we propose a simple methodology for investigating how shocks to trend and cycle are correlated in unidentified unobserved components models, in which the correlation is not identified. The proposed methodology is applied to U.S. and U.K. real GDP data. We find that the correlation parameters are negative for both countries. We also investigate how changing the identification restriction results in different trend and cycle estimates. It is found that estimates of the trend and cycle can vary substantially depending on the identification restrictions imposed.
    Keywords: Business Cycle Analysis, Trend, Cycle, Permanent Component, Transitory Component, Unobserved Components Model
    JEL: C01 E32
    Date: 2008–10
  8. By: Isachenkova, N.; Weeks, M.
    Abstract: This paper investigates the determinants of involuntary insolvency and acquisition in UK small and medium-sized companies. Using a competing risks model and data from the survey database of the ESRC CBR at the University of Cambridge, we draw specific attention to the impact of managerial characteristics. The explanatory power of financial variables, firm size, and firm age, highlighted by previous studies, is confirmed. In addition, the results indicate that .rms run by entrepreneurial managers with higher human capital and intentions to pursue a strategy of growth have greater survival prospects and are less likely to be forced into insolvency or become acquired.
    Keywords: Small firm, management human capital, involuntary insolvency, acquisition target, competing risks model, MCMC, Bayesian analysis
    JEL: C41 C11 C33 C51 L26 D21
    Date: 2008–08
  9. By: V. V. Chari; Patrick J. Kehoe; Ellen R. McGrattan
    Abstract: The central finding of the recent structural vector autoregression (SVAR) literature with a differenced specification of hours is that technology shocks lead to a fall in hours. Researchers have used this finding to argue that real business cycle models are unpromising. We subject this SVAR specification to a natural economic test by showing that when applied to data generated from a multiple-shock business cycle model, the procedure incorrectly concludes that the model could not have generated the data as long as demand shocks play a nontrivial role. We also test another popular specification, which uses the level of hours, and show that with nontrivial demand shocks, it cannot distinguish between real business cycle models and sticky price models. The crux of the problem for both SVAR specifications is that available data necessitate a VAR with a small number of lags and, when demand shocks play a nontrivial role, such a VAR is a poor approximation to the model's infinite order VAR.
    JEL: C32 C51 E13 E2 E3 E32 E37
    Date: 2008–10
  10. By: Henry Sauermann; Wesley M. Cohen
    Abstract: We examine the impact of individual-level motives upon innovative effort and performance in firms. Drawing from economics and social psychology, we develop a model of the impact of individuals' motives and incentives upon their innovative effort and performance. Using data on over 11,000 industrial scientists and engineers (SESTAT 2003), we find that individuals' motives have significant effects upon innovative effort and performance. These effects vary significantly, however, by the particular kind of motive (e.g., desire for intellectual challenge vs. pay). We also find that intrinsic and extrinsic motives affect innovative performance even when controlling for effort, suggesting that motives affect not only the level of individual effort, but also its quality. Overall, intrinsic motives, particularly the desire for intellectual challenge, appear to benefit innovation more than extrinsic motives such as pay.
    JEL: O3 O30 O31 O32
    Date: 2008–10
  11. By: Holly , S.; Santoro, E.
    Abstract: There is growing evidence that the cross section of the growth rate of firms is subject to systematic distortions at business cycle frequencies. In this paper we briefly review this evidence and then offer a theoretical model that incorporates nonlinearities in the way in which firms respond to aggregate and ideosyncratic shocks. We are able to replicate the most commonly found regularity - skewness in the cross section is counter-cyclical - and show that the strength of this relationship varies with the extent of financial fragility.
    Keywords: Cross Sectional Business Cycle, Financial Fragility, Corporate Growth.
    JEL: E22 E24
    Date: 2008–09
  12. By: Tor Eriksson (Department of economics - University of Aarhus); Marie-Claire Villeval (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: Variable pay links pay and performance but may also help firms in attracting more productive employees. Our experiment investigates the impact of performance pay on both incentives and sorting and analyzes the influence of repeated interactions between firms and employees on these effects. We show that (i) the opportunity to switch from a fixed wage to variable pay scheme increases the average effort level and its variance; (ii) high skill employees concentrate under the variable pay scheme; (iii) however, in repeated interactions, efficiency wages reduce the attraction of performance pay. Social motivation and reputation influence both the provision of incentives and their sorting effect.
    Keywords: performance pay ; incentives ; sorting ; social motivation ; experiment
    Date: 2008
  13. By: Alex Coad (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, Max Planck Institute of Economics - Evolutionary Economics Group)
    Abstract: A robust feature of the corporate growth process is the Laplace, or symmetric exponential, distribution of firm growth rates. In this paper, we sketch out a class of simple theoretical models capable of explaining this empirical regularity. We do not attempt to generalize on where growth opportunities comme from, but rather we focus on how firms build upon growth opportunites. We borrow ideas from the self-organizing criticality literature to explain how the interdependent nature of discrete resources may lead to the triggering off of a series of additions to a firm's resources. In a first formal model we consider the case of employment growth in a hierarchy, and observe that growth rates follow an exponential distribution. In a second model we include plant and capital as resources and we are able to reproduce a number of stylized facts about firm growth.
    Keywords: Firm growth rates, exponential distribution, hierarchy, growth autocorrelation.
    Date: 2008–10
  14. By: Schlicht, Ekkehart
    Abstract: Internal organization relies heavily on psychological consistency requirements. This perspective has been emphasized in modern compensation theory, but has not been extended to organization theory. The idea is developed by starting from Williamson's discussion of idiosyncratic exchange. The perspective sheds new light on several topics in the theory of the firm, like the boundaries of the firm (“Williamson's puzzle”), the importance of fairness concerns within firms, the attenuation of incentives, or the role of routines. It implies a “perceptional” theory of the firm that is “realistic” in the sense advocated by Coase (1937).
    Keywords: theory of the firm; hierarchy; evolutionary theory of the firm; perceptional theory of the firm; consistency; small numbers; centralization paradox; Williamson's puzzle; compensation; boundaries of the firm; fairness; small numbers; idiosyncratic exchange; entitlements; obligations; routines; framing
    JEL: B52 D02 L2
    Date: 2008–10–20
  15. By: Flora Bellone; Patrick Musso; Lionel Nesta; Stefano Schiavo
    Abstract: The paper analyzes the link between financial constraints and firm export behavior. Our main finding is that firms enjoying better financial health are more likely to become exporters. The result contrasts with the previous empirical literature which found evidence that export participation improves firm financial health, but not that export starters display any ex-ante financial advantage. On the contrary, we find that financial constraints act as a barrier to export participation. Better access to external financial resources increases the probability to start exporting and also shortens the time before firms decide to serve foreign customers. This finding has important policy implications as it suggests that, in presence of financial markets imperfections, public intervention can be called for to help efficient but financially constrained firms to overcome the sunk entry costs into export markets and expand their activities abroad.
    Keywords: Export; Firm heterogeneity; Financial constraints; Sunk costs
    JEL: F14 G32 L25 D92
    Date: 2008
  16. By: Marco Terrones; Enrique G. Mendoza
    Abstract: We study the characteristics of credit booms in emerging and industrial economies. Macro data show a systematic relationship between credit booms and economic expansions, rising asset prices, real appreciations and widening external deficits. Micro data show a strong association between credit booms and leverage ratios, firm values, and banking fragility. We also find that credit booms are larger in emerging economies, particularly in the nontradables sector; most emerging markets crises are associated with credit booms; and credit booms in emerging economies are often preceded by large capital inflows but not by financial reforms or productivity gains.
    Keywords: Credit expansion , Business cycles , Emerging markets , Asset prices , Current account deficits , Productivity ,
    Date: 2008–09–30
  17. By: Sabarwal, Shwetlena (World Bank); Terrell, Katherine (University of Michigan)
    Abstract: Using 2005 firm level data for 26 ECA countries, this paper estimates performance gaps between male- and female-owned businesses, while controlling for their location by industry and country. We find that female entrepreneurs have significantly smaller scale of operations (as measured by sales revenues) and are less efficient in terms of Total Factor Productivity (TFP), although this difference is very small. However, they generate the same amount of profit per unit of revenue as men. We find that while both male and female entrepreneurs in ECA are sub-optimally small, women's returns to scale are significantly larger than men's implying that they would gain more from increasing their scale. We argue that the main reasons for the sub-optimal size of female-owned firms are that they are both capital constrained and concentrated in industries with small firms.
    Keywords: entrepreneurship, finance, gender, Eastern Europe, Central Asia
    JEL: D24 M21 O12 O16
    Date: 2008–10
  18. By: Marcello Basili; Antonio Nicita; Maria Alessandra Rossi
    Abstract: The literature on Open Source phenomenon has revealed the crucial role played by both intrinsic and extrinsic motivations. However an analysis attempting to formally explore this interplay is still missing. In this paper, we try to fill the gap by introducing intrinsic motivations in standard principal-agent model, focusing on the case of Open Source Software (OSS). We show that, if developers’ intrinsic motivation is sufficiently high, paying developers to work on OSS projects allows the firm to induce a desired level of workers’ effort at a lower cost compared to the standard case of monetary incentives and sanctions coupled with costly monitoring.
    Keywords: extrinsic and intrisic motivations, agency contracts, open-source software, open-source software developers
    JEL: O32 M52 M54 O33 O31 M12
    Date: 2008–10
  19. By: Peter Egger; Christian Keuschnigg; Hannes Winner
    Abstract: This paper provides theory and firm-level evidence on the incorporation decision of entrepreneurs in a model of corporate governance and taxation. The theory explains how the incorporation decision of entrepreneurs is driven by taxation (corporate and personal income taxes), corporate transparency, access to external capital and limited liability. We estimate features of this model using a large cross-section of more than 540, 000 firms in European manufacturing. The impact of taxation on the incorporation decision is at the heart of this analysis. We find that higher personal income tax rates and their progression are associated with an increase in the probability of incorporation, while higher corporate tax rates entail an impediment to incorporate. This finding is robust to the inclusion of other economic and institutional determinants and to a variety of functional form assumptions about the latent variable in the estimated discrete choice model.
    Keywords: Incorporation, governance, taxes, discrete choice models
    JEL: H25 H73 F23 C21
    Date: 2008–09

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