nep-bec New Economics Papers
on Business Economics
Issue of 2009‒03‒22
twenty-six papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Wage Dispersion and Firm Productivity in Different Working Environments By Mahy, Benoît; Rycx, Francois; Volral, Mélanie
  2. The Entrepreneurial Adjustment Process in Disequilibrium: Entry and Exit when Markets Under and Over Shoot By Andrew Burke; Andre van Stel
  3. Rigid labour compensation and flexible employment ? Firm-level evidence with regard to productivity for Belgium By Catherine Fuss; Ladislav Wintr
  4. The demand for youth: implications for the hours volatility puzzle By Nir Jaimovich; Seth Pruitt; Henry E. Siu
  5. Investment and Value: a Neoclassical Benchmark By Janice Eberly; Sergio Rebelo; Nicolas Vincent
  6. Cross-sectoral variation in firm-level idiosyncratic risk By Rui Castro; Gian Luca Clementi; Yoonsoo Lee
  7. Real Business Cycle Dynamics under Rational Inattention By Martins, Guilherme; Sinigaglia, Daniel
  8. Bank Capital Requirements and Capital Structure By John P. Harding; Xiaozhong Liang; Stephen L. Ross
  9. Entrepreneurship, Self-Employment and Business Data: An Introduction to Several Large, Nationally-Representative Datasets By Fairlie, Robert W.; Robb, Alicia M.
  10. Is housing the business cycle? evidence from U.S. cities By Andra C. Ghent; Michael T. Owyang
  11. Business Unit Controller Involvement in Management: an Emperical Study in the Netherlands licensing By Rouwelaar, Hans ten; Bots, Jan
  12. International Trade with Firm Heterogeneity in Factor Shares By Julian Emami Namini
  13. Diagnosing labor market search models: a multiple-shock approach By Kenneth Beauchemin; Murat Tasci
  14. Generating Evidence to Guide Merger Enforcement By Orley C. Ashenfelter; Daniel Hosken; Matthew Weinberg
  15. Globalization and Innovation in Emerging Markets By Yuriy Gorodnichenko; Jan Svejnar; Katherine Terrell
  16. Development Blocks, Faulty Investment and Structural Tensions – The Åkerman- Dahmén Theory of the Business Cycle By Erixon, Lennart
  17. Employment and hours of work By Kudoh, Noritaka; Sasaki, Masaru
  18. A Theory of Corporate Social Responsibility in Oligopolistic Markets By Claudia Alves; Luís Santos-Pinto
  19. Production in General Equilibrium with Incomplete Markets By Pascal Stiefenhofer;
  20. Modeling earnings dynamics By Joseph Altonji; Anthony Smith; Ivan Vidangos
  21. Exploring Differences in Employment between Household and Establishment Data By Katharine G. Abraham; John C. Haltiwanger; Kristin Sandusky; James Spletzer
  22. Conditional Delegation and Optimal Supervision By Alfredo Burlando; Alberto Motta
  23. Quantitative macroeconomics with heterogeneous households By Giovanni L. Violante; Jonathan Heathcote; Kjetil Storesletten
  24. Promoting clean technologies under imperfect competition By Théophile T. Azomahou; Raouf Boucekkine; Phu Nguyen-Vanc
  25. Revisions to Canada and United States Annual Estimates of Labour Productivity in the Business Sector, 2004 to 2007 By Kaci, Mustapha; Maynard, Jean-Pierre
  26. Tacit Collusion under Fairness and Reciprocity By Doruk Iris; Luís Santos-Pinto

  1. By: Mahy, Benoît (University of Mons-Hainaut); Rycx, Francois (Free University of Brussels); Volral, Mélanie (University of Mons-Hainaut)
    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: linked employer-employee data, personnel economics, working environments, labour productivity, wage dispersion
    JEL: J31 J24 M52
    Date: 2009–02
  2. By: Andrew Burke; Andre van Stel
    Abstract: The main contribution of entrepreneurship theory to economics is to provide an account of market performance in disequilibrium but little empirical research has examined firm entry and exit in this context. We redress this by modelling the interrelationship between firm entry and exit in disequilibrium. Introducing a new methodology we investigate whether this interrelationship differs between market ‘undershooting’ (the actual number of firms is below the equilibrium number) and ‘overshooting’ (vice versa). We find that equilibrium-restoring mechanisms are faster in over than in undershoots. The results imply that in undershoots a lack of competition between incumbent firms contributes to restoration of equilibrium (creating room for new-firm entry) while in overshoots competition induced by new firms (in particular strong displacement) helps restore equilibrium.
    Keywords: entry, exit, equilibrium, industrial organization, undershooting, overshooting
    JEL: B50 J01 L00 L1 L26
    Date: 2009–01
  3. By: Catherine Fuss (National Bank of Belgium, Research Department); Ladislav Wintr (Central Bank of Luxembourg, Economics and Research Department)
    Abstract: Using firm-level data for Belgium over the period 1997-2005, we evaluate the elasticity of firms' labour and real average labour compensation to microeconomic total factor productivity (TFP). Our results may be summarised as follows. First, we find that the elasticity of average labour compensation to firm-level TFP is very low contrary to that of labour, consistent with real wage rigidity. Second, while the elasticity of average labour compensation to idiosyncratic firm-level TFP is close to zero, the elasticity with respect to aggregate sector-level TFP is high. We argue that average labour compensation adjustment mainly occur at the sector level through sectoral collective bargaining, which leaves little room for firm-level adjustment to firm-specific shocks. Third, we report evidence of a positive relationship between hours and idiosyncratic TFP, as well as aggregate TFP within the year
    Keywords: labour compensation, employment, hours, Total Factor Productivity
    JEL: J30 J60
    Date: 2009–03
  4. By: Nir Jaimovich; Seth Pruitt; Henry E. Siu
    Abstract: The employment and hours worked of young individuals fluctuate much more over the business cycle than those of prime-aged individuals. Understanding the mechanism underlying this observation is key to explaining the volatility of aggregate hours over the cycle. We argue that the joint behavior of age-specific hours and wages in the U.S. data point to differences in the cyclical characteristics of labor demand. To articulate this view, we consider a production technology displaying capital-experience complementarity. We estimate the key parameters governing the degree of complementarity and show that the model can account for the behavior of age-specific hours and wages while generating a series of aggregate hours that is nearly as volatile as output.
    Date: 2009
  5. By: Janice Eberly; Sergio Rebelo; Nicolas Vincent
    Abstract: Do investment models fit firm-level data? - which model fits best? To answer this question we estimate alternative models using Compustat data. We find that both a version of the Hayashi (1982) and a model with decreasing returns to scale in production fit firm-level data very well. Our estimates suggest that there is substantial measurement error in Q. This measurement error implies that the investment-cash-flow regressions that have received so much attention are ineffectual to discriminate among alternative models. In fact, the models that we estimate generate empirically plausible cash-flow and lagged-investment effects even though they were not designed to produce them.
    Keywords: Investment, Hayashi, Investment adjustment costs, Tobin's Q, Regime switching
    JEL: E22 D92
    Date: 2009
  6. By: Rui Castro; Gian Luca Clementi; Yoonsoo Lee
    Abstract: In this paper we use data from the U.S. Census Bureau’s Longitudinal Research Database in order to assess the extent of the cross-sectoral variation in firm-level idiosyncratic risk and shed light on its determinants. We find that firms producing investment goods exhibit greater volatility in sales and TFP growth than firms producing consumption goods. Our data suggests that this may be the case because winner–takes–all competition is more common for the former than for the latter.
    Keywords: Manufacturing industries ; Research and development
    Date: 2008
  7. By: Martins, Guilherme; Sinigaglia, Daniel
    Abstract: This paper incorporates Rational Inattention as defined by Sims (2003a) to a traditional RBC model with multiple sources of uncertainty. Our model distinguishes between transitory and permanent labor and relative investment productivity shocks. The introduction of information frictions works as an endogenous adjustment cost: given the model parameters, the degree of sluggishness of endogenous variables in response to shocks is optimally determined. In practical terms, Rational Inattention increases the volatility and the contemporaneous correlations with output of consumption and decreases those of investment and hours. Moreover, it generates a trade-off between short-run and long-run shock variances. We believe these effects might have important welfare implications and can provide an analytical understanding on the links between business cycle fluctuations and the long-run performance of an economy.
    Keywords: Real Business Cycle; Rational Inattention; Technology Diffusion
    JEL: E32 D80
    Date: 2009–03–14
  8. By: John P. Harding (University of Connecticut); Xiaozhong Liang (State Street Corporation); Stephen L. Ross (University of Connecticut)
    Abstract: This paper studies the impact of capital requirements, deposit insurance and tax benefits on a bank's capital structure. We find that properly regulated banks voluntarily choose to maintain capital in excess of the minimum required. Central to this decision is both tax advantaged debt (a source of firm franchise value) and the ability of regulators to place banks in receivership stripping equity holders of firm value. These features of our model help explain both the capital structure of the large mortgage Government Sponsored Enterprises and the recent increase in risk taking through leverage by financial institutions.
    Keywords: Banks, Capital Structure, Capital Regulation, Financial Intermediation, Leverage, GSE, Investment Banks
    JEL: G21 G28 G32 G38
    Date: 2009–02
  9. By: Fairlie, Robert W. (University of California, Santa Cruz); Robb, Alicia M. (University of California, Santa Cruz)
    Abstract: Only a few large, nationally-representative datasets include information on both the owner and the business. We briefly describe several of the most respected and up-to-date sources of data on entrepreneurs, the self-employed, and small businesses. More information including estimates of recent trends in business ownership and performance (e.g. survival rates, sales, employment, payroll, profits and industry) from these datasets is contained in Fairlie and Robb (2008).
    Keywords: small businesses, business owners, self-employment, entrepreneurship, data
    JEL: L26 Y1
    Date: 2009–03
  10. By: Andra C. Ghent; Michael T. Owyang
    Abstract: We analyze the relationship between housing and the business cycle in a set of 36 US cities. Most surprisingly, we find that falls in house prices are often not followed by declines in employment. We also find that the leading indicator property of residential investment is not consistent across cities and that, at the national level, the leading indicator property of residential investment is not robust to including financial factors as control variables.
    Keywords: Housing ; Housing - Prices ; Business cycles
    Date: 2009
  11. By: Rouwelaar, Hans ten; Bots, Jan (Nyenrode Business Universiteit)
    Abstract: In recent years there has been much debate on the new business-oriented role of management accountants, also called controllers. The purpose of this paper is to investigate to what extent the involvement of the business unit (BU) controller in the decision-making process of business units is impacted not only by organizational factors, but also by the personal characteristics of BU controllers. This exploratory study provides further insight into the various roles of BU controllers. Survey data from 119 BU controllers in Dutch multidivisional organizations indicate that Controller Involvement in Management (CIM) takes two different forms: CIM in strategic decisions and CIM in operating decisions. CIM by BU controllers in strategic decisions is positively related to the degree of decentralization and the stability of performance of the business unit. CIM in strategic decisions is also positively related to more extravert BU controllers. The degree of CIM in operating decisions is related to interdependencies between business units and to strict hierarchical relationships between BU controllers and their BU managers or the corporate controller. CIM in operating decisions is positively related to BU controllers who are ‘open to new experience’ but negatively related to BU controllers who are tolerant and ‘accepting towards others’. This study shows that the personal characteristics of BU controllers do actually matter in CIM in both strategic and operating decisions.
    Date: 2008
  12. By: Julian Emami Namini (Erasmus School of Economics, Erasmus University Rotterdam)
    Abstract: This paper presents a trade model with capital and labor as factors of production. The main contribution of this paper is that it considers a new type of firm heterogeneity, which is empirically relevant: firms in this paper differ with respect to their factor shares in production. Therefore, this paper addresses the following four empirical facts on globalization, firms’ factor shares and factor prices: (i) firms within narrowly defined industries exhibit a large degree of heterogeneity in factor shares in production; (ii) exporters are, on average, more capital intensive than non—exporters; (iii) globalization decreases labor’s share in national income; (iv) the larger the share of exporters in the industry, the larger the increase in the industry’s wages due to globalization.
    Keywords: two—factor trade model; firm heterogeneity in factor shares
    JEL: F12 L11
    Date: 2009–02–24
  13. By: Kenneth Beauchemin; Murat Tasci
    Abstract: We construct a multiple-shock version of the Mortensen-Pissarides labor market search model to investigate the basic model’s well-known tendency to underpredict the volatility of key labor market variables. Data on U.S. job-finding and job separation probabilities are used to help estimate the parameters of a three-dimensional shock process comprising labor productivity, job separation, and matching or “allocative” effciency. Although our multiple-shock model generates some more volatility, it has counterfactual implications for the cyclicality of unemployment and vacancies. Our second exercise forces the model to be the data-generating process to uncover the necessary realizations of all three shocks. We show that the Mortensen-Pissarides labor market search model requires significantly procyclical and volatile matching efficiency and job separations to simultaneously account for high procyclical variations in job-finding probabilities as well as relatively small net employment changes in the data. Hence, the model is more fundamentally flawed than its inability to amplify shocks would suggest. We also show that variation in job separations accounts for most of the employment fluctuations, suggesting that endogenous separations could be the key feature of an improved model. This leads us to conclude that the model lacks mechanisms to generate procyclical matching efficiency and labor force reallocation. As for the latter, we conjecture that nontrivial labor force participation and job-to-job transitions are promising avenues of research. Note: This paper is a revised version of an earlier working paper of the same title, WP 07-20.
    Keywords: Labor market ; Business cycles
    Date: 2008
  14. By: Orley C. Ashenfelter; Daniel Hosken; Matthew Weinberg
    Abstract: The challenge of effective merger enforcement is tremendous. U.S. antitrust agencies must, by statute, quickly forecast the competitive effects of mergers that occur in virtually every sector of the economy to determine if mergers can proceed. Surprisingly, given the complexity of the regulators task, there is remarkably little empirical evidence on the effects of mergers to guide regulators. This paper describes the necessity of retrospective analysis of past mergers in building an empirical basis for antitrust enforcement, and provides guidance on the key measurement issues researchers confront in estimating the price effects of mergers. We also describe how evidence from merger retrospectives can be used to evaluate the economic models used to predict the competitive effects of mergers.
    JEL: K21 L1 L4
    Date: 2009–03
  15. By: Yuriy Gorodnichenko (University of Michigan); Jan Svejnar (University of Michigan); Katherine Terrell (University of Michigan)
    Abstract: Globalization brings opportunities and pressures for domestic firms in emerging markets to innovate and improve their competitive position. Using data on firms in 27 transition economies, we test for the effects of globalization through the impact of increased competition and foreign direct investment on domestic firms' efforts to raise their capability (innovate) by upgrading their technology or the quality of their product/service, taking into account firm heterogeneity. We find competition has a negative effect on innovation, especially for firms further from the frontier, and that the supply chain of multinational enterprises and international trade are important channels for domestic firm innovation. We do not find support for the inverted U effect of competition on innovation. There is weak evidence that firms in a more pro-business environment invest more in innovation and are more likely to display the inverted U relationship between competition and innovation.
    Keywords: emerging markets, globalization, innovation
    Date: 2008–04
  16. By: Erixon, Lennart (Dept. of Economics, Stockholm University)
    Abstract: Johan Åkerman and Erik Dahmén’s structural theory of economic fluctuations is a constructive alternative to traditional macroeconomic approaches and also to modern business-cycle models based on micro economic concepts. There are similarities between Åkerman and Dahmén’s theory and Schumpeter’s theory in Business Cycles. Both theories underline the importance of progressive industries for the recovery or prosperity phase. However, by the notions of faulty investment, structural tensions and development blocks, Åkerman and Dahmén provided an original explanation of the turning points in the business cycle. An empirical study of the severely overheated Swedish economy in the 1980s and the following depression did not confirm the Åkerman-Dahmén theory. One weakness of the theory is that it downplays the independent role of financial-market conditions. Åkerman and Dahmén’s theory is more valid for innovation-driven cycles such as the ICT boom in the late 1990s and the subsequent crisis.
    Keywords: Development Blocks; Faulty Investment; Structural Change; Juglar Cycles; Progressive Industries
    JEL: B25 B52 E11 E32 G33 O31
    Date: 2009–03–11
  17. By: Kudoh, Noritaka; Sasaki, Masaru
    Abstract: This paper develops a dynamic model of the labor market in which the degree of substitution between employment and hours of work is determined as part of a search equilibrium. Each firm chooses its demand for working hours and number of vacancies, and the earnings profile is determined by Nash bargaining. The earnings profile is generally nonlinear in hours of work, and defines the trade-off between employment and hours of work. Concave production technology induces firms to overemploy and, as a result, hours of work are below their optimal level. The Hosios condition is not sufficient for efficiency. When there are two industries, workers employed by firms with higher recruitment costs work longer and earn more. That is, "good jobs" require longer hours of work. Interestingly, technology differentials cannot account for working hours differentials.
    Keywords: employment, hours of work, search frictions,
    JEL: J21 J23 J31 J64
    Date: 2009–02–18
  18. By: Claudia Alves; Luís Santos-Pinto
    Abstract: This paper provides a theory of corporate social responsibility in imperfectly competitive markets. We consider a two-stage game where consumers have a preference from buying goods from firms that do CSR and where firms first decide simultaneously the amount per unit sold to give to social causes and then choose quantities. We find that firms will do CSR when products are complements but might not do it when products are substitutes. We characterize how contributions to social causes depend on costs of production and on the degree of product differentiation. Finally, we show that CSR increases quantities, prices and profits.
    Keywords: corporate social responsibility; oligopoly; market outcomes
    JEL: D21 D43 D64 M14
    Date: 2008–10
  19. By: Pascal Stiefenhofer;
    Abstract: Short and long run production is introduced in a two period general equilibrium model with incomplete markets, where firms are profit maximizers. They maximize profits in the long run, which implies profit maximization over both periods. The sequential structure of the model is such that, firms issue shares in the short run in order to build up long run production capacity. Long run production takes place in the second period subject to long run technological feasibility and installed capacity constraints. It is shown that equilibrium exists generically.
    Keywords: General Equilibrium, Incomplete Markets, Production.
    JEL: D62 D52 D53
    Date: 2009–03
  20. By: Joseph Altonji; Anthony Smith; Ivan Vidangos
    Abstract: In this paper we use indirect inference to estimate a joint model of earnings, employment, job changes, wage rates, and work hours over a career. Our model incorporates duration dependence in several variables, multiple sources of unobserved heterogeneity, job-specific error components in both wages and hours, and measurement error. We use the model to address a number of important questions in labor economics, including the source of the experience profile of wages, the response of job changes to outside wage offers, and the effects of seniority on job changes. We provide estimates of the dynamic response of wage rates, hours, and earnings to various shocks and measure the relative contributions of the shocks to the variance of earnings in a given year and over a lifetime. We find that human capital accounts for most of the growth of earnings over a career although job seniority and job mobility also play significant roles. Unemployment shocks have a large impact on earnings in the short run as well a substantial long long-term effect that operates through the wage rate. Shocks associated with job changes and unemployment make a large contribution to the variance of career earnings and operate mostly through the job-specific error components in wages and hours.
    Date: 2009
  21. By: Katharine G. Abraham; John C. Haltiwanger; Kristin Sandusky; James Spletzer
    Abstract: Using a large data set that links individual Current Population Survey (CPS) records to employer-reported administrative data, we document substantial discrepancies in basic measures of employment status that persist even after controlling for known definitional differences between the two data sources. We hypothesize that reporting discrepancies should be most prevalent for marginal workers and marginal jobs, and find systematic associations between the incidence of reporting discrepancies and observable person and job characteristics that are consistent with this hypothesis. The paper discusses the implications of the reported findings for both micro and macro labor market analysis.
    JEL: C80 J21
    Date: 2009–03
  22. By: Alfredo Burlando (Boston University); Alberto Motta (University di Padova)
    Abstract: This paper analyzes a simple modification of a standard mechanism in hierarchical centralized structures with hard-information supervision. The supervisor receives a signal about the productive agent's technology. With some probability the supervisor learns the true agent's technology, otherwise she learns nothing. Our design lets the productive agent choose between two competing contracts, a "secure" contract or a grand contract subject to uncertainty. The mechanism eliminates agency costs by providing the productive agent with the possibility of avoiding inspection. When productive agent is risk averse, our mechanism also provides him with an insurance coverage: as a consequence, this mechanism would be worthwhile even abstracting from collusion.
    Date: 2009
  23. By: Giovanni L. Violante; Jonathan Heathcote; Kjetil Storesletten
    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?
    Date: 2009
  24. By: Théophile T. Azomahou; Raouf Boucekkine; Phu Nguyen-Vanc
    Abstract: We develop a general equilibrium multi-sector vintage capital model with energy-saving technological progress and an explicit energy market to study the impact of investment subsidies on investment and output. Energy and capital are assumed to be complementary in the production process. New machines are less energy consuming and scrapping is endogenous. The intermediate inputs sector is modelled à la Dixit-Stiglitz (1977). Two polar market structures are considered for the energy market, free entry and natural monopoly. The impact of imperfect competition on the outcomes of the decentralized equilibria are deeply characterized. We identify an original paradox: adoption subsidies may induce a larger investment into cleaner technologies either under free entry or natural monopoly. However, larger diffusion rates do not necessarily mean lower energy consumption at equilibrium, which may explain certain empirical puzzles.
    Keywords: Energy-saving technological progress; vintage capital; market imperfections; natural monopoly; investment subsidies
    JEL: O40 E22 Q40
    Date: 2009–02
  25. By: Kaci, Mustapha; Maynard, Jean-Pierre
    Abstract: This paper examines the impact of the revisions to labour productivity estimates and related variables covering the revision cycle of the National Accounts from 2004 to 2007 for Canada and from 2005 to 2007 for the United States.
    Keywords: Labour, Economic accounts, Hours of work and work arrangements, Productivity accounts
    Date: 2009–03–11
  26. By: Doruk Iris; Luís Santos-Pinto
    Abstract: This paper explores the implications of fairness and reciprocity in dynamic market games. A reciprocal player responds to kind behavior of rivals with unkind actions (destructive reciprocity), while at the same time, it responds to kind behavior of rivals with kind actions (constructive reciprocity). The paper shows that for general perceptions of fairness, reciprocity facilitates collusion in dynamic market games. The paper also shows that this is a robust result. It holds when players' choices are strategic complements and strategic substitutes. It also holds under grim trigger punishments and optimal punishments.
    Keywords: fairness; reciprocity; collusion; repeated games
    JEL: D43 D63 L13 L21
    Date: 2008–10

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