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on Business Economics |
| By: | Che, Natasha Xingyuan |
| Abstract: | Most traditional explanations for the decreasing aggregate output volatility - so-called "Great Moderation" - fail to accommodate, or even directly contradict, another aspect of empirical data: the average sales volatility for publicly-traded US firms has been increasing during the same period. The paper aims to reconcile the opposite trends of firm-level and aggregate volatilities. I argue that the rise of organization capital, or firm-specific intangible capital, is the origin of the volatility divergence. Firms in the modern economy have been investing heavily in intangible and organizational assets, such as R&D, management processes, intellectual property, software, and brand name - the "soft" capitals that distinguish a firm from the sum of its physical properties. Most intangible assets are firm-specific, inseparable from the company that originally produced them, and difficult to trade on outside market. Investing in these organization-specific capitals insulates a firm from market-wide shocks, but introduces higher firm-specific risk that does not equally affect its peers. When value creation is increasingly relying on organization capital, the impact of idiosyncratic risk factor rises, while that of general risk factor declines. The former elevates firm-level volatility; the latter reduces aggregate volatility, mainly through weakening the positive co-movements among firms. Therefore, the decrease in aggregate output volatility is not because of less turbulent macro environment, but a result of more heterogeneity among production units. In this sense, the Great Moderation is rather a story of "Great Dissolution". It may indicate greater economic uncertainty faced by individual agents, instead of less. My empirical investigation found that, consistent with the paper's hypotheses, firm-level volatility increases with organizational investment, but general factors' impact on firm performance and a firm's correlation with others decrease with organizational investment. Simulations of the general equilibrium model featuring organization capital investment are capable of replicating the volatility trends at both aggregate and firm level for the past two decades. |
| Keywords: | organization capital; intangible capital; great moderation; firm volatility; business cycle; business investment |
| JEL: | D21 E22 D58 E10 E32 C23 E23 D24 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13701&r=bec |
| By: | Hideaki Sakawa; Naoki Watanabel |
| Abstract: | This paper examines the relations between the disciplinary role of Japanese relationship-oriented corporate governance mechanisms, such as keiretsu memberships and bank-appointed directors, and pay-performance sensitivity in Japan. Previous studies show that pay-performance sensitivity is positive and almost the same as in a market-oriented system like that of the USA. However, under the Japanese relationship-oriented system, pay-performance sensitivity may be controlled by financial keiretsu ties and bank-appointed directors. We find that the disciplinary mechanism of keiretsu memberships and bank-appointed monitors did not function well in Japan in the 1990s. |
| Keywords: | Corporate Governance, Firm Performance, Japan, Keiretsu Memberships, Managerial Compensation |
| JEL: | G30 G32 J33 L22 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:hst:ghsdps:gd08-031&r=bec |
| By: | Benoît Mahy (Université Mons-Hainaut, WRC and DULBEA); François Rycx (Centre Emile Bernheim, DULBEA, Solvay Brussels School of Economics and Management, Université Libre de Bruxelles, Brussels and IZA-Bonn.); Mélanie Volral (Université Mons-Hainaut and WRC) |
| Abstract: | This paper investigates the impact of wage dispersion on firm productivity in different working environments. More precisely, it examines the interaction with: i) the skills of the workforce, using a more appropriate indicator than the standard distinction between white- and blue collar-workers, and ii) the uncertainty of the firm economic environment, which has, to our knowledge, never been explored on an empirical basis. Using detailed LEED for Belgium, we find a hump-shaped relationship between (conditional) wage dispersion and firm productivity. This result suggests that up to (beyond) a certain level of wage dispersion, the incentive effects of “tournaments” dominate (are dominated by) “fairness” considerations. Findings also show that the intensity of the relationship is stronger for highly skilled workers and in more stable environments. This might be explained by the fact that monitoring costs and production-effort elasticity are greater for highly skilled workers and that in the presence of high uncertainty workers have less control over their effort-output relation and associate higher uncertainty with more unfair environments. |
| Keywords: | Wage dispersion, labour productivity, working environments, personnel economics, linked employer-employee data. |
| JEL: | J31 J24 M52 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:09-012&r=bec |
| By: | V. LEWIS |
| Abstract: | Business cycle models with sticky prices and endogenous firm entry make novel predictions on the transmission of shocks through the extensive margin of investment. I test some of these predictions using a vector autoregression with model-based sign restrictions. I find a positive and significant response of firm entry to expansionary shocks to productivity, aggregate spending, monetary policy and entry costs. The estimated response to a monetary expansion does not support the monetary policy transmission mechanism proposed by the model. Insofar as firm startups require labour services, wage stickiness is needed to make the signs of the model responses consistent with the estimated ones. The shapes of the empirical responses suggest that congestion effects in entry make it harder for new .firms to survive when the number of startups rises. |
| Keywords: | firm entry, business cycles, VAR |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:08/539&r=bec |
| By: | Yolanda Portilla |
| Abstract: | This paper characterizes the contractual relationship between an external auditor and a manager of a client firm when the incentives for both agents are implicit as in the career concerns framework. The main result is that the earning management and the audit effort are decreasing over time because the incentives to build a reputation also decline for both agents in spite of a managers first mover advantage. This suggests that the audit effort should be higher when the auditor is an emerging firm and the future employment opportunities for the client firm´s manager are larger. |
| Keywords: | Contract theory, Career concerns, Reputation, Auditing |
| JEL: | C73 G38 D82 D83 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we091308&r=bec |
| By: | Philippe Aghion; John Van Reenen; Luigi Zingales |
| Abstract: | We find that institutional ownership in publicly traded companies is associated with more innovation (measured by cite-weighted patents). To explore the mechanism through which this link arises, we build a model that nests the lazy-manager hypothesis with career-concerns, where institutional owners increase managerial incentives to innovate by reducing the career risk of risky projects. The data supports the career concerns model. First, whereas the lazy manager hypothesis predicts a substitution effect between institutional ownership and product market competition (and managerial entrenchment generally), the career-concern model allows for complementarity. Empirically, we reject substitution effects. Second, CEOs are less likely to be fired in the face of profit downturns when institutional ownership is higher. Finally, using instrumental variables, policy changes and disaggregating by type of owner we find that the effect of institutions on innovation does not appear to be due to endogenous selection. |
| JEL: | G20 G32 O31 O32 O33 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14769&r=bec |
| By: | Oleksiy Kryvtsov; Virgiliu Midrigan |
| Abstract: | Kryvtsov and Midrigan (2008) study the behavior of inventories in an economy with menu costs, fixed ordering costs and the possibility of stock-outs. This paper extends their analysis to a richer setting that is capable of more closely accounting for the dynamics of the US business cycle. We find that the original conclusion survives in this setting: namely, the model requires an elasticity of real marginal cost to output approximately equal to the inverse intertemporal elasticity of substitution in consumption in order to account for the countercyclicality of the aggregate inventory-to-sales ratio in the data. |
| Keywords: | Business fluctuations and cycles; Transmission of monetary policy |
| JEL: | E31 F12 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:09-9&r=bec |
| By: | Thede, Susanna (Department of Economics, Lund University); Lindvert, Markus (Swedish Institute for Growth Policy Studies) |
| Abstract: | This paper empirically examines the foreign internalisation decision of multinational corporations. The purpose of the paper is to identify determinants of the firm boundary, where within-boundary production takes the form of foreign direct investments (FDI) and outside-boundary production takes place through international outsourcing, with reference to recently developed general-equilibrium trade theories incorporating firm behaviour. The empirical investigation is performed for 2246 multinationals production engagements in 148 foreign countries under the 1997 to 2006 period. The primary contribution of the paper is the investigation of firm behaviour per se instead of industry level implications of firm behaviour. |
| Keywords: | Foreign Direct Investment; International Outsourcing; Firm-level Evidence |
| JEL: | F10 F23 L23 |
| Date: | 2009–02–27 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2009_002&r=bec |
| By: | André van Stel; Mickey Folkeringa; Sierdjan Koster |
| Abstract: | We investigate the impact of start-up rates on a measure of competition among incumbent firms called mobility. Interactions between new and incumbent firms play an important role in the process of economic growth. While recent literature suggests that competition among incumbent firms is caused by (lagged) start-up rates, this relation has not yet been tested using a direct measure of competition among incumbent firms. In the present paper we estimate a regression model, at the region-sector level for the Netherlands, where the mobility rate is explained by (lagged) startup rates and control variables. Using data for 40 regions and five sectors over the period 1993-2006 we find that the impact of start-ups on mobility varies by sector. In particular, we find a strong positive relation between start-up rates and mobility rates for industry sectors (manufacturing and construction) but a much smaller effect for services sectors. These results suggest there are differences in the types of entry between sectors and in the roles start-ups play in different sectors. |
| Date: | 2009–03–03 |
| URL: | http://d.repec.org/n?u=RePEc:eim:papers:h200905&r=bec |
| By: | Anos-Casero, Paloma; Udomsaph, Charles |
| Abstract: | This paper presents new evidence on the causal links between changes in the business environment and firm productivity growth. It contributes to the literature in three important aspects. First, it constructs a unique database merging information from two large firm-level databases. The samples of both databases are merged on four criteria-country, sub-national location, firm size, and year-producing a panel of 22,004 firms in eight economies of Eastern Europe and the former Soviet Union: Bulgaria, Croatia, Czech Republic, Estonia,, Poland, Romania, Serbia, and Ukraine. Second, the paper addresses shortcomings of earlier studies, namely reverse causation, multicollinearity, and unreliable productivity estimates. Firm productivity growth is estimated drawing on corporate financial data from manufacturing firms included in the AMADEUS database. Changes in the business environment are estimated from the World Bank Enterprise Surveys conducted in 2002 and 2005. Multicollinearity problems in the full model regression are mitigated by constructing a set of six aggregate indicators of the business environment (using principal component analysis). The paper finds that, over the period 2001 to 2004, an increase of one standard deviation in infrastructure quality, financial development, governance, labor market flexibility, labor quality, and market competition raises the total factor productivity of the average firm by 9.8, 7.8, 3.2, 3.4, 5.8, and 3 percent, respectively. Lastly, the paper decomposes firm productivity growth and ranks the relative impact of changes in these six aspects of the business environment by country, by firm size, and by industry. |
| Keywords: | E-Business,Banks&Banking Reform,Labor Policies,Governance Indicators,Economic Theory&Research |
| Date: | 2009–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:4841&r=bec |
| By: | Itai Agur |
| Abstract: | This paper develops a game theory model to analyze the optimal structure of the Lender of Last Resort in Europe. When depositors are imperfectly informed, the indifference to international transmission displayed by national authorities has value. A centralized authority, because it internalizes externalities, faces a pooling equilibrium. It cannot effectively signal the motivation behind its interventions. This leads to unnecessary depositor scares. The first-best is achieved by delegation: the central authority decides when to retain control and when to delegate to the national authorities. Central coordination dominates pure centralization. |
| Keywords: | Lender of Last Resort; Bailout; Delegation; Contagion; Centralization |
| JEL: | D82 G21 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:200&r=bec |
| By: | Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante |
| Abstract: | Macroeconomics is evolving from the study of aggregate dynamics to the study of the dynamics of the entire equilibrium distribution of allocations across individual economic actors. This article reviews the quantitative macroeconomic literature that focuses on household heterogeneity, with a special emphasis on the "standard" incomplete markets model. We organize the vast literature according to three themes that are central to understanding how inequality matters for macroeconomics. First, what are the most important sources of individual risk and cross-sectional heterogeneity? Second, what are individuals' key channels of insurance? Third, how does idiosyncratic risk interact with aggregate risk? |
| JEL: | E2 J22 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14768&r=bec |
| By: | Wouter den Haan; Vincent Sterk |
| Abstract: | In this paper, we analyze the business cycle behavior of home mortgages and consumer credit and investigate whether the observed changes. and in particular observed changes in the comovement between the loan variables and real activity. are likely to be caused by changes in financial markets. We find that there may have been such a role for changes in markets for consumer credit, but even before the financial crisis hit, the data do not support the hypothesis that changes in mortgage markets reduced the impact of economic shocks on real activity. |
| JEL: | C10 E44 F15 F36 F37 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:204&r=bec |
| By: | Lars Ljungqvist; Harald Uhlig |
| Abstract: | Campbell and Cochrane (1999) formulate a model that successfully explains a wide variety of asset pricing puzzles, by augmenting the standard power utility function with a time-varying subsistence level, or "external habit", that adapts nonlinearly to current and past average consumption in the economy. This paper demonstrates, that this comes at the "price" of several unusual implications. For example, we calculate that a society of agents with the preferences and endowment process of Campbell and Cochrane (1999) would experience a welfare gain equivalent to a permanent increase of nearly 16% in consumption, if the government enforced one month of fasting per year, reducing consumption by 10 percent then. We examine and explain these features of the preferences in detail. We numerically characterize the solution to the social planning problem. We conclude that Campbell-Cochrance preferences will provide for interesting macroeconomic modeling challenges, when endogenizing aggregate consumption choices and government policy. |
| JEL: | C61 E21 E44 G12 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14772&r=bec |