nep-bec New Economics Papers
on Business Economics
Issue of 2008‒12‒14
seventeen papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. What Drives the Productive Efficiency of a Firm? The Importance of Industry,Location, R&D, and Size By Stephan, Andreas; Badunenko, Oleg; Fritsch, Michael
  2. Bank competition and collateral: theory and evidence By Hainz , Christa; Weill , Laurent; Godlewski, Christophe
  3. Capital Structure, Corporate Taxation and Firm Age By Michael Pfaffermayr; Matthias Stöckl; Hannes Winner
  4. Inventories, liquidity, and the macroeconomy By Yi Wen
  5. Business Cycle in the euro Area By Domenico Giannone; Michele Lenza; Lucrezia Reichlin
  6. Successive oligopolies and decreasing returns By Jean J., GABSZEWICZ; Skerdilajda, ZANAJ
  7. Did Mergers Help Japanese Mega-Banks Avoid Failure? Analysis of the Distance to Default of Banks By Kimie Harada; Takatoshi Ito
  8. US Volatility Cycles of Output and Inflation, 1919-2004: A Money and Banking Approach to a Puzzle By Benk, Szilárd; Gillman, Max; Kejak, Michal
  9. An Analysis of the Effects of the Severance Payment Reform on Credit to Italian SMEs By Riccardo Calcagno; Roman Kraeussl; Chiara Monticone
  10. Escalation of Commitment in Investment Decisions: The Role of Emotions under Uncertainty By Brundin, Ethel; Gustavsson, Veronica
  11. Financial Crash, Commodity Prices and Global Imbalances By Ricardo J. Caballero; Emmanuel Farhi; Pierre-Olivier Gourinchas
  12. Market Price Mechanisms and Stackelberg General Equilibria By Ludovic A. Julien; Fabrice Tricou
  13. Physical Capital, Knowledge Capital and the Choice Between FDI and Outsourcing By Yongmin Chen; Ignatius J. Horstmann; James R. Markusen
  14. Mispricing of S&P 500 Index Options By George M. Constantinides; Jens Carsten Jackwerth; Stylianos Perrakis
  15. Institutional features of wage bargaining in 23 European countries, the US and Japan. By Philip Du Caju; Erwan Gautier; Daphne Momferatou; Melanie Ward-Warmedinger
  16. Existence Advertising, Price Competition, and Asymmetric Market Structure By Curtis B. Eaton; Ian A. MacDonald; Laura Meriluoto
  17. Testing the Optimality of Aggregate Consumption Decisions: Is there Rule-of-Thumb Behavior? By Gomes, Fábio Augusto Reis; Issler, João Victor

  1. By: Stephan, Andreas (Jönköping International Business School); Badunenko, Oleg (German Institute for Economic Research, DIW Berlin); Fritsch, Michael (Friedrich Schiller University Jena)
    Abstract: This paper investigates the factors that explain the level and dynamics of productive efficiency of a manufacturing firm. In our empirical analysis, we use a unique sample of about 39,000 firms in 256 industries from the German Cost Structure Census over the years 1992–2005. We estimate the efficiencies of the firms and relate them to firm-specific and environmental factors. <p> We find that (1) about half of the model’s explanatory power is due to industry effects, (2) that firm size accounts for another twenty percent, and (3) that the headquarters’ location explains approximately fifteen percent. <p> Interestingly, most other firm characteristics such as R&D intensity, outsourcing activities or the number of owners have an extremely small explanatory power. Surprisingly, our findings suggest that higher R&D intensity is associated with being less efficient, though higher R&D spending increases a firm’s efficiency over time.
    Keywords: Frontier analysis; determinants of efficiency; firm performance; industry effects; regional effects; firm size
    JEL: D24 L10 L25
    Date: 2008–03–25
  2. By: Hainz , Christa (University of Munich); Weill , Laurent (Université Robert Schuman, Strasbourg); Godlewski, Christophe (University of Strasbourg)
    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 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 estimate logit models where the presence of collateral is regressed on bank competition, measured by the Lerner index. Our empirical tests corroborate the theoretical predictions that bank competition reduces the use of collateral. These findings survive several robustness checks.
    Keywords: collateral; bank competition; asymmetric information
    JEL: D43 D82 G21
    Date: 2008–12–02
  3. By: Michael Pfaffermayr (University of Innsbruck; Austrian Institute of Economic Research (WIFO), CESifo and ifo-Institute); Matthias Stöckl (University of Innsbruck); Hannes Winner (University of Innsbruck)
    Abstract: This paper analyzes the relationship between corporate taxation, firm age and debt. We adapt a standard model of capital structure choice under corporate taxation, focusing on the financing and investment decisions a firm is typically faced with. Our model suggests that the debt ratio is positively associated with the corporate tax rate, and negatively with firm age. Further, we predict that the tax-induced advantage of debt is more important for older than for younger firms. To test these hypotheses empirically, we use a cross-section of 405,000 firms from 35 European countries and 126 NACE 3-digit industries. In line with previous research, we find that a firm's debt ratio increases with the corporate tax rate. Further, we observe that older rms exhibit smaller debt ratios than their younger counterparts. Finally, consistent with our theoretical model, we find a positive interaction between corporate taxation and firm age, indicating that the impact of corporate taxation on debt is increasing over a firm's life-time.
    Keywords: Corporate taxation; Capital structure; Firm age
    JEL: H20 H32 G32 C31
    Date: 2008
  4. By: Yi Wen
    Abstract: It is widely believed in the literature that inventory fluctuations are destabilizing to the economy. This paper re-assesses this view by developing an analytically-tractable general-equilibrium model of inventory dynamics based on a precautionary stockout-avoidance motive. The model's predictions are broadly consistent with the U.S. business cycle and key features of inventory behavior, including (i) a large inventory stock-to-sales ratio and a small inventory investment-to-sales ratio in the long run, (ii) excess volatility of production relative to sales, (iii) procyclical inventory investment but countercyclical stock-to-sales ratio over the business cycle, and (iv) more volatile input inventories than output inventories. However, contrary to common beliefs, the model predicts that inventories are stabilizing, rather than destabilizing. The volatility of aggregate output could rise by 30% if inventories were eliminated from the economy. Key to this seemingly counter-intuitive result is that a stockout-avoidance motive leads to procyclical liquidity-value of inventories (hence, procyclical relative prices of final goods), which acts as an automatic stabilizer that discourages final sales in a boom and encourages final sales during a recession, thereby reducing the variability of GDP.
    Keywords: Inventories ; Liquidity (Economics) ; Business cycles
    Date: 2008
  5. By: Domenico Giannone; Michele Lenza; Lucrezia Reichlin
    Abstract: This paper shows that the EMU has not affected historical characteristics of member countries’ business cycles and their cross-correlations. Member countries which had similar levels of GDP percapita in the seventies have also experienced similar business cycles since then and no significant change associated with the EMU can be detected. For the other countries, volatility has been historically higher and this has not changed in the last ten years. We also find that the aggregate euro area per-capita GDP growth since 1999 has been lower than what could have been predicted on the basis of historical experience and US observed developments. The gap between US and euro area GDP per capita level has been 30% on average since 1970 and there is no sign of catching up or of further widening.
    Keywords: Euro area, International Business Cycle, European monetary union, European integration
    JEL: E32 C5 F2 F43
    Date: 2008
  6. By: Jean J., GABSZEWICZ; Skerdilajda, ZANAJ (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE))
    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: 2008–12–02
  7. By: Kimie Harada; Takatoshi Ito
    Abstract: In the late 1990s, several large Japanese banks failed for the first time in its postwar history. As the financial environment was deteriorating further, several remaining banks decided to merge among themselves, presumably, to make their operations more efficient to avoid failures. This paper defines, calculates and analyzes the distance to default (DD), a concept of credit risk in corporate finance, of Japanese large banks. The DD helps us to answer a question whether mergers in the late 1990s and 2000s made the merged banks financially more robust as intended. The novelty of the paper is to develop a method of analyzing the DD for banks that experience a merger, and to apply the method to the Japanese banking data. Our findings include: (1) A merged bank fundamentally inherits financial soundness of pre-merged banks, without adding special value from the merger. A merger of sound (unsound) banks produced a sound (unsound, respectively) merged financial institution; and (2) In some cases, a merged bank experienced a negative DD right after the merger. The findings are consistent with a view that a primary objective of a merger was to take advantage of the perceived too-big-to-fail policy, rather than to pursue a radical reform. Another interpretation is that mergers with intention of enhancing efficiency resulted in failed implementation of true operational efficiency, such as quick integration of computer operation systems and elimination of duplicating branches.
    JEL: G19 G21
    Date: 2008–12
  8. By: Benk, Szilárd; Gillman, Max (Cardiff Business School); Kejak, Michal
    Abstract: The post-1983 moderation coincided with an ahistorical divergence in the money aggregate growth and velocity volatilities away from the downward trending GDP and inflation volatilities. Using an endogenous growth monetary DSGE model, with micro-based banking production, enables a contrasting characterization of the two great volatility cycles over the historical period of 1919-2004, and enables this puzzle to be addressed more easily. The volatility divergence is explained by the upswing in the credit volatility that kept money supply variability from translating into inflation and GDP volatility.
    Keywords: Volatility; money and credit shocks; growth; inflation
    JEL: E13 E32 E44
    Date: 2008–11
  9. By: Riccardo Calcagno (VU University Amsterdam); Roman Kraeussl (VU University Amsterdam); Chiara Monticone (University of Torino)
    Abstract: We study the effects of the reform of the system of severance payments (TFR) of Italian employees on the cost and the access to credit for small and medium-size enterprises (SMEs). The most direct consequence of the reform is to reduce in the long run the amount of liquid assets available to Italian firms. We argue that this reform, implemented in July 2007, will reduce the aggregate investment by SMEs in a more than proportional way, since it will restrict the access to credit for some of them (Holmstrom and Tirole, 1997). However, we also predict that the reform will not increase the cost of intermediated finance, coeteris paribus. In order to assess the effects of the reform on the investment of SMEs and on the cost of bank loans, we also estimate the future outflows of TFR funds due to the reform.
    Keywords: severance indemnities; moral hazard; credit constraints; SMEs
    JEL: G31 G32 G38
    Date: 2008–11–06
  10. By: Brundin, Ethel (Jönköping International Business School); Gustavsson, Veronica (Jönköping International Business School)
    Abstract: The purpose of this study is to better understand whether emotional aspects affect entrepreneurs’ and owner-managers’ decisions in investment situations when escalation of commitment can be observed and where the level of uncertainty was also added to the emotional aspect. The study was performed using conjoint analysis (a.k.a stated preference technique) and yielded following results: positive emotions (self-confidence, challenge, and hope) increase the decision-maker’s propensity to escalate commitment. Negative emotions (embarrassment and strain) do not, on the other hand, make the entrepreneur prone to escalate. The result remains the same for all positive emotions where an increasing level of uncertainty tends to make the entrepreneur more prone to escalate. Strain and embarrassment, under high uncertainty, decrease the tendency to escalate. All results are significant except for frustration that does not show any significant relationship. The combination of cognitive decision theories and emotional theories enhances our knowledge about the emotive side of entrepreneurs’ motives to escalate. The results also enable us to supplement and refine existing theories on self-justification.
    Keywords: Emotions; Escalation of commitment; Uncertainty; Entrepreneurs
    JEL: M19
    Date: 2008–12–05
  11. By: Ricardo J. Caballero; Emmanuel Farhi; Pierre-Olivier Gourinchas
    Abstract: In this paper we argue that the persistent global imbalances, the subprime crisis, and the volatile oil and asset prices that followed it, are tightly interconnected. They all stem from a global environment where sound and liquid financial assets are in scarce supply.
    JEL: F3
    Date: 2008–12
  12. By: Ludovic A. Julien; Fabrice Tricou
    Abstract: This paper considers Stackelberg competition in a general equilibrium framework with production. The working of market power and the confi…gurations of strategic interactions are complexi…ed by the presence of an active leader. Two market price mechanisms are here studied: one is associated with the Stackelberg-Walras equilibrium, the other is linked to the Stackelberg-Cournot equilibrium. In the context of an exchange economy with a production sector, several results are obtained about equilibria mergings and about welfare comparisons.
    Date: 2008
  13. By: Yongmin Chen; Ignatius J. Horstmann; James R. Markusen
    Abstract: There exist two approaches in the literature concerning the multinational firm's mode choice for foreign production between an owned subsidiary and a licensing contract. One approach considers environments where the firm is transferring primarily knowledge-based assets. An important assumption there is that the relevant knowledge is absorbed by the local manager or licensee over the course of time: knowledge is non-excludable. More recently, a number of influential papers have adopted a property-right view of the firm, assuming the application abroad of physical capital, the owner of which retains full and exclusive rights to the capital should a relationship break down. In this paper we combine both forms of capital assets in a single model. The model predicts that foreign direct investment (owned subsidiaries) is more likely than licensing when the ratio of knowledge capital to physical capital is high, or when market value is high relative to the book value of capital (high Tobin's-Q).
    JEL: F2 F23 L2 L22 L24
    Date: 2008–12
  14. By: George M. Constantinides; Jens Carsten Jackwerth; Stylianos Perrakis
    Abstract: Widespread violations of stochastic dominance by one-month S&P 500 index call options over 1986-2006 imply that a trader can improve expected utility by engaging in a zero-net-cost trade net of transaction costs and bid-ask spread. Although pre-crash option prices conform to the Black-Scholes-Merton model reasonably well, they are incorrectly priced if the distribution of the index return is estimated from time-series data. Substantial violations by post-crash OTM calls contradict the notion that the problem primarily lies with the left-hand tail of the index return distribution and that the smile is too steep. The decrease in violations over the post-crash period 1988-1995 is followed by a substantial increase over 1997-2006 which may be due to the lower quality of the data but, in any case, does not provide evidence that the options market is becoming more rational over time.
    JEL: G12 G13
    Date: 2008–12
  15. By: Philip Du Caju (Banque Nationale de Belgique, Boulevard de Berlaimont 14, B-1000 Brussels, Belgium.); Erwan Gautier (Banque de France, 39, rue Croix-des-Petits-Champs, F-75049 Paris Cedex 01, France.); Daphne Momferatou (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Melanie Ward-Warmedinger (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper presents information on wage bargaining institutions, collected using a standardised questionnaire. Our data provide information from 1995 and 2006, for four sectors of activity and the aggregate economy, considering 23 European countries, plus the US and Japan. Main findings include a high degree of regulation in wage setting in most countries. Although union membership is low in many countries, union coverage is high and almost all countries also have some form of national minimum wage. Most countries negotiate wages on several levels, the sectoral level still being the most dominant, with an increasingly important role for bargaining at the firm level. The average length of collective bargaining agreements is found to lie between one and three years. Most agreements are strongly driven by developments in prices and eleven countries have some form of indexation mechanism which affects wages. Cluster analysis identifies three country groupings of wage-setting institutions. JEL Classification: J31, J38, J51, J58.
    Keywords: wage bargaining, institutions, indexation, trade union membership, cluster analysis.
    Date: 2008–12
  16. By: Curtis B. Eaton; Ian A. MacDonald; Laura Meriluoto (University of Canterbury)
    Abstract: We examine a two stage duopoly game in which firms advertise their existence to consumers in stage 1 and compete in prices in stage 2. Whenever the advertising technology generates positive overlap in customer bases the equilib- rium for the stage 1 game is asymmetric in that one firm chooses to remain small in comparison to its competitor. For a specific random advertising technology we show that one firm will always be half as large as the other. No equilibrium in pure price strategies exists in the stage 2 game and as long as there is some overlap in customer bases the mixed strategy equilibrium is far from the Bertrand equilibrium.
    Keywords: Existence advertising; price dispersion; Bertrand paradox; information; duopoly
    JEL: D43 D80
    Date: 2008–10–15
  17. By: Gomes, Fábio Augusto Reis; Issler, João Victor
    Abstract: Consumption is an important macroeconomic aggregate, being about 70% of GNP. Finding sub-optimal behavior in consumption decisions casts a serious doubt on whether optimizing behavior is applicable on an economy-wide scale, which, in turn, challenge whether it is applicable at all. This paper has several contributions to the literature on consumption optimality. First, we provide a new result on the basic rule-of-thumb regression, showing that it is observational equivalent to the one obtained in a well known optimizing real-business-cycle model. Second, for rule-of-thumb tests based on the Asset-Pricing Equation, we show that the omission of the higher-order term in the log-linear approximation yields inconsistent estimates when lagged observables are used as instruments. However, these are exactly the instruments that have been traditionally used in this literature. Third, we show that nonlinear estimation of a system of N Asset-Pricing Equations can be done efficiently even if the number of asset returns (N) is high vis-a-vis the number of time-series observations (T). We argue that efficiency can be restored by aggregating returns into a single measure that fully captures intertemporal substitution. Indeed, we show that there is no reason why return aggregation cannot be performed in the nonlinear setting of the Pricing Equation, since the latter is a linear function of individual returns. This forms the basis of a new test of rule-of-thumb behavior, which can be viewed as testing for the importance of rule-of-thumb consumers when the optimizing agent holds an equally-weighted portfolio or a weighted portfolio of traded assets. Using our setup, we find no signs of either rule-of-thumb behavior for U.S. consumers or of habit-formation in consumption decisions in econometric tests. Indeed, we show that the simple representative agent model with a CRRA utility is able to explain the time series data on consumption and aggregate returns. There, the intertemporal discount factor is significant and ranges from 0:956 to 0:969 while the relative risk-aversion coe¢ cient is precisely estimated ranging from 0:829 to 1:126. There is no evidence of rejection in over-identifying-restriction tests.
    Date: 2008–12

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