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on Business Economics |
| By: | Olga Bohachova |
| Abstract: | This paper explores the links between macroeconomic conditions and individual bank risk. Using capital adequacy ratios as a broad measure of risk sustainability, a linear mixed effects model for a large international panel of banks for the years 2001-2005 is estimated. In OECD countries, banks tend to hold higher capital ratios during business cycle highs, this effect being even stronger for a subsample of EU banks. In non-OECD countries, periods of higher economic growth are associated with lower capital ratios. This indicates procyclical behavior. Banks accumulate risks more rapidly in economically good times and some of these risks materialize as asset quality deteriorates during subsequent recessions. Furthermore, higher inflation rates are associated with higher capital ratios of banks, implying that inflation-induced economic uncertainty stimulates banks to restrict credit. As far as regulatory and institutional environment is concerned, econometric estimates show that banks in non-OECD countries with deposit insurance tend to be more risky, whereas evidence of a negative relationship between concentration of the banking sector and banks’ risk taking is statistically less robust. |
| Keywords: | international banking, macroeconomic conditions, banking risk |
| JEL: | F37 F41 G21 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:iaw:iawdip:44&r=bec |
| By: | Guido Menzio (Department of Economics, University of Pennsylvania); Espen Moen (Department of Economics, Norwegian School of Management (NSM)) |
| Abstract: | We consider a frictional labor market in which firms want to insure their senior employees against income fluctuations and, at the same time, want to recruit new employees to fill their vacant positions. Firms can commit to a wage schedule, i.e. a schedule that specifies the wage paid by the firm to its employees as function of their tenure and other observables. However, firms cannot commit to the employment relationship with any of their workers, i.e. firms can dismiss workers at will. We find that, because of the firm’s limited commitment, the optimal schedule prescribes not only a rigid wage for senior employees, but also a downward rigid wage for new hires. Moreover, we find that, while the rigidity of the wage of senior workers does not affect the allocation of labor, the rigidity of the wage of new hires magnifies the response of unemployment and vacancies to negative shocks to the aggregate productivity of labor. |
| Keywords: | Competitive Search, Risk Sharing, Unemployment, Business Cycles |
| JEL: | E24 E32 J64 |
| Date: | 2008–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:08-040&r=bec |
| By: | Baldwin, John R.; Gu, Wulong |
| Abstract: | This paper presents the long-term trends in outsourcing and offshoring across Canadian industries. |
| Keywords: | International trade, Business performance and ownership, Business adaptation and adjustment |
| Date: | 2008–10–27 |
| URL: | http://d.repec.org/n?u=RePEc:stc:stcp2e:2008020e&r=bec |
| By: | Thomas Cornelißen; John S. Heywood; Uwe Jirjahn |
| Abstract: | We present a sorting model in which workers with greater ability and greater risk tolerance move into performance pay jobs and contrast it with the classic agency model of performance pay. Estimates from the German Socio-Economic Panel confirm testable implications drawn from our sorting model. First, prior to controlling for earnings, workers in performance pay jobs have higher job satisfaction, a proxy for on-the-job utility. Second, after controlling for the higher earnings associated with performance pay, the job satisfaction of those in performance pay jobs is the same as those not in such jobs. Third, those workers in performance pay jobs who have greater risk tolerance routinely report greater job satisfaction. While these findings support the sorting model, they would not be suggested by the classic agency model. |
| Keywords: | Performance Pay, Worker Heterogeneity, Ability, Risk Preferences, Sorting |
| JEL: | D80 J24 J28 J33 M52 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwsop:diw_sp136&r=bec |
| By: | Pierre-Guillaume Méon (DULBEA, Université libre de Bruxelles, Brussels); Ariane Szafarz (DULBEA, Université libre de Bruxelles, Brussels) |
| Abstract: | This paper studies labor market discriminations as an agency problem. It sets up a principal-agent model of a firm, where the manager is a taste discriminator and has to make unobservable hiring decisions that determine the shareholder’s profits because workers differ in skills. The paper shows that performance-based contracts may moderate the manager’s propensity to discriminate, but that they are unlikely to fully eliminate discrimination. Moreover, the model predicts that sectors with high skill leverages discriminate less. Finally, the impacts of unknown taste for discrimination, of a wage gap between groups, and of a diversity premium are investigated. |
| Keywords: | discrimination, agency theory, hiring. |
| JEL: | J71 D21 M12 M51 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:dul:wpaper:08-19rs&r=bec |
| By: | Ma, Yue; Hart, Robert A. |
| Abstract: | This paper offers a contract-based theory to explain the determination of standard hours, overtime hours and overtime premium pay. We expand on the wage contract literature that emphasises the role of firm-specific human capital and that explores problems of contract efficiency in the face of information asymmetries between the firm and the worker. We first explore a simple wage-hours contract without overtime and show that incorporating hours into the contract may itself produce efficiency gains. We then show how the introduction of overtime hours, remunerated at premium rates, can further improve contract efficiency. Our modelling outcomes in respect of the relationship between the overtime premium and the standard wage rate relate closely to earlier developments in hedonic wage theory. Throughout, we emphasise the intuitive reasoning behind the theory and we also supply relevant empirical evidence. Mathematical derivations are provided in an appendix. |
| Keywords: | asymmetric information; specific human capital; premium pay; overtime; wage-hours contracts |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:stl:stledp:2008-04&r=bec |
| By: | Jacobson, Tor (Research Department, Central Bank of Sweden); Kindell, Rikard (Svenska Handelsbanken); Lindé, Jesper (Monetary Policy Department, Central Bank of Sweden); Roszbach, Kasper (Research Department, Central Bank of Sweden) |
| Abstract: | This paper studies the relation between macroeconomic fluctuations and corporate defaults while conditioning on industry affiliation and an extensive set of firm-specific factors. Using a logit approach on a panel data set for all incorporated Swedish businesses over 1990- 2002, we find strong evidence for a substantial and stable impact of aggregate fluctuations. Macroeffects differ across industries in an economically intuitive way. Out-of-sample evaluations show our approach is superior to both models that exclude macro information and best fitting naive forecasting models. While firm-specific factors are useful in ranking firms’ relative riskiness, macroeconomic factors capture fluctuations in the absolute risk level. |
| Keywords: | Default; default-risk model; business cycles; aggregate fluctuations; microdata; logit; firm-specific variables; macroeconomic variables |
| JEL: | C35 C41 C52 E44 G21 G33 |
| Date: | 2008–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0226&r=bec |
| By: | Shouyong Shi |
| Abstract: | I construct a theoretical framework in which firms offer wage-tenure contracts to direct the search by risk-averse workers. All workers can search, on or off the job. I characterize an equilibrium and prove its existence. The equilibrium generates a non-degenerate, continuous distribution of employed workers over the values of contracts, despite that all matches are identical and workers observe all offers. A striking property is that the equilibrium is block recursive; that is, individuals' optimal decisions and optimal contracts are independent of the distribution of workers. This property makes the equilibrium analysis tractable. Consistent with stylized facts, the equilibrium predicts that (i) wages increase with tenure, (ii) job-to-job transitions decrease with tenure and wages, and (iii) wage mobility is limited in the sense that the lower the worker's wage, the lower the future wage a worker will move to in the next job transition. Moreover, block recursivity implies that changes in the unemployment benefit and the minimum wage have no effect on an employed worker's job-to-job transitions and contracts. |
| Keywords: | Directed search; On-the-job search; Wage-tenure contracts |
| JEL: | E24 C78 J6 |
| Date: | 2008–10–27 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-343&r=bec |
| By: | Christiane Clemens and Maik Heinemann (Institute of Economics, University of Lüneburg) |
| Abstract: | This paper deals with credit market imperfections and idiosyncratic risks in a two–sector heterogeneous agent dynamic general equilibrium model of occupational choice. We focus especially on the effects of tightening financial constraints on macroeconomic performance, entrepreneurial risk–taking, and social mobility. Contrary to many models in the literature, our comparative static results cover a broad range for borrowing constraints, from an unrestrained to a perfectly constrained economy. In our baseline model, we find substantial gains in output, welfare, and wealth equality associated with credit market improvements. The marginal gains from relaxing constraints are largest for empirically relevant debt–equity ratios. Interestingly, the entrepreneurship rate and social mobility respond non–monotonically to a change in the tightness of financial constraints. The results crucially depend on the degree of income persistence and feedback effects in general equilibrium, where optimal firm sizes and the demand for credit are determined endogenously. |
| Keywords: | CGE, occupational choice, financial constraints, wealth distribution |
| JEL: | C68 D3 D8 D9 G0 J24 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:lue:wpaper:103&r=bec |
| By: | Christa Hainz (University of Munich); Laurent Weill (Laboratoire de Recherche en Gestion et Economie, Institut d'Etudes Politiques, Strasbourg); Christophe J. Godlewski (Laboratoire de Recherche en Gestion et Economie, Université Louis Paster) |
| Abstract: | We investigate the impact of bank competition on the use of collateral in loan contracts. We develop a theoretical model incorporating information asymmetries in a spatial competition framework where banks choose between screening the borrower and asking for collateral. We show that the presence of collateral is more likely when bank competition is low. We then test this prediction empirically on a sample of bank loans from 70 countries. We perform logit regressions of the presence of collateral on bank competition, measured by the Lerner index. Our empirical tests corroborate the theoretical predictions that bank competition reduces the presence of collateral. These findings survive several robustness checks. |
| Keywords: | Collateral, Bank Competition, Asymmetric information. |
| JEL: | G21 D43 D82 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:lar:wpaper:2008-19&r=bec |
| By: | André van Stel; Mickey Folkeringa; Kashifa Suddle; Sita Tan |
| Abstract: | Business dynamics in an industry is generally seen as an important indicator of the industry's level of competitiveness and economic performance. Two types of business dynamics may be distinguished: business dynamics reflecting competition by new-firm entries and business dynamics reflecting competition among incumbent firms. A growing literature pays attention to the important role of the former type of business dynamics (the starting up of new firms) for achieving economic growth. However, the latter type of business dynamics tends to be overlooked in this type of literature. In part this is due to the large requirements, both in terms of data and in terms of methodology, of measuring competition among incumbent firms. A sophisticated indicator for measuring the extent of business dynamics among incumbent firms in an industry is the mobility index. In the current paper we compute mobility indices for 16 industries -covering the whole private sector except for the primary sectors of economy- in the Netherlands over the period 2000-2006, and compare the values of the mobility indices across the sectors. |
| Date: | 2008–10–27 |
| URL: | http://d.repec.org/n?u=RePEc:eim:papers:h200816&r=bec |
| By: | Ilan Tojerow (DULBEA, Université libre de Bruxelles, Brussels.) |
| Abstract: | The main objective of this paper is to present new empirical elements to the debate on sources of wage differentials. We investigate issues specifically related to the role of employer’s characteristics in the wage setting process. Findings show that combined industry effects explain almost no share of the gender wage gap in Belgium. Our results also suggest that a substantial part of the gender wage gap is due to women’s segregation in less profitable firms. Finally, our results show that rent-sharing account for a large fraction of industry wage differentials. To gain an accurate perspective, theories on wages are described extensively |
| Keywords: | industry wage differentials, rent sharing, gender wage gap. |
| JEL: | J16 J31 J71 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:dul:wpaper:08-20rs&r=bec |
| By: | Claudio Campanale (Universidad de Alicante); Gian Luca Clementi (New York University); Rui Castro (Université de Montréal) |
| Abstract: | In this paper we provide a thorough characterization of the asset returns implied by a simple general equilibrium production economy with convex investment adjustment costs. When households have Epstein-Zin preferences, there exist plausible parametervalues such that the model generates unconditional mean risk--free rate and equity return, and volatility of consumption growth, which are in line with historical averages for the US economy. Consistently with the data, the model's implied price--dividendratio is pro-cyclical and stock returns are predictable (and increasingly so as the time horizon increases), while dividend growth is not. The model also implies realistic values for (i) the correlation of the risk--free rate with output growth and consumption growth and (ii) the correlation pattern between risk--free rate, equity return, and equity premium. The risk implied by the model is rather low. At the modal state of nature, an individual that expects to consume for 100,000 dollars a year faces a lottery over future consumption with a standard deviation of 55 dollars (per quarter). Her risk aversion is such that she's willing to pay 1 dollar (per quarter) in order to avoid that lottery. Very similar results can be obtained assuming that agents are disappointment averse in the sense of Gul (1991). With such risk preferences, the universality requirement is not a problem to the extent that it is in the case of expected utility. In fact, faced with a lottery that has a coefficient of variation 100 times as large as that implied by our model, a disappointment averse agent displays the same relative risk aversion as an expected utility agent with logarithmic utility! |
| Keywords: | Equity Premium, Business Cycle, Predictability, Disappointment Aversion. |
| JEL: | D81 E32 E43 E44 G12 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2008-14&r=bec |
| By: | Regula Geel (Institute for Strategy and Business Economics, University of Zurich); Johannes Mure (Institute for Strategy and Business Economics, University of Zurich); Uschi Backes-Gellner (Institute for Strategy and Business Economics, University of Zurich) |
| Abstract: | According to standard human capital theory firm financed training cannot be explained if skills are of general nature. Nevertheless, investments of firms into general training can be observed and there has been a large literature to explain this puzzle, mostly referring to imperfect labor market issues. In German speaking countries firms invest heavily into apprenticeship training although it is assumed to be general. In our paper, we study the question to what extent apprenticeship training is general at all. Our paper for the first time studies how specificity of training may be defined based on Lazear’s skill-weights approach. In our empirical part we use a unique German Qualification Survey, containing extensive information about the required skills at a workplace. We build occupationspecific skill-weights and find that the more specific the skill portfolio in an occupation is in comparison to the general labor market, the higher are the net costs firms have to bear for apprenticeship training in the respective occupations. At the same time, the more specific the skill requirements are in an occupation, the smaller is the probability of an occupational change during an employee’s entire career. Due to the new definition of occupational specificity, we thus find that apprenticeship training - formerly seen as general training - is very heterogeneous in its specificity. |
| Keywords: | Mobility, Skill-weights, Occupational specificity, Apprenticeship training |
| JEL: | J62 M53 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:iso:educat:0038&r=bec |
| By: | Oliver Holtemöller; Torsten Schmidt |
| Abstract: | In this paper, we estimate a small New Keynesian dynamic stochastic general equilibrium (DSGE) model for Germany for the period from 1975 to 1998 and use it to identify the structural shocks, which have driven the business cycle. For this purpose we apply indirect inference methods, that is we specify the parameters of the theoretical model such that simulated data mimics observed data as closely as possible. In addition to the identification of structural shocks, we uncover the unobservable output gap, which is a prominent indicator in business cycle analysis. Furthermore,we show to which extent each identified shock has contributed to the business cycle fluctuations. |
| Keywords: | Business cycle accounting, dynamic stochastic general equilibrium models, Germany, indirect inference, New Keynesian macroeconomics |
| JEL: | C32 C51 E32 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0068&r=bec |
| By: | Ronald Bachmann; Sebastian Braun |
| Abstract: | Using an administrative data set containing daily information on individual workers’ employment histories, we investigate how workers’ labour market transitions are affected by international outsourcing. In order to do so,we estimate hazard rate models for match separations, as well as for worker flows from employment to another job, to unemployment, and to nonparticipation. Outsourcing is found to have no significant impact on overall job stability in the manufacturing sector, but it is associated with increased job stability in the service sector. Furthermore, the effect of outsourcing varies strongly across skill levels and age groups.This is especially the case in the manufacturing sector, where the hazard of transiting to nonemployment rises with international outsourcing for medium-skilled and older workers. |
| Keywords: | Job stability, labour market transitions; worker flows, outsourcing,duration analysis |
| JEL: | F16 J63 J23 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0053&r=bec |
| By: | Hart, Robert A.; Devereux, Paul J. |
| Abstract: | In this paper, we compile a unique historical dataset that records strike activity in the British engineering industry from 1920 to 1970. These data have the advantage of containing a fairly homogenous set of companies and workers, covering a long period with varying labour market conditions, including information that enables the addition of union and company fixed effects, and providing geographical detail that allows a districtlevel analysis that controls for year and seasonal effects. We study the cyclicality of strike durations, strike incidence, and strike outcomes and distinguish between pay and non-pay strikes. Like the previous literature, we find evidence that strikes over pay have countercyclical durations. However, in the post-war period, the magnitude of this effect is much reduced when union and firm fixed effects are included. These findings suggest that it is important when studying strike durations to take account of differences in the composition of companies and unions that are involved in strikes at different points of the business cycle. We also find that strike outcomes tend to be more favourable to unions when the national unemployment rate is lower. |
| Keywords: | Outcome; Incidence; Duration; Cyclicality; Strikes |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:stl:stledp:2008-12&r=bec |
| By: | WAKASUGI Ryuhei; TODO Yasuyuki; SATO Hitoshi; NISHIOKA Shuichiro; MATSUURA Toshiyuki; ITO Banri; TANAKA Ayumu |
| Abstract: | Using firm-level data for the Japanese manufacturing sector, we examine characteristics of internationalized firms, i.e., firms engaging in export and/or foreign direct investment (FDI), and compare these characteristics with those for selected European countries. We find that internationalized firms are a few and that their productivity is higher than that of non-internationalized firms, confirming the findings of existing studies on Japan and other countries. In addition, we find that productivity differences between non- internationalized firms, exporters, and FDI firms are substantially smaller in Japan than in the European countries. This evidence suggests that productivity differences alone cannot determine export or FDI behavior of Japanese firms. |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:08036&r=bec |
| By: | Klaus Schaeck (Bangor Business School, Hen Goleg, College Road, Bangor, LL57 2DG, UK.); Martin ?ihák (International Monetary Fund, 700 19th Street N. W. Washington, D. C. 20431, USA.) |
| Abstract: | A growing body of literature indicates that competition increases bank soundness. Applying an industrial organization based approach to large data sets for European and U.S. banks, we offer new empirical evidence that efficiency plays a key role in the transmission from competition to soundness. We use a twopronged approach. First, we employ Granger causality tests to establish the link between competition and measures of profit efficiency in banking, and find that competition indeed increases bank efficiency. Second, building on these results, we examine the relation between the Boone indicator [Boone, J. (2001)Intensity of competition and the incentive to innovate. IJIO, Vol. 19, pp. 705-726], an innovative measure of competition that focuses on the impact of competition on performance of efficient banks, and relate this measure to bank soundness. We find evidence that competition robustly increases bank soundness, via the efficiency channel. JEL Classification: G21, G28, L11. |
| Keywords: | Bank competition, efficiency, soundness, market structure, regulation. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080932&r=bec |
| By: | Paola Conconi; Patrick Legros; Andrew F. Newman |
| Abstract: | We embed a simple incomplete-contracts model of organization design in a standard two-country perfectly-competitive trade model to examine how the liberalization of product and factor markets affects the ownership structure of firms. In our model, managers decide whether or not to integrate their firms, trading off the pecuniary benefits of coordinating production decisions with the private benefits of operating in their preferred ways. The price of output is a crucial determinant of this choice, since it affects the size of the pecuniary benefits. In particular, non-integration is chosen at “low” and “high” prices, while integration occurs at moderate prices. Organizational choices also depend on the terms of trade in supplier markets, which affect the division of surplus between managers. We obtain three main results. First, even when firms do not relocate across countries, the price changes triggered by liberalization of product markets can lead to significant organizational restructuring within countries. Second, the removal of barriers to factor mobility can lead to inefficient reorganization and adversely affect consumers. Third, “deep integration” — the liberalization of both product and factor markets — leads to the convergence of organizational design across countries. |
| Keywords: | Firms, Contracts, Globalization |
| JEL: | D23 F13 F23 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2008_025&r=bec |
| By: | Giessner, S.R.; Knippenberg, D.L. van; Sleebos, E. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | Leadership often serves as an explanatory category for performance outcomes (i.e., failure and success). This process can strengthen or weaken leadership effectiveness, because contingent on their performance leaders may gain or lose follower endorsement – the basis of leadership. Drawing on the social identity analysis of leadership, we hypothesized that leader group prototypicality and performance information interact to predict followers’ perceptions of leadership effectiveness. Because group prototypical leaders are more trusted by their followers, we hypothesized that group prototypical leaders are evaluated as more effective after failure information than non-prototypical leaders. In contrast, we predicted that both prototypical and non-prototypical leaders should receive similar evaluations of leadership effectiveness after success. We found support for our predictions in a scenario experiment, a cross-sectional field study, and a laboratory experiment. |
| Keywords: | leader prototypicality;leader performance;leadership effectiveness;trust in leadership |
| Date: | 2008–10–21 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:1765013626&r=bec |
| By: | Philip Bond; David K. Musto; Bilge Yilmaz |
| Abstract: | Regulators express growing concern over predatory loans, which we take to mean loans that borrowers should decline. Using a model of consumer credit in which such lending is possible, we identify the circumstances in which it arises both with and without competition. We find that predatory lending is associated with highly collateralized loans, inefficient refinancing of subprime loans, lending without due regard to ability to pay, prepayment penalties, balloon payments, and poorly informed borrowers. Under most circumstances competition among lenders attenuates predatory lending. We use our model to analyze the effects of legislative interventions. |
| Keywords: | Predatory lending |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:08-24&r=bec |
| By: | Carmen Fillat-Castejon (University of Zaragoza); Joseph Francis Francois (Department of Economics, Johannes Kepler University Linz, Austria); Julia Maria Woerz (Oesterreichische Nationalbank (National Bank of Austria), Foreign Research Division) |
| Abstract: | Working with a panel dataset of of OECD countries over the decade 1994-2004, we examine linkages between cross-border trade and FDI in the service sectors. We first develop a consistent analytical framework for the application of the gravity model jointly to services trade and commercial presence (i.e. FDI), using a composite model of delivery that offers testable hypotheses about the roles of different modes of services supply as complements or substitutes. We further link our estimates to policy variables measuring market regulations that may act directly or implicitly as barriers to trade. We find robust evidence of complementary effects in the short-run, which is reinforced in the long run by an increased potential for cross-border imports based on previous FDI inflows. A detailed analysis by individual service sectors highlights business, communication and financial services as showing the largest potential for cross-border trade when market regulations are reduced and when commercial presence increases. |
| Keywords: | FDI, imports, services, panel data, substitution and complementary effects. |
| JEL: | F10 F14 F21 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:jku:econwp:2008_12&r=bec |
| By: | Casey Mulligan; Luke Threinen |
| Abstract: | We model the panic of 2008 as part of the wealth and substitution effects deriving from a housing price crash that began in 2006. The dissipation of the wealth effect stimulates a reorganization of the banking industry and increases in employment, GDP, and unemployment. The release of resources from the housing sector lowers investment goods prices, and thereby devalues existing non-residential capital while stimulating non-residential investment. These predictions are compared with measured U.S. economic performance from 2006 to 2008 Q2. |
| JEL: | E20 E32 R21 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14446&r=bec |
| By: | Klaus Desmet (Universidad Carlos III); Stephen L. Parente (University of Illinois) |
| Abstract: | This paper proposes a novel mechanism whereby larger markets increase competition and facilitate process innovation. Larger markets, in the sense of more people or more open trade, support a larger variety of goods, resulting in a more crowded product space. This raises the price elasticity of demand and lowers mark-ups. Firms, therefore, become larger to break even. This facilitates process innovation as larger firms can amortize R&D costs over more goods. We demonstrate this mechanism in a standard model of process and product innovation. In doing so, we question some important results in the new trade and endogenous growth literatures. |
| Keywords: | trade; population; price elasticity; competition; innovation; firm-size; scale effects; Dixit-Stiglitz; Hotelling |
| JEL: | F12 L11 O31 |
| Date: | 2008–10–27 |
| URL: | http://d.repec.org/n?u=RePEc:imd:wpaper:wp2008-10&r=bec |