nep-bec New Economics Papers
on Business Economics
Issue of 2008‒11‒25
nineteen papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Organizational capabilities and industry dynamics: a computational model. By Marco Corsino; Roberto Gabriele; Enrico Zaninotto
  2. Trade and mergers in the presence of firm heterogeneity By Noriaki Matsushima; Yasuhiro Sato; Kazuhiro Yamamoto
  3. Financial development, entrepreneurship, and job satisfaction By Milo Bianchi
  4. The Spirit of Capitalism and Expectation Driven Business Cycles By Lilia Karnizova
  5. Job Mobility and the Gender Wage Gap in Italy By Emilia Del Bono; Daniela Vuri
  6. Who Becomes an Entrepreneur? Labor Market Prospects and Occupational Choice By Poschke, Markus
  7. Determinants of Directors’ Pay in Switzerland: “Optimal-Contract” versus “Fat Cat” Explanation By Katja Rost; Margit Osterloh
  8. Double Sided Moral Hazard and Share Contracts in agriculture By Fernandez-Olmos, M.; Rosell-Martinez, J.; Espitia-Escuer, M.
  9. On the industry experience premium and labor mobility By Montserrat Vilalta-Bufi
  10. Entrepreneurship, Collective Entrepreneurship and the Producer-Owned Firm By Bijman, Jos; Doorneweert, Bart
  11. Employment Flows with Endogenous Financing Constraints By Shuyun May Li
  12. The effect of the great moderation on the U.S. business cycle in a time-varying multivariate trend-cycle model By Drew Creal; Siem Jan Koopman; Eric Zivot
  13. Internal Finance and Growth: Microeconometric Evidence on Chinese Firms By Guariglia, Alessandra; Liu, Xiaoxuan; Song, Lina
  14. Measuring Productivity Change without Neoclassical Assumptions: A Conceptual Analysis By Balk, B.M.
  15. Successive oligopolies and decreasing returns By GABSZEWICZ, Jean J.; ZANAJ, Skerdilajda
  16. Cost of capital adjusted for governance risk through a multiplicative model of expected returns By Rodolfo Apreda
  17. Learning-by-Doing and Productivity Dynamics in Manufacturing Industries By Andrew Clarke
  18. Cournot Duopoly when the Competitors Operate Multiple Production Plants By Fabio Tramontana; Laura Gardini; Tönu Puu
  19. Efficiency gains and mergers By DE FEO, Giuseppe

  1. By: Marco Corsino; Roberto Gabriele; Enrico Zaninotto (DISA, Faculty of Economics, Trento University)
    Abstract: In this paper we propose a model of bounded rational organizations that addresses the role of organizational capabilities in shaping firm size, growth rates and profitability. Our approach aims at reconciling the logic behind stochastic models of firm growth with the notion of organizational capabilities as drivers of economic performance. We extend the stochastic framework by incorporating behavioural assumptions on: (a) the interactions between the firm and the business environment; and (b) the mechanism by which firms sense and seize business opportunities. In our perspective, the degree of concurrence between the substance and organization of the firm and the context in which it operates will directly influence its profitability and indirectly (through costly mutations of the organizational structure) drive its growth. Despite its simple nature the model is able to capture well known regularities about industry dynamics. It generates firm size distributions that are skewed and heterogeneous across different scenarios. Moreover, our results suggest that the higher the selective power of the firm's organizational capabilities, the more the steady state distribution deviates from a log normal. Besides, the distribution of growth rates has a tent-shaped form which is consistent with the pattern described in empirical studies. The distribution of opportunities per firm is also skewed suggesting that a very few entities account for a large fraction of business opportunities arising throughout the simulation period. Finally, the interaction between the external environment and the internal structure of the firms also influences the heterogeneity in the value of the opportunities they capture.
    Keywords: organizational capabilities; firm size distribution; growth rates; simulation model
    Date: 2008–11
  2. By: Noriaki Matsushima (Kobe University); Yasuhiro Sato (Osaka University); Kazuhiro Yamamoto (Osaka University)
    Abstract: We investigate the role of firm heterogeneity in considering profitability and desirability of mergers in the international economy. Analysis shows that higher trade costs make only crossborder mergers profitable whereas larger firm heterogeneity is likely to increase both domestic and cross-border mergers. Furthermore, it is shown that whether or not a merger leads to merger waves depends on the types of firms involved in it. It is also demonstrated that larger firm heterogeneity can reduce the discrepancy between profitability and desirability of mergers when the trade cost is sufficiently low.
    Keywords: M&As, trade, firm heterogeneity, Cournot competition
    JEL: F12 G34 L13
    Date: 2008–11
  3. By: Milo Bianchi
    Abstract: This paper explores both theoretically and empirically the relation between financial development and occupational choices, as determined by utility differences between the self-employed and employees. In our model, financial constraints may impede firms' creation and depress labor demand, thereby pushing some individuals into self-employment by lack of salaried jobs. When these constraints are relaxed, instead, more individuals choose self-employment because of their talent. In more financially developed countries, then, the self-employed are more satisfied with their job, even if competition is higher and profits may be lower. Our empirical results support these predictions by showing that greater financial development increases job satisfaction for the self-employed, despite reducing their profits, as it allows them to enjoy greater non-monetary benefits, and in particular higher independence in their job.
    Date: 2008
  4. By: Lilia Karnizova (Department of Economics, University of Ottawa)
    Abstract: While news shocks are believed to be instrumental in explaining business cycles, many existing models fail to predict an economic boom in consumption, investment, employment, output and the stock market in response to good news about future productivity. This paper proposes and evaluates a model with the intrinsic desire for wealth accumulation, or ‘the spirit of capitalism’ hypothesis, which generates the aforementioned responses. Restrictions for the existence of expectation driven business cycles are derived analytically. The restrictions are confirmed by an estimated version of the model. The proposed preference specification is supported with additional empirical evidence.
    Keywords: Spirit of Capitalism; News Shocks; Business Cycles
    JEL: E32
    Date: 2008
  5. By: Emilia Del Bono (Institute for Social & Economic Research (ISER)); Daniela Vuri (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: This paper investigates the way in which job mobility contributes to the emergence of a gender wage gap in the Italian labour market. We show that men experience higher wage growth than women during the first 10 years of their career, and that this difference is particularly large when workers move across firms. This gender mobility penalty is robust to the inclusion of individual, job and firm characteristics, to different ways of accounting for individual unobserved heterogeneity, and is mainly found for voluntary job moves. Exploring the wage growth of job movers, we find that a significant gender wage penalty emerges when workers move to larger firms. This might be explained by the fact that bigger establishments offer jobs more highly valued by women than men or that the relationship between job satisfaction and firm size is less negative for women than men. Using data on job satisfaction, we find evidence for the latter hypothesis as well as some indication that wages and fringe benefits compensate for lower levels of job satisfaction in larger firms, but that this is so only for men.
    Keywords: panel data, job mobility, gender gap, wage growth, job satisfaction
    JEL: C23 J62 J16 J31 J28
    Date: 2008–11–06
  6. By: Poschke, Markus (McGill University)
    Abstract: Why do some people become entrepreneurs (and others don't)? Why are firms so heterogeneous, and many firms so small? To start, the paper briefly documents evidence from the empirical literature that the relationship between entrepreneurship and education is U-shaped, that many entrepreneurs start a firm "out of necessity", that most firms are small, remain so, yet persist in the market, and that returns to entrepreneurship have a much larger cross-sectional variance than returns to wage work. Popular models of firm heterogeneity cannot easily account for the U-shape or for the persistence of low-productivity firms. The paper shows that these facts can be explained in a model of occupational choice between wage work and entrepreneurship where agents are heterogeneous in their ability as workers, and starting entrepreneurs face uncertainty about their project's productivity. Then, if agents' expected productivity as entrepreneurs is increasing and not too concave in their ability as workers, the most and the least able individuals choose to become entrepreneurs. This sorting is due to heterogeneous outside options in the labor market. Because of their low opportunity cost, low-ability agents benefit disproportionately from the ability to pursue only good business projects and abandon low-productivity ones. This also makes them more likely to immediately abandon a project for a new one. Data from the NLSY79 gives support to these two predictions. Individuals with relatively high or low wages when employed, or with a high or low degree, are more likely to be entrepreneurs or to become entrepreneurs, and spend more time in entrepreneurship. Among entrepreneurs, more of the firms run by individuals with low wages when employed, or with a low degree, are abandoned after only a year.
    Keywords: occupational choice, entrepreneurship, firm entry, selection, search
    JEL: E20 J23 L11 L16
    Date: 2008–11
  7. By: Katja Rost; Margit Osterloh
    Abstract: Director compensation has become a fashionable topic: Cross-nationally, the earnings of executives and non-executive directors have risen significantly in recent years. Academic literature offers two hypotheses for this trend, a “fat cat” and an “optimal-contract” explanation. Proponents of the “fat cat” explanation state that directors are paid too much due to their unjustified power. Proponents of the “optimalcontract” hypothesis state that competition in the managerial labour market establishes an optimal compensation contract. This study contrasts both hypotheses and presents evidence that the level of directors’ pay in Swiss corporations is to be explained by “optimal contracts” and by managerial power. We give evidence to which degree the two explanations are valid.
    Keywords: director compensation; corporate governance; “optimal-contracts”; “fat cat” explanation
    Date: 2008–11
  8. By: Fernandez-Olmos, M.; Rosell-Martinez, J.; Espitia-Escuer, M.
    Abstract: This paper develops a double-sided moral hazard model of share contract in agriculture, with imperfect quality measurement by the agent and the principal, who contribute to the final good quality in terms of production effort and marketing effort respectively. Using this model, we analyse the implications of the share contract for quantity and quality, often ignored in previous analysis. With the help of a simulation exercise, we prove that the outcome-conditioned share generally weakens the agent´s incentive to make effort in quality input. This finding could explain the contractual evidence in some differentiated markets such as the wine market, where bottle-price conditioned contracts are rarely used.
    Keywords: share-contract, double moral-hazard, quality, Farm Management,
    Date: 2008
  9. By: Montserrat Vilalta-Bufi (Universitat de Barcelona)
    Abstract: There is evidence that experience premium differs across industries. We propose a theoretical model for explaining these differences. We assume that labor mobility brings external knowledge to the firm, which increases its productivity. We find that industry experience premium is decreasing in the inter-firm mobility costs, while increasing in the learning-by-doing and the technological level of the industry. Moreover, it has a U-shape relationship with the level of learning-by-hiring, the substitutability between different types of experienced workers and the variety of knowledge in the industry. Results are consistent with the empirical findings that R&D-intensive industries have steeper wage profiles.
    Keywords: wage growth, labor mobility, learning-by-hiring, industry experience premium
    JEL: J61 J24 J30
    Date: 2008
  10. By: Bijman, Jos; Doorneweert, Bart
    Abstract: Entrepreneurship is predominantly associated with the activities of an individual actor €Ӡ the entrepreneur. It has also been related to the concept of firm ownership (e.g. Foss and Klein, 2005). This may lead to the conjecture that a collectively-owned firm is a setting for collective entrepreneurship. However, such reasoning encounters a number of taxing questions. If entrepreneurship is usually related to the individual, how does the collective embody entrepreneurial spirit and lead to effective outcomes? These and other questions will be addressed in this paper, which is mainly based on a review of the literature. The paper starts by providing an overview of the different schools of (economic) thought on entrepreneurship. Subsequently we discuss the implications for the conceptualization of entrepreneurship when it is not carried out by an individual but by a group of people. Finally, the notion of collective entrepreneurship will be framed within the context of the producer-owned firm in agriculture, by considering conditions under which collective entrepreneurship can be attributed to the cooperative.
    Keywords: entreprepreneurship, cooperative, pro, Agribusiness, Industrial Organization,
    Date: 2008
  11. By: Shuyun May Li
    Abstract: Empirical studies document that resource reallocation across production units plays an important role in accounting for aggregate productivity growth in the U.S. manufacturing. Distortions in financial market could hinder the reallocation process and hencemay adversely affect aggregate productivity growth. This paper studies the quantitative impact of costly external finance on aggregate productivity through resource reallocation across firms with idiosyncratic productivity shocks. A partial equilibrium model calibrated to the U.S. manufacturing data shows that costly external finance causes inefficient output reallocation from high productivity firms to low productivity firms and as a result leads to a 1 percent loss in aggregate TFP.
    Keywords: Costly external Finance; Reallocation; Output weighted aggregate productivity
    Date: 2008
  12. By: Drew Creal (Department of Econometrics, Vrije Universiteit Amsterdam); Siem Jan Koopman (Department of Econometrics, Vrije Universiteit Amsterdam); Eric Zivot (University of Washington)
    Abstract: In this paper we investigate whether the dynamic properties of the U.S. business cycle have changed in the last fifty years. For this purpose we develop a flexible business cycle indicator that is constructed from a moderate set of macroeconomic time series. The coincident economic indicator is based on a multivariate trend-cycle decomposition model that accounts for time variation in macroeconomic volatility, known as the great moderation. In particular, we consider an unobserved components time series model with a common cycle that is shared across different time series but adjusted for phase shift and amplitude. The extracted cycle can be interpreted as the result of a model-based bandpass filter and is designed to emphasize the business cycle frequencies that are of interest to applied researchers and policymakers. Stochastic volatility processes and mixture distributions for the irregular components and the common cycle disturbances enable us to account for all the heteroskedasticity present in the data. The empirical results are based on a Bayesian analysis and show that time-varying volatility is only present in the a selection of idiosyncratic components while the coefficients driving the dynamic properties of the business cycle indicator have been stable over time in the last fifty years.
    Date: 2008–08
  13. By: Guariglia, Alessandra (University of Nottingham); Liu, Xiaoxuan (Chinese Academy of Social Sciences); Song, Lina (University of Nottingham)
    Abstract: Does the availability of internal finance constrain firm growth? Or does it foster it? To answer these questions, we use a panel of 407,096 Chinese firms over the period 2000−2005. We estimate dynamic assets growth equations augmented with cash flow, and find that the growth of state owned enterprises is not affected by cash flow, while that of privately owned firms is most affected. Considering that they represent 62% of the observations in our sample and that, in spite of being typically discriminated against by financial institutions, private firms have experienced sensational growth rates, our results suggest that internal finance has fostered rather than constrained their growth.
    Keywords: assets growth, cash flow, financial constraints
    JEL: D92
    Date: 2008–10
  14. By: Balk, B.M. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: The measurement of productivity change (or difference) is usually based on models that make use of strong assumptions such as competitive behaviour and constant returns to scale. This survey discusses the basics of productivity measurement and shows that one can dispense with most if not all of the usual, neoclassical assumptions. By virtue of its structural features, the measurement model is applicable to individual establishments and aggregates such as industries, sectors, or economies.
    Keywords: producer;profit;profitability;productivity;decomposition;capital;index number theory
    Date: 2008–11–17
  15. By: GABSZEWICZ, Jean J. (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)); ZANAJ, Skerdilajda
    Abstract: In this paper, we propose an example of successive oligopolies where the downstream firms share the same decreasing returns technology of the Cobb-Douglas type. We stress the differences between the conclusions obtained under this assumption and those resulting from the traditional example considered in the literature, namely, a constant returns technology.
    Keywords: successive oligopolies, vertical integration, technology.
    JEL: D43 L1 L22 L42
    Date: 2008–08
  16. By: Rodolfo Apreda
    Abstract: This paper sets forth another contribution to the long standing debate over cost of capital, firstly by introducing a multiplicative model that translates the inner structure of the weighted average cost of capital rate and, secondly, adjusting such rate for governance risk. The conventional wisdom states that the cost of capital may be figured out by means of a weighted average of debt and capital. But this is a linear approximation only, which may bring about miscalculations, whereas the multiplicative model not only takes account of that linear approximation but also the joint outcome of expected costs of debt and stock, and their proportions in the capital structure. And finally, we factor into the cost of capital expression a rate of governance risk.
    Keywords: cost of capital; governance risk; weighted average cost of capital; governance index; multiplicative model of returns
    JEL: G30 G32 G34
    Date: 2008–11
  17. By: Andrew Clarke
    Abstract: This paper estimates a structural model of learning-by-doing. Treating production experience as a state variable, this paper provides estimates of the structural parameters obtained from the first order conditions arising from the plant’s maximization problem. Estimates are provided using data on 4-digit manufacturing industries and plant-level observations. Using aggregate industry data, the results indicate that estimated learning rates might be considerably lower than previous estimates. The results also reveal considerable variation in estimated learning rates, across broad industry groups, at both the plant-level and the 4-digit industry level. This implies that using results from existing studies that focus upon specific, narrowly defined industries or firms, may lead to misleading conclusions concerning the widespread importance of learning-by-doing for generating productivity dynamics within the manufacturing industry
    Keywords: Production Experience; Learning-by-Doing; Structural Estimation
    JEL: C13 D21 L23 L60
    Date: 2008
  18. By: Fabio Tramontana (Università Politecnica delle Marche & Dipartimento di Economia e Metodi Quantitativi, Università di Urbino); Laura Gardini (Dipartimento di Economia e Metodi Quantitativi, Università di Urbino (Italy)); Tönu Puu (CERUM, Umeå University, SE-90187 Umeå, Sweden)
    Abstract: This article considers a Cournot duopoly under an isoelastic demand function and cost functions with built-in capacity limits. The special feature is that each fi…rm is assumed to operate multiple plants, which can be run alone or in combination. Each …firm has two plants with different capacity limits, so each has three cost options, the third being to run both plants, dividing the load according to the principle of equal marginal costs. As a consequence, the marginal costs functions come in three disjoint pieces, so the reaction functions, derived on basis of global pro…fit maximization, may also consist of disjoint pieces. This is reflected in a particular bifurcation structure, due to border collision bifurcations, and to particular basin boundaries, related to the discontinuities. It is shown that stable cycles may coexist, and the non-existence of unstable cycles constitutes a new property. We also compare the coexistent short periodic solutions in terms of the resulting real pro…fits.
    Keywords: Cournot duopoly, isoelastic demand function, cost functions with built-in capacity limits, bifurcation structure.
    JEL: C15 C62 D24 D43
    Date: 2008
  19. By: DE FEO, Giuseppe (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))
    Abstract: In the theoretical literature, strong arguments have been provided in support of the efficiency defense in antitrust merger policy. One of the most often cited results is due to Williamson (1968) that shows how relatively small reduction in cost could offset the deadweight loss of a large price increase. Furthermore, Salant et al. (1983) demonstrate that (not for monopoly) mergers are unprofitable absent efficiency gains. The general result, drawn in a Cournot framework by Farrell and Shapiro (1990), is that (not too large) mergers that are profitable are always welfare improving. In the present work we challenge the conclusions of this literature in two aspects. First, we show that Williamson's results underestimate the welfare loss due to a price increase and overestimate the effect of efficiency gains. Then, we prove that the conditions for welfare improving mergers defined by Farrell and Shapiro (1990) hold true only when consumers are adversely affected. This seems an argument to disregard their policy prescriptions when antitrust authorities are more "consumers-oriented". In this respect, we provide a necessary and sufficient condition for a consumer surplus improving merger: in a two firm merger, efficiency gains must be larger than the pre-merger average markup.
    Keywords: mergers, efficiency gains, Cournot oligopoly.
    JEL: D43 L11 L22
    Date: 2008–01

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