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on Business Economics |
| By: | Gueorgui I. Kolev; Robin Hogarth |
| Abstract: | Illusory correlation refers to the use of information in decisions that is uncorrelated with the relevant criterion. We document illusory correlation in CEO compensation decisions by demonstrating that information, that is uncorrelated with corporate performance, is related to CEO compensation. We use publicly available data from the USA for the years 1998, 2000, 2002, and 2004 to examine the relations between golf handicaps of CEOs and corporate performance, on the one hand, and CEO compensation and golf handicaps, on the other hand. Although we find no relation between handicap and corporate performance, we do find a relation between handicap and CEO compensation. In short, golfers earn more than non-golfers and pay increases with golfing ability. We relate these findings to the difficulties of judging compensation for CEOs. To overcome this – and possibly other illusory correlations – in these kinds of decisions, we recommend the use of explicit, mechanical decision rules. |
| Keywords: | Illusory correlation; executive compensation; golf handicaps; decision rules |
| JEL: | D81 J33 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1132&r=bec |
| By: | Oliver Hart; Bengt Holmstrom |
| Abstract: | The existing literature on firms, based on incomplete contracts and property rights, emphasizes that the ownership of assets - and thereby firm boundaries - is determined in such a way as to encourage relationship-specific investments by the appropriate parties. It is generally accepted that this approach applies to owner-managed firms better than to large companies. In this paper, we attempt to broaden the scope of the property rights approach by developing a simple model with three key ingredients: (a) decision rights can be transferred ex ante through ownership, (b) managers (and possibly workers) enjoy private benefits that are non-transferable, and (c) owners can divert a firm's profit. In our basic model decisions are ex post non-contractible; in an extension we use the idea that contracts are reference points to relax this assumption. We show that firm boundaries matter. Nonintegrated firms fail to account for the external effects that their decisions have on other firms. An integrated firm can internalize such externalities, but it does not put enough weight on the private benefits of managers and workers. We explore this tradeoff in a model that focuses on the difficulties companies face in cooperating through the market if the benefits from cooperation are unevenly divided; therefore, they may sometimes end up merging. We show that the assumption that contracts are reference points introduces a friction that permits an analysis of delegation. |
| JEL: | D23 L23 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14613&r=bec |
| By: | Andreea Cosnita-Langlais |
| Abstract: | This paper aims to further advance the study of horizontal mergers by critically reviewing the theory on spatial models that may be used for the analysis of horizontal market concentration. We examine the incentives conveyed by locations for undertaking merger and merger-related strategies, as well as the impact of merger on strategic location choices. Thereby this paper highlights the two-way relationship between market concentration behavior and firm location. |
| Keywords: | geographic and product space, strategic location, horizontal market concentration, merger control |
| JEL: | D43 L41 R32 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2008-42&r=bec |
| By: | Luis Cabral; Zhu Wang |
| Abstract: | We develop a “passive learning” model of firm entry by spin-off: firm employees leave their employer and create a new firm when (a) they learn they are good entrepreneurs (type I spin-offs) or (b) they learn their employer's prospects are bad (type II spin-offs). Our theory predicts a high correlation between spin-offs and parent exit, especially when the parent is a lowproductivity firm. This correlation may correspond to two types of causality: spin-off causes firm exit (type I spin-offs) and firm exit causes spin-off (type II spin-offs). We test and confirm this and other model predictions on a unique data set of the U.S. automobile industry. Finally, we discuss policy implications regarding “covenant not to compete” laws |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp08-15&r=bec |
| By: | Alejandro Justiniano; Giorgio E. Primiceri; Andrea Tambalotti |
| Abstract: | Shocks to the marginal efficiency of investment are the most important drivers of business cycle fluctuations in US output and hours. Moreover, these disturbances drive prices higher in expansions, like a textbook demand shock. We reach these conclusions by estimating a DSGE model with several shocks and frictions. We also find that neutral technology shocks are not negligible, but their share in the variance of output is only around 25 percent, and even lower for hours. Labor supply shocks explain a large fraction of the variation of hours at very low frequencies, but not over the business cycle. Finally, we show that imperfect competition and, to a lesser extent, technological frictions are the key to the transmission of investment shocks in the model. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-08-12&r=bec |
| By: | Zheng Liu; Daniel F. Waggoner; Tao Zha |
| Abstract: | We study the sources of the Great Moderation by estimating a variety of medium-scale DSGE models that incorporate regime switches in shock variances and in the inflation target. The best-fit model, the one with two regimes in shock variances, gives quantitatively different dynamics in comparison with the benchmark constant-parameter model. Our estimates show that three kinds of shocks accounted for most of the Great Moderation and business-cycle fluctuations: capital depreciation shocks, neutral technology shocks, and wage markup shocks. In contrast to the existing literature, we find that changes in the inflation target or shocks in the investment-specific technology played little role in macroeconomic volatility. Moreover, our estimates indicate much less nominal rigidities than those suggested in the literature. |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:emo:wp2003:0811&r=bec |
| By: | J. David Brown; Julie L. Hotchkiss; Myriam Quispe-Agnoli |
| Abstract: | Do firms employing undocumented workers have a competitive advantage? Using administrative data from the state of Georgia, this paper investigates the incidence of undocumented worker employment across firms and how it affects firm survival. Firms are found to engage in herding behavior, being more likely to employ undocumented workers if competitors do. Rivals' undocumented employment harms firms' ability to survive while firms' own undocumented employment strongly enhances their survival prospects. This finding suggests that firms enjoy cost savings from employing lower-paid undocumented at workers wages less than their marginal revenue product. The herding behavior and competitive effects are found to be much weaker in geographically broad product markets, where firms have the option to shift labor-intensive production out of state or abroad. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2008-28&r=bec |
| By: | Lenno Uusküla |
| Abstract: | Traditional models of monetary transmission such as sticky price and limited participation abstract from firm creation and destruction. Only a few papers look at the empirical effects of the monetary shock on the firm turnover measures. But what can we learn about monetary transmission by including measures for firm turnover into the theoretical and empirical models? Based on a large scale vector autoregressive (VAR) model for the U.S. economy I show that a contractionary monetary policy shock increases the number of business bankruptcy filings and failures, and decreases the creation of firms and net entry. According to the limited participation model, a contractionary monetary shock leads to a drop in the number of firms. On the contrary the same shock in the sticky price model increases the number of firms. Therefore the empirical findings support more the limited participation type of the monetary transmission |
| Keywords: | monetary transmission, limited participation, sticky prices, firm entry, firm bankruptcy, structural VAR |
| JEL: | E32 C32 |
| Date: | 2009–01–02 |
| URL: | http://d.repec.org/n?u=RePEc:eea:boewps:wp2008-07&r=bec |
| By: | Silvio Contessi; Pierangelo DePace; Johanna Francis |
| Abstract: | We describe the second-moment properties of the components of international capital flows and their relationship (covariance and correlation) to business cycle variables of 22 emerging and OECD countries. Disaggregated flows have different volatility properties, with debt being the most volatile and FDI the least volatile. We show that (a) inward flows are procyclical, outward and net outward flows are countercyclical for most industrial and emerging countries while, for the G-7, both inward and outward flows are procyclical and net outflows are countercyclical; (b) inward FDI flows are procyclical in industrial countries, countercyclical in emerging countries; and (c) there is no clear pattern for other equity flows and debt. Using formal statistical tests, we document changes in variability, covariance, and correlation of capital flows with a set of macroeconomic variables for G-7 countries. We find mixed evidence of changes over capital account liberalization episodes and breaks in international business cycles, and a clear increase in variance for all types and signs of flows. We estimate breaks at unknown dates in the conditional variance of each capital flow to find that they differ considerably from the breaks associated with capital account liberalization and financial globalization. |
| Keywords: | Capital movements ; Business cycles |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2008-041&r=bec |
| By: | J. Christina Wang; Susanto Basu; John G. Fernald |
| Abstract: | This paper addresses the proper measurement of financial service output that is not priced explicitly. It shows how to impute nominal service output from financial intermediaries' interest income, and how to construct price indices for those financial services. We model financial intermediaries as providers of financial services which resolve asymmetric information between borrowers and lenders. We embed these intermediaries in a dynamic, stochastic, general-equilibrium model where assets are priced competitively according to their systematic risk, as in the standard consumption-based capital-asset-pricing model. In this environment, we show that it is critical to take risk into account in order to measure financial output accurately. We also show that even using a risk-adjusted reference rate does not solve all the problems associated with measuring nominal financial service output. Our model allows us to address important outstanding questions in output and productivity measurement for financial firms, such as: (1) What are the correct "reference rates" to use in calculating bank output? In particular, should they take account of risk? (2) If reference rates need to be risk-adjusted, should they be ex ante or ex post rates of return? (3) What is the right price deflator for the output of financial firms? Is it just the general price index? (4) When--if ever--should we count capital gains of financial firms as part of financial service output? |
| JEL: | E01 E44 G21 G32 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14616&r=bec |
| By: | Baldwin, John R.; Green, Alan G. |
| Abstract: | Many historical comparisons of international productivity use measures of labour productivity (output per worker). Differences in labour productivity can be caused by differences in technical efficiency or differences in capital intensity. Moving to measures of total factor productivity allows international comparisons to ascertain whether differences in labour productivity arise from differences in efficiency or differences in factors utilized in the production process. This paper examines differences in output per worker in the manufacturing sectors of Canada and the United States in 1929 and the extent to which it arises from efficiency differences. It makes corrections for differences in capital and materials intensity per worker in order to derive a measure of total factor efficiency of Canada relative to the United States, using detailed industry data. It finds that while output per worker in Canada was only about 75% of the United States productivity level, the total factor productivity measure of Canada was about the same as the United States level - that is, there was very little difference in technical efficiency in the two countries. Canada's lower output per worker was the result of the use of less capital and materials per worker than the United States. |
| Keywords: | Manufacturing, Economic accounts, Productivity accounts |
| Date: | 2008–12–23 |
| URL: | http://d.repec.org/n?u=RePEc:stc:stcp6e:2008022e&r=bec |
| By: | Damiaan Persyn |
| Abstract: | This paper analyses the wage demands of a sector-level monopoly union facing internationally mobile firms. A simple two-country economic geography model is used to describe how firms relocate in function of international dierences in production costs and market size. The union sets wages in function of the firm level labour demand elasticity and the responsiveness of firms to relocate internationally. If countries are suffciently symmetric lower foreign wages and lower trade costs necessarily lead to lower union wage demands. With asymmetric countries these intuitive properties do not always hold. But even for symmetric countries it holds that small increases in market size or trade costs makes union wages more sensitive to the foreign wage level. |
| Keywords: | Unions, globalisation, economic geography |
| JEL: | J50 J31 F16 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ete:vivwps:3&r=bec |
| By: | Robin Hogarth; Natalia Karelaia |
| Abstract: | Excess entry – or the high failure rate of market-entry decisions – is often attributed to overconfidence exhibited by entreprene urs. We show analytically that whereas excess entry is an inevitable consequence of imperfect assessments of entrepreneurial skill, it does not imply overconfidence. Judgmental fallibility leads to excess entry even when everyone is underconfident. Self-selection implies greater confidence (but not necessarily overconfidence) among those who start new businesses than those who do not and among successful entrants than failures. Our results question claims that “entrepreneurs are overconfident” and emphasize the need to understand the role of judgmental fallibility in producing economic outcomes. |
| Keywords: | Excess entry, fallible judgment, overconfidence, skill uncertainty, entrepreneurship |
| JEL: | D80 L26 M13 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1130&r=bec |
| By: | Nutahara, Kengo |
| Abstract: | In many applications of habit persistence to macroeconomics, it is of little significance whether habits are internal or external. In this paper, it is shown that the distinction between internal and external habits is important in a situation wherein a shock is news about the future. An internal habit can be a source of news-driven business cycles, positive comovement in consumption, labor, investment, and output from the news about the future, whereas an external habit cannot. |
| Keywords: | Habit persistence; internal habit; external habit; news-driven business cycles |
| JEL: | E32 E21 |
| Date: | 2009–01–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:12550&r=bec |
| By: | Kresimir Zigic |
| Abstract: | Allowing for endogenous entry in the traditional Stackelberg setup with product differentiation, leads to reverting of the standard comparative static and limiting results. Unlike in the standard Stackelberg setup with barriers to entry, the leader's profit increases when the differentiation becomes lower. The reason is that competition becomes tougher when products become more alike, and consequently, fewer firms enter in equilibrium. On the other hand, increasing product differentiation towards its limit results in number of entrants tending to infinity and for very large market, the profit of the leader approaches zero. Thus market structure approaches monopolistic competition, rather than the standard monopoly outcome that occurs with exogenous number of followers. |
| Keywords: | Stackelberg leadership, product differentiation, endogenous entry. |
| JEL: | L1 D43 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp369&r=bec |
| By: | Fumiko Hayashi; Zhu Wang |
| Abstract: | This paper studies product innovation and firm survival in the U.S. ATM/debit card industry. The industry started with a few shared ATM networks in the early 1970s. The number of networks grew quickly up until the mid 1980s, but then declined sharply. We construct a theoretical model based on Jovanovic and MacDonald (1994). In contrast to their model focusing on cost-saving technological innovation, our model shows a major product innovation may also trigger the shakeout. The theoretical predictions are tested using a novel dataset on network entry, exit, size, location, ownership and product choices. The findings suggest introducing the point of sale debit function in the mid 1980s played an important role driving the network consolidation. Unlike previous studies, we find little advantage of being early industry entrants. Rather, due to network effects in the industry, large networks had better chance to adopt the product innovation and survive the shakeout. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp08-14&r=bec |
| By: | Edward C. Prescott; Timothy J. Kehoe |
| Abstract: | Three of the arguments made by Temin (2008) in his review of Great Depressions of the Twentieth Century are demonstrably wrong: that the treatment of the data in the volume is cursory; that the definition of great depressions is too general and, in particular, groups slow growth experiences in Latin America in the 1980s with far more severe great depressions in Europe in the 1930s; and that the book is an advertisement for the real business cycle methodology. Without these three arguments — which are the results of obvious conceptual and arithmetical errors, including copying the wrong column of data from a source — his review says little more than that he does not think it appropriate to apply our dynamic general equilibrium methodology to the study of great depressions, and he does not like the conclusion that we draw: that a successful model of a great depression needs to be able to account for the effects of government policy on productivity. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:418&r=bec |
| By: | Susanto Basu; Robert Inklaar; J. Christina Wang |
| Abstract: | Rather than charging direct fees, banks often charge implicitly for their services via interest spreads. As a result, much of bank output has to be estimated indirectly. In contrast to current statistical practice, dynamic optimizing models of banks argue that compensation for bearing systematic risk is not part of bank output. We apply these models and find that between 1997 and 2007, in the U.S. National Accounts, on average, bank output is overestimated by 21 percent and GDP is overestimated by 0.3 percent. Moreover, compared with current methods, our new estimates imply more plausible estimates of the share of capital in income and the return on fixed capital. |
| JEL: | E01 E44 G21 G32 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14615&r=bec |