nep-bec New Economics Papers
on Business Economics
Issue of 2008‒12‒07
twenty papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Rent-Sharing and the Cyclicality of Wage Differentials By Du Caju, Philip; Rycx, Francois; Tojerow, Ilan
  2. The Return to Capital and the Business Cycle By Paul Gomme; B. Ravikumar; Peter Rupert
  3. Not So Lucky Any More: CEO Compensation in Financially Distressed Firms By Kang, Qiang; Mitnik, Oscar A.
  4. Higher Productivity in Importing German Manufacturing Firms: Self-Selection, Learning from Importing, or Both? By Vogel, Alexander; Wagner, Joachim
  5. Union Membership and Age: The Inverted U-Shape Hypothesis under Test By Schnabel, Claus; Wagner, Joachim
  6. The Impact of Firm’s R&D Strategy on Profit and Productivity By Johansson, Börje; Lööf, Hans
  7. How HRM control affects boundary-spanning employees’ behavioural strategies and satisfaction : The moderating impact of cultural performance orientation By Rouziès, Dominique; Onyemah, Vincent; Panagopoulos, Nikolaos
  8. Does the Growth Process Discriminate against Older Workers? By Langot, François; Moreno-Galbis, Eva
  9. Anti-Dumping Regulations: Anti-Competitive and Anti-Export By Collie, David R.; Le, Vo Phuong Mai
  10. Sectoral vs. aggregate shocks : a structural factor analysis of industrial production By Andrew T. Foerster; Pierre-Daniel G. Sarte; Mark W. Watson
  11. The U.S. Business Cycle, 1867-1995: Dynamic Factor Analysis vs. Reconstructed National Accounts By Albrecht Ritschl; Samad Sarferaz; Martin Uebele
  12. Repeated moral hazard with effort persistence By Arantxa Jarque
  13. Offshoring and the skill composition of employment in the Italian manufacturing industries By Anna M. Falzoni; Lucia Tajoli
  14. Opportunistic Discrimination By Rick Harbaugh; Ted To
  15. You Pay a Fee for Strong Beliefs: Homogeneity as a Driver of Corporate Governance Failure By Katja Rost; Margit Osterloh
  16. Firms formation and growth in the model with heterogeneous agents and monitoring By Peter Marko; Petr Svarc
  17. What drives U.S. current account fluctuations? By Alina Barnett; Roland Straub
  18. Does credit supply affect small-firm finance? By Tara Rice; Philip E. Strahan
  19. European vs. American Hours Worked: Assessing the Role of the Extensive and Intensive Margins By Langot, François; Quintero Rojas, Coralia
  20. A New Model of Wage Determination and Wage Inequality By Jasso, Guillermina

  1. By: Du Caju, Philip (National Bank of Belgium); Rycx, Francois (Free University of Brussels); Tojerow, Ilan (Free University of Brussels)
    Abstract: This paper investigates inter-industry wage differentials in Belgium, taking advantage of access to a unique matched employer-employee data set covering all the years from 1999 to 2005. Findings show the existence of large wage differentials among workers with the same observed characteristics and working conditions, employed in different sectors. These differentials are persistent and no particular downward or upward trend is observed. However, the dispersion of inter-industry wage differentials appears to show a cyclical pattern over time. Further results indicate that ceteris paribus, workers earn significantly higher wages when employed in more profitable firms. The time dimension of our matched employer-employee data allows us to instrument firms' profitability by its lagged value. The instrumented elasticity between wages and profits is found to be quite stable over time and varies between 0.034 and 0.043. It follows that Lester's range of pay due to rent sharing fluctuates between about 24 and 37 percent of the mean wage. This rent-sharing phenomenon accounts for a large fraction of the industry wage differentials. We find indeed that the magnitude, dispersion and significance of industry wage differentials decreases sharply when controlling for profits.
    Keywords: industry wage differentials, rent-sharing, matched employer-employee data
    JEL: D31 J31 J41
    Date: 2008–11
  2. By: Paul Gomme (Department of Economics, Concordia University); B. Ravikumar (Department of Economics, University of Iowa); Peter Rupert (Department of Economics, University of California, Santa Barbara)
    Abstract: We measure the return to capital directly from the NIPA and BEA data and examine the return implications of the real business cycle model. Specifically, we construct a quarterly time series of the after-tax return to business capital. The business cycle properties of this return differs considerably from those of the S&P 500 returns. First, its volatility is considerably smaller than that of S\&P 500 returns. Second, our measured return is procyclical and leads output by one quarter; S&P 500 returns are countercyclical and lead the cycle by four quarters. The standard business cycle model captures almost 50% of the volatility in the return to capital (relative to the volatility of output), and does well in capturing the lead-lag pattern. We consider several departures from the benchmark model; the model with stochastic taxes captures nearly 85% of the relative volatility in the return to capital and the model with high risk aversion captures 80% of the relative volatility. We then include capital gains in our measurement and use a model with investment specific technological change to address the higher volatility in the return to capital. This model accounts for more than 80% of the return volatility, and essentially all of the relative volatility.
    Keywords: return to capital, business cycles, asset returns
    JEL: E01 E32 E13
    Date: 2008–04
  3. By: Kang, Qiang (University of Miami); Mitnik, Oscar A. (University of Miami)
    Abstract: There is a debate on whether executive pay reflects rent extraction due to "managerial power" or is the result of arms-length bargaining in a principal-agent framework. In this paper we offer a test of the managerial power hypothesis by empirically examining the CEO compensation of U.S. public companies that were ever in financial distress between 1992 and 2005. Using a bias-corrected matching estimator that estimates the causal effects of financial distress, we find that, for the distressed firms, CEO turnover rates increase markedly and their CEOs, both incumbents and successors, experience significant reductions in total compensation. The bulk of the reduction in total compensation derives from the decline in value of stock option grants, which we argue is due to a change in the opportunistic timing of option grants. We define "lucky" grants as those with grant prices below or at the lowest stock price of the grant month, and we find that the proportion of lucky grants for financially distressed firms is higher before insolvency and lower upon and after insolvency, while the proportion for similar but solvent firms remains stable throughout the period. We interpret this evidence as consistent with a decrease in managerial power induced by a tightening in the "outrage" constraint due to the episode of financial distress.
    Keywords: CEO compensation, CEO turnover, financial distress, lucky grants, bias-corrected matching estimators
    JEL: G30 J33 M52
    Date: 2008–11
  4. By: Vogel, Alexander (University of Lüneburg); Wagner, Joachim (University of Lüneburg)
    Abstract: This paper uses a newly available comprehensive panel data set for manufacturing enterprises from 2001 to 2005 to document the first empirical results on the relationship between imports and productivity for Germany, a leading actor on the world market for goods. Furthermore, for the first time the direction of causality in this relationship is investigated systematically by testing for self-selection of more productive firms into importing, and for productivity-enhancing effects of imports ('learning-by-importing'). We find a positive link between importing and productivity. From an empirical model with fixed enterprise effects that controls for firm size, industry, and unobservable firm heterogeneity we see that the premia for trading internationally are about the same in West and East Germany. Compared to firms that do not trade at all two-way traders do have the highest premia, followed by firms that only export, while firms that only import have the smallest estimated premia. We find evidence for a positive impact of productivity on importing, pointing to self-selection of more productive enterprises into imports, but no evidence for positive effects of importing on productivity due to learning-by-importing.
    Keywords: imports, exports, productivity, enterprise panel data, Germany
    JEL: F14 D21
    Date: 2008–11
  5. By: Schnabel, Claus (University of Erlangen-Nuremberg); Wagner, Joachim (University of Lüneburg)
    Abstract: In this note we cast some doubt on the claim put forward by David Blanchflower (2007) that the probability of being unionized follows an inverted U-shaped pattern in age with a maximum in the mid- to late 40s. By using a special test for an inverted U-shaped pattern that has not been applied to the age-membership nexus before, and by constructing exact confidence intervals for the maximum value, we demonstrate that at least for West Germany Blanchflower's hypothesis does not hold. Our findings suggest that more definitive evidence is needed before the existence of international unionization-age patterns can be taken for granted.
    Keywords: unionization, age, inverted U-shape, Germany
    JEL: J51
    Date: 2008–11
  6. By: Johansson, Börje (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology); Lööf, Hans (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: This paper investigates how a firm’s R&D strategy influences the firm performance as measured by productivity and profitability. A formal production model is introduced to define and interpret alternative ways of measuring the impact of R&D. Studying 1,767 randomly selected firms from the Swedish manufacturing sector, the main findings are: (i) firms which apply persistent R&D perform better than firms with occasional as well as no R&D, (ii) occasional R&D is associated with lower performance than no R&D, and (iii) in quantile regressions the positive effect from R&D persistency is lacking for low productivity firms (lowest quartile) indicating a non-linear response. Moreover, the analysis recognises the different roles of ordinary and knowledge labour in production when specifying alternative performance measures and when identifying knowledge labour as a firm’s R&D capacity, which has a highly significant impact on firm performance. Introducing a formal production model in order to define and interpret alternative ways of measuring the impact of R&D, we apply simple ordinary OLS and quantile regressions on the economic model for analyzing the importance for a particular R&D strategy on firms’ productivity and profitability. To the best of our knowledge, we believe that the main findings of the analysis make contributions to the R&D literature.
    Keywords: R&D; productivity; profit; innovation; production analysis
    JEL: L19 O33
    Date: 2008–12–03
  7. By: Rouziès, Dominique; Onyemah, Vincent; Panagopoulos, Nikolaos
    Abstract: This study examines how cultural performance orientation moderates the influence of human resource management (HRM) controls on boundary-spanning employees’ behavioural strategies and satisfaction.
    Keywords: HRM control; national culture; performance orientation; boundary-spanning employees; salespeople
    JEL: O15
    Date: 2008–11–27
  8. By: Langot, François (University of Le Mans); Moreno-Galbis, Eva (University of Le Mans)
    Abstract: This paper seeks to gain insights on the relationship between growth and unemployment, when considering heterogeneous agents in terms of age. We introduce life cycle features in the endogenous job destruction framework à la Mortensen and Pissarides (1998). We show that, under the assumption of homogeneous productivity among workers, firms tend to fire older workers more often than young ones, when deciding whether to update or not a technology: there is an equilibrium where the creative destruction effect dominates over the capitalization effect for old workers, whereas the capitalization effect dominates for young workers. This discrimination against older workers can be moderated when we introduce heterogeneity (in terms of productivity) among workers. We also provide empirical support for these theoretical findings using OECD panel data and numerical simulations of the model.
    Keywords: TFP growth, unemployment by age, old workers' employment rate, capitalization, creative destruction effect
    JEL: J14 J24 J26 O33
    Date: 2008–11
  9. By: Collie, David R. (Cardiff Business School); Le, Vo Phuong Mai (Cardiff Business School)
    Abstract: In a Bertrand duopoly model, it is shown that an anti-dumping regulation can be strategically exploited by the domestic firm to reduce the degree of competition in the domestic market. The domestic firm commits not to export to the foreign market which gives the foreign firm a monopoly in its own market. As a result the foreign firm will increase its price allowing the domestic firm to increase its price and its profits. If the products are sufficiently close substitutes then the higher profits in the domestic market are large enough to compensate for the loss of profits on exports.
    Keywords: anti-dumping regulations; Bertrand oligopoly; strategic behaviour
    JEL: F13 L13
    Date: 2008–11
  10. By: Andrew T. Foerster; Pierre-Daniel G. Sarte; Mark W. Watson
    Abstract: This paper uses factor analytic methods to decompose industrial production (IP) into components arising from aggregate shocks and idiosyncratic sector-specific shocks. An approximate factor model finds that nearly all (90%) of the variability of quarterly growth rates in IP are associated with common factors. Because common factors may reflect sectoral shocks that have propagated by way of input-output linkages, we then use a multisector growth model to adjust for the effects of these linkages. In particular, we show that neoclassical multisector models, of the type first introduced by Long and Plosser (1983), produce an approximate factor model as a reduced form. A structural factor analysis then indicates that aggregate shocks continue to be the dominant source of variation in IP, but the importance of sectoral shocks more than doubles after the Great Moderation (to 30%). The increase in the relative importance of these shocks follows from a fall in the contribution of aggregate shocks to IP movements after 1984.
    Keywords: Econometric models ; Business cycles
    Date: 2008
  11. By: Albrecht Ritschl; Samad Sarferaz; Martin Uebele
    Abstract: This paper presents insights on U.S. business cycle volatility since 1867 de- rived from diffusion indices. We employ a Bayesian dynamic factor model to obtain aggregate and sectoral economic activity indices. We find a remarkable increase in volatility across World War I, which is reversed after World War II. While we can generate evidence of postwar moderation relative to pre-1914, this evidence is not robust to structural change, implemented by time-varying factor loadings. We do find evidence of moderation in the nominal series, however, and reproduce the standard result of moderation since the 1980s. Our estimates broadly confirm the NBER historical business cycle chronology as well the National Income and Product Accounts, except for World War II where they support alternative estimates of Kuznets (1952).
    Keywords: U.S. business cycle, volatility, dynamic factor analysis
    JEL: N11 N12 C43 E32
    Date: 2008–11
  12. By: Arantxa Jarque
    Abstract: I study a problem of repeated moral hazard in which the effect of effort is persistent over time: each period's outcome distribution is a function of a geometrically distributed lag of past efforts. I show that when the utility of the agent is linear in effort, a simple rearrangement of terms in his lifetime utility translates this problem into a related standard repeated moral hazard. The solutions for consumption in the two problems are observationally equivalent, implying that the main properties of the optimal contract remain unchanged with persistence. To illustrate, I present the computed solution of an example. ; See also: WP 07-07
    Keywords: Microeconomics ; Economics
    Date: 2008
  13. By: Anna M. Falzoni (Università degli Studi di Bergamo and CESPRI, Bocconi University, Milan - Italy); Lucia Tajoli (Politecnico di MIlano and CESPRI, Bocconi University, Milan -Italy)
    Abstract: In this paper, we assess the extent of offshoring in the Italian manufacturing industries, and we study how this phenomenon is affecting the skill composition of employment. Measuring offshoring using the import-use matrices of input-output tables, firstly we estimate the impact of offshoring on the general level of employment, and we don’t find any significant relationship. Then, we examine the relationship between offshoring and employment composition by skills. Our results show that the use of offshoring is not restricted to the search for cheaper unskilled labor, and its impact on the composition of employment seems to be quite different in different industry groups.
    Keywords: offshoring, employment, skills
    JEL: F14 F16 J23
    Date: 2008–07
  14. By: Rick Harbaugh (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Ted To (Bureau of Labor Statisics)
    Abstract: When can you cheat some people without damaging your reputation among others? In a trust game between a firm and a series of individuals from two groups of different sizes, the firm has more incentive to cheat minority individuals because trade with the minority is less frequent and the long-term benefits of a reputation for fairness toward the minority are correspondingly smaller. If the majority is sufficiently large it gains nothing from a solidarity strategy of punishing opportunism against the minority, so the firm can continue doing business with the majority even if it cheats the minority. When some firms have a preference-based bias against the minority, the interaction with reputation effects gives all firms a stronger incentive to cheat the minority, and discrimination is the unique equilibrium for firms of intermediate patience.
    Keywords: discrimination, trust, social capital, opportunism, reputation spillover
    JEL: J71 J24 D63 L14
    Date: 2008–11
  15. By: Katja Rost; Margit Osterloh
    Abstract: The financial crisis made apparent the fact that managers and the boards of banks had failed to see the implications of irrational behavior and had ignored the risk associated with group think. Taking data from Switzerland our study shows that there is an increasing homogeneity of management and board teams. Most committees mainly consist of males with a managerial background. We derive from the existing literature the hypotheses that in radically changing environments women and individuals without a managerial background are less affected by systematic forecasting errors. Using a dataset collected shortly before the peak of the financial crisis we demonstrate that the groups which are highly underrepresented in most boards and management teams were significantly more capable of giving correct forecasts than the groups generally best represented in boards and management teams. To mitigate corporate governance failures we argue that firms should use simple social mechanisms in order to increase the diversity of their management and board teams while at the same time avoiding the danger of time consuming team conflicts. They should therefore include criss-cross individuals, i.e. individuals with no clear-cut group affiliation such as males with a nonmanagerial background as well as women with a management-related background.
    Keywords: Board diversity; psychological economics; forecasting predictions; gender; expert knowledge; uncertainty
    Date: 2008–11
  16. By: Peter Marko (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Petr Svarc (Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic)
    Abstract: In this article we extend the agent-based model of firms’ formation and growth proposed in [4]. In [4] the firms‘ creation, expansion or contraction results from the interaction of heterogeneous utility maximizers. While the original model was able to replicate the power law distribution in the firms’ sizes agents in the model set their utility maximizing effort levels completely freely and undetected. This led to the emergence of free riding and influenced the overall dynamics of the model. Therefore we decided to extend the original model by introducing the monitoring which is seen in the economic literature, besides for example the proper incentive scheme ([18]), as a possible way how to make employees work harder. Our motivation is to compare the extended model with both to the original case without monitoring and empirical data about firms‘ sizes distribution.
    Keywords: monitoring, firms‘ size, power law, agent-based model, simulation,heterogeneous agents
    JEL: L11 C15 C16
    Date: 2008–11
  17. By: Alina Barnett (University of Warwick, Coventry CV4 7AL, UK.); Roland Straub (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We use a structural VAR with sign restrictions to jointly identify the impact of monetary policy, private absorption, technology and oil price shocks on current account fluctuations in the U.S.. We derive the sign restrictions from theoretical impulse response functions of a DSGE model with oil, ensuring that these are consistent with a broad range of parameter values. We find that a contractionary oil price shock has a negative effect on the current account which lasts for approximately 3 years. We also find that monetary policy shocks and private absorption shocks are the main drivers of historical current account deteriorations in the U.S. Furthermore, monetary policy shocks can explain approximately 60 percent at a one year forecast horizon, although this reduces to around 40 per cent at a 7 year horizon, whilst the oil price explains just under 10 percent of the forecast error variance of the U.S. current account. JEL Classification: E0, F32, F4.
    Keywords: Current Account, Global Imbalances, Sign Restrictions.
    Date: 2008–11
  18. By: Tara Rice; Philip E. Strahan
    Abstract: States were granted authority to limit interstate branching following passage of Federal legislation in 1994, relaxing restrictions on geographical expansion by banks. We show that differences in state’s branching restrictions affect credit supply. In states more open to branching, small firms borrow at interest rates 25 to 45 basis points lower than firms operating in less open states. Firms in open states also are more likely to borrow from banks. Despite this evidence that interstate branch openness expands credit supply, we find no effect of variation in state restrictions on branching on small-firm borrowing or other indicators of credit constraints.
    Date: 2008
  19. By: Langot, François (University of Le Mans); Quintero Rojas, Coralia (University of Le Mans)
    Abstract: Europeans have worked less than Americans since the 1970s. In this paper, we quantify the relative importance of the extensive and intensive margins of aggregate hours of market work on the observed differences. Our counterfactual exercises show that the two dimensions of the extensive margin, the employment rate and the participation rate, explain the most of the total-hours-gap between regions. Moreover, both ratios have similar weight. Conversely, the intensive margin, measured by the number of hours worked per employee, has the smallest role.
    Keywords: hours of market work, participation, employment, intensive and extensive margins
    JEL: E2 J2
    Date: 2008–11
  20. By: Jasso, Guillermina (New York University)
    Abstract: This paper proposes a new model of wage determination and wage inequality. In this model, wage-setters set workers' wages; they do so either directly, as when individuals vote in a salary committee, or indirectly, as when political parties, via the myriad of social, economic, fiscal, and other policies, generate wages. The recommendations made by wage-setters (or arising from their policies) form a distribution, and all the wage-setter-specific distributions are combined into a single final wage distribution. There may be any number of wage-setters; some wage-setters count more than others; and the wage-setters may differ among themselves on both the wage distribution and the amounts recommended for particular workers. We use probability theory to derive initial results, including both distribution-independent and distribution-specific results. Fortuitously, elements of the model correspond to basic democratic principles. Thus, the model yields implications for the effects of democracy on wage inequality. These include: (1) The effects of the number of wage-setters and their power depend on the configuration of agreements and disagreements; (2) Independence of mind reduces wage inequality, and dissent does so even more; (3) When leaders of democratic nations seek to forge an economic consensus, they are unwittingly inducing greater economic inequality; (4) Arguments for independent thinking will be more vigorous in small societies than in large societies; (5) Given a fixed distributional form for wages and two political parties which either ignore or oppose each other's distributional ideas, the closer the party split to 50-50, the lower the wage inequality; and (6) Under certain conditions the wage distribution within wage-setting context will be normal, but the normality will be obscured, as cross-context mixtures will display a wide variety of shapes.
    Keywords: wage-setter, power, consensus, independence of mind, dissent, form of government, probability distributions, shifted exponential distribution, shifted general Erlang distribution, shifted mirror-exponential distribution, Gini coefficient
    JEL: C02 C16 D31 D6 J31
    Date: 2008–11

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