nep-bec New Economics Papers
on Business Economics
Issue of 2009‒03‒28
sixteen papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Rigid labour compensation and flexible employment? Firm-level evidence with regard to productivity for Belgium. By Catherine Fuss; Ladislav Wintr
  2. Matching Firms, Managers and Incentives By Oriana Bandiera; Luigi Guiso; Andrea Prat; Raffaella Sadun
  3. When does Lumpy Factor Adjustment Matter for Aggregate Dynamics? By Stephan Fahr; Fang Yao
  4. What’s News in Business Cycles By Schmitt-Grohé, Stephanie; Uribe, Martín
  5. Real wages over the business cycle: OECD evidence from the time and frequency domains. By Julián Messina; Chiara Strozzi; Jarkko Turunen
  6. Trade, wages and productivity By Kristian Behrens; Giordano Mion; Yasusada Murata; Jens Südekum
  7. Managers and wage policies By Natália P. Monteiro; Paulo Bastos
  8. The Impact of Financial Structure on Firms' Financial Constraints : A Cross-Country Analysis By Christopher F. Baum; Dorothea Schäfer; Oleksandr Talavera
  9. Modern Corporate Changes: Reinstating the Link between the Nature, Boundaries and Governance of the Firm By Cécile Cézanne-Sintès
  10. Determinants and dimensions of firm growth By Gerrit de Wit; Haibo Zhou
  11. Dynamic Model of Credit Risk in Relationship Lending: A Game- theoretic Real Options Approach By Takashi Shibata; Tetsuya Yamada
  12. Rewarding Carrots & Crippling Sticks: Eliciting Employee Preferences for the Optimal Incentive Mix in Europe By Pouliakas, Konstantinos; Theodossiou, Ioannis
  13. Measuring the Utility Cost of Temporary Employment Contracts before Adaptation: A Conjoint Analysis Approach By Pouliakas, Konstantinos; Theodossiou, Ioannis
  14. Incorporating responsiveness to marketing efforts in brand choice modelling By Fok, D.; Paap, R.; Franses, Ph.H.B.F.
  15. Cross-Border Mergers and Acquisitions: Financial and Institutional Forces By Nicolas Coeurdacier; Roberto A. De Santis; Antonin Aviat
  16. Convergence in the Finite Cournot Oligopoly with Social and Individual Learning By Thomas Vallée; Murat Yildizoglu

  1. By: Catherine Fuss (National Bank of BelgiumNational Bank of Belgium, Research Department, 14, bd. de Berlaimont, 1000 Brussels, Belgium.); Ladislav Wintr (Central Bank of Luxembourg, Economics and Research Department, 2 boulevard Royal, L – 2983 Luxembourg, Luxembourg.)
    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. JEL Classification: J30, J60.
    Keywords: labour compensation, employment, hours, Total Factor Productivity.
    Date: 2009–03
  2. By: Oriana Bandiera; Luigi Guiso; Andrea Prat; Raffaella Sadun
    Abstract: We provide evidence on the match between firms, managers and incentives using a new survey designed for this purpose. The survey contains information on a sample of executives’ risk preferences and human capital, on the explicit and implicit incentives they face and on the firms they work for. We model a market for managerial talent where both firms and managers are heterogeneous. Following the sources of heterogeneity observed in the data, we assume that firms differ by ownership structure and that family firms, though caring about profits, put relatively more weight on benefits of direct control than non-family firms. Managers differ in their degree of risk aversion and talent. The entry of firms and managers, the choice of managerial compensation schemes and the manager firm matching are all endogenous. The model yields predictions on several equilibrium correlations that find support in our data: (i) Family firms use managerial contracts that are less sensitive to performance, both explicitly through bonus pay and implicitly through career development; (ii) More talented and risk-tolerant managers are matched with firms that offer steeper contracts. (iii) Managers who face steeper contracts work harder, earn more and display higher job satisfaction. Alternative explanations may account for some of these correlations but not for all of them jointly.
    Keywords: managerial incentives, matching, firm performance, family firms
    JEL: J3 J5 G3
    Date: 2009
  3. By: Stephan Fahr (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Fang Yao (Institute for Economic Theory, Humboldt University of Berlin, Spandauer Strasse 1, D-10178 Berlin, Germany.)
    Abstract: We analyze the dynamic effects of lumpy factor adjustments at the firm level onto the aggregate economy. We find that distinguishing between capital and labour as lumpy factors within the production function result in very different dynamics for aggregate output, investment and labour in an otherwise standard real business cycle model. Lumpy capital leaves the RBC dynamics mainly unchanged, while lumpy labour allows for persistence and an inner propagation within the model in form of hump-shaped impulse responses. In addition, when modeling lumpy adjustments on both investment and labour, the aggregate effects are even stronger. We investigate the mechanisms underlying these results and identify the elasticity of factor supply as the most important element in accounting for these differences. JEL Classification: E32, E22, E24.
    Keywords: Lumpy labor adjustment, Lumpy investment, Business cycles, Elasticity of supply.
    Date: 2009–03
  4. By: Schmitt-Grohé, Stephanie; Uribe, Martín
    Abstract: In this paper, we perform a structural Bayesian estimation of the contribution of anticipated shocks to business cycles in the postwar United States. Our theoretical framework is a real-business-cycle model augmented with four real rigidities: investment adjustment costs, variable capacity utilization, habit formation in consumption, and habit formation in leisure. Business cycles are assumed to be driven by permanent and stationary neutral productivity shocks, permanent investment-specific shocks, and government spending shocks. Each of these driving forces is buffeted by four types of structural innovations: unanticipated innovations and innovations anticipated one, two, and three quarters in advance. We find that anticipated shocks account for more than two thirds of predicted aggregate fluctuations.
    Keywords: anticipated shocks; Bayesian estimation; sources of aggregate fluctuations
    JEL: C11 C51 E13 E32
    Date: 2009–03
  5. By: Julián Messina (University of Girona, Plaça Sant Domènec, 3, E-17071 Girona, Spain.); Chiara Strozzi (Università degli Studi di Modena e Reggio Emilia,Via Università 4, I - 41100 Modena, Italy.); Jarkko Turunen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We study differences in the adjustment of aggregate real wages in the manufacturing sector over the business cycle across OECD countries, combining results from different data and dynamic methods. Summary measures of cyclicality show genuine cross-country heterogeneity even after controlling for the impact of data and methods. We find that more open economies and countries with stronger unions tend to have less pro-cyclical (or more counter-cyclical) wages. We also find a positive correlation between the cyclicality of real wages and employment, suggesting that policy complementarities may influence the adjustment of both quantities and prices in the labour market. JEL Classification: E32, J30, C10.
    Keywords: real wages, business cycle, dynamic correlation, labour market institutions.
    Date: 2009–02
  6. By: Kristian Behrens (Department of Economics, Université du Québec à Montréal (UQAM), Canada; CORE, Université catholique de Louvain, Belgium; CIRPÉE, Canada); Giordano Mion (National Bank of Belgium, Research Department; LSE, Department of Geography, London, UK); Yasusada Murata (Advanced Research Institute for the Sciences and Humanities (ARISH), Nihon University, Tokyo, Japan); Jens Südekum (Mercator School of Management, Universität Duisburg-Essen, Germany; Ruhr Graduate School of Economics, Germany; IZA, Germany)
    Abstract: We develop a new general equilibrium model of trade with heterogeneous firms, variable demand elasticities and endogenously determined wages. Trade integration favours wage convergence, boosts competition, and forces the least efficient firms to leave the market, thereby affecting aggregate productivity. Since wage and productivity responses are endogenous, our model is well suited to studying the impact of trade integration on aggregate productivity and factor prices. Using Canada-US interregional trade data, we first estimate a system of theory-based gravity equations under the general equilibrium constraints generated by the model. Doing so allows us to measure 'border effects' and to decompose them into a 'pure' border effect, relative and absolute wage effects, and a selection effect. Using the estimated parameter values, we then quantify the impact of removing the Canada-US border on wages, productivity, mark-ups, the share of exporters, the mass of varieties produced and consumed, and thus welfare. Finally, we provide a similar quantification with respect to regional population changes.
    Keywords: heterogeneous firms; gravity equations; general equilibrium; monopolistic competition; variable demand elasticities
    JEL: F12 F15 F17
    Date: 2009–03
  7. By: Natália P. Monteiro (Universidade do Minho - NIPE); Paulo Bastos (Inter-American Development Bank and GEP, University of Nottingham)
    Abstract: We investigate the effects of individual top managers on wages and wage policies. A large longitudinal administrative dataset from Portugal allows us to match workers,firms and top managers, and follow the movements of the latter across different firms over time. We estimate the role of top manager fixed-effects in determining wages and wage policies, while also accounting for the effect of worker and firm heterogeneity. Our results reveal that top managers have a significant influence on wages, the returns to schooling and tenure, the gender wage gap, and the extent of rent sharing. Further-more, they point to the existence of managerial styles in the setting of wage policies. Finally, we relate worker compensation to observable managerial attributes, and find that returns to schooling tend to be higher in firms led by more educated top executives, while longer-tenured managers appear on average to engage in more rent sharing.
    Keywords: Top managers, wage policies, linked worker-firm-manager data.
    JEL: D21 M5 J31 J16
    Date: 2009
  8. By: Christopher F. Baum; Dorothea Schäfer; Oleksandr Talavera
    Abstract: We estimate firms' cash flow sensitivity of cash to empirically test how the financial system's structure and activity level influence their financial constraints. For this purpose we merge Almeida, Campello and Weisbach (2004), a pathbreaking new design for evaluating a firm's financial constraints, with Levine (2002), who paved the way for comparative analysis of financial systems around the world. We conjecture that a country's financial system, both in terms of its structure and its level of development, should influence the cash flow sensitivity of cash of constrained firms but leave unconstrained firms unaffected. We test our hypothesis with a large international sample of 80,000 firm-years from 1989 to 2006. Our findings reveal that both the structure of the financial system and its level of development matter. Bank-based financial systems provide constrained firms with easier access to external financing.
    Keywords: financial constraints, financial system, cash flow sensitivity of cash
    JEL: G32 G30
    Date: 2009
  9. By: Cécile Cézanne-Sintès (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - CNRS : UMR6227 - Université de Nice Sophia-Antipolis)
    Abstract: The theory of the firm and corporate governance are two fields of analysis traditionally tackled separately in the economic literature. This paper seeks to rediscover the link between the nature, boundaries and governance of the firm on the basis of changes in corporate industrial firms. We advance the argument that, to understand the human capital-intensive firm, this analytical interconnection should be restored. On the basis of Critical Resource Theory, we present an innovative vision of the nature, boundaries and governance of firms whose productive activity is built around its key partners' human capital. The organisational mode of governance has changed linked to a renewed conception of the firm. What we term the ‘multi-resources' model of governance of the firm depends on an original representation of the structure, organisation and power relationships of modern firms, whose value arises from the accumulation of specific human capital. Consequently, the multi-resources model involves hybrid governance instrument in order to protect the integrity of the human capital-intensive firm.
    Keywords: Human Capital; Nature and Boundaries of the Firm; Corporate Governance; Critical Resources Theory
    Date: 2008–07–01
  10. By: Gerrit de Wit; Haibo Zhou
    Abstract: Firm growth is an important indicator of a thriving economy. Although the determinants of firm growth have been studied in various disciplines, an integrated analysis is still lacking. This paper attempts to provide such an analysis. Many determinants of firm growth are summarized and classified into three dimensions: individual, organizational, and environmental determinants. By conducting an empirical study using 523 Dutch small and medium sized firms, we identify the determinants of firm growth which is measured by employment growth. Our findings show that environmental determinants do not affect firm growth. Individual ones do: entrepreneurs with growth motivation and having technical knowledge are more likely to grow their firms while entrepreneurs characterized by a strong need of achievement are less likely to engage in firm growth. Organizational determinants have the most influence on firm growth: the older thefirm, the less likely it is to grow. Availability of financial capital is found to be crucial to firm growth. Finally, the firm’s scalability (its preparedness to grow) is found to have a positive impact on firm growth.
    Date: 2009–03–17
  11. By: Takashi Shibata (Associate Professor, Tokyo metropolitan University (E-mail:; Tetsuya Yamada (Associate Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: We develop a dynamic credit risk model for the case that banks compete to collect their loans from a firm falling in danger of bankruptcy. We apply a game-theoretic real options approach to investigate bankfs optimal strategies. Our model reveals that the bank with the larger loan amount, namely the main bank, provides an additional loan to support the deteriorating firm when the other bank collects its loan. This suggests that there exists rational forbearance lending by the main bank. Comparative statics show that as the liquidation value is lower, the optimal exit timing for the non-main bank comes at an earlier stage of business downturn and the optimal liquidation timing by the main bank is delayed further. As the interest rate of the loan is lower, the optimal exit timing for the non-main bank comes earlier. These analyses are consistent with the forbearance lending and exposure concentration of main banks observed in Japan.
    Keywords: Credit risk, Relationship lending, Real option, Game theory, Concentration risk
    JEL: G21 G32 G33 D81 D92
    Date: 2009–03
  12. By: Pouliakas, Konstantinos; Theodossiou, Ioannis
    Abstract: A ranking of a variety of incentive devices used by firms according to their perceived effectiveness by employees is identified. The determinants of employee incentive preferences are also investigated, suggesting a ‘menu’ of conditions under which an organization’s personnel policies will have maximum motivational impact on its workforce. Based on the beliefs of a unique sample of workers from seven European countries, the results suggest that (a) the primary determinant of the level of employee effort is the amount of discretion offered at work; (b) pay incentives and ‘gift exchanges’ are the most important motivators; (c) the use of monitoring and Taylor-type assembly lines are the least effective incentives; and (d) the optimal design of incentive strategies by firms is strongly shaped by a host of contextual factors. The expressed desire for autonomy, and distaste for control, by employees gives credibility to the “participative” management approach.
    Keywords: Incentives; effectiveness; effort; attitudes; employees
    JEL: C14 M54 M52 J33
    Date: 2009–03–19
  13. By: Pouliakas, Konstantinos; Theodossiou, Ioannis
    Abstract: This study attempts to estimate the ‘utility cost’ of temporary employment contracts purged of the psychological effects of adaptation. A conjoint analysis experiment is used that examines the ex-ante contract preferences of a unique sample of low-skilled employees from 7 European countries. It is shown that permanent contract holders request a significant wage premium to move to a temporary job. In contrast, temporary workers are indifferent between permanent and temporary contracts, ceteris paribus. The evidence suggests that individuals have a psychological immune system which neutralises events that challenge their sense of well-being, such as job insecurity. The methodology developed in this paper can provide policymakers with an alternative and relatively inexpensive method of quantifying the transitional loss (or gain) in welfare that individuals might experience in response to changing labour market policies.
    Keywords: Utility; Temporary contracts; Adaptation; Conjoint analysis
    JEL: J31 J41 C25
    Date: 2008–11–13
  14. By: Fok, D.; Paap, R.; Franses, Ph.H.B.F. (Erasmus Econometric Institute)
    Abstract: We put forward a brand choice model with unobserved heterogeneity that concerns responsiveness to marketing efforts. We introduce two latent segments of households. The first segment is assumed to respond to marketing efforts while households in the second segment do not do so. Whether a specific household is a member of the first or the second segment at a specific purchase occasion is described by household-specific characteristics and characteristics concerning buying behavior. Households may switch between the two responsiveness states over time. When comparing the performance of our model with alternative choice models that account for various forms of heterogeneity for tree different datasets, we find better face validity of our parameters. Our model also forecasts better.
    Keywords: marketing-instrument effectiveness;heterogeneity;multinomial probit;mixtures
    Date: 2008–08–21
  15. By: Nicolas Coeurdacier (London Business School, Regent's Park, London NW1 4SA, UK.); Roberto A. De Santis (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Antonin Aviat (Paris School of Economics, Pse--Ens, 48 bd Jourdan, F-75014 Paris, France.)
    Abstract: Cross-border mergers and acquisitions (M&As) sharply increased over the last two decades. It is often pointed out that cross-border capital reallocation is partly the result of financial liberalization policies, government policies and regional agreements. In this paper, we identify some of the main forces driving cross-border M&As using a unique database on bilateral cross-border M&As at the sectoral level (in manufacturing and services) over the period 1985-2004. We focus on the role of institutional and financial developments with a special attention to the role played by the European Integration process. We identify the impact of (i) joining the European Union and (ii) joining the Euro on cross-border M&As. We show that EU and EMU have almost doubled M&As in manufacturing towards their members from all over the globe, with an additional 50% increase within EMU countries. Conversely, the service sector did not exploit the opportunity offered by the single currency. We also show how cross-border M&As are linked to the acquirer expected profitability and provide insights on the effectiveness of policies to attract foreign capital (such as corporate tax incentives, and interventions to improve the country's financial system and product market regulations). JEL Classification: F30, F36, F41, G11.
    Keywords: Cross Mergers and Acquisitions, Gravity Equation, Euro.
    Date: 2009–03
  16. By: Thomas Vallée (LEMNA - Université de Nantes); Murat Yildizoglu (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579)
    Abstract: Convergence to the Nash equilibrium in a Cournot oligopoly is a question that recurrently arises as a subject of controversy in economics. The development of evolutionary game theory has provided an equilibrium concept more directly connected with adjustment dynamics, and the evolutionary stability of the equilibria of the Cournot game has been extensively studied in the literature. Several articles show that the Walrasian equilibrium is the stable ESS of the Cournot game. But no general result has been established for the difficult case of simultaneous heterogenous mutations.Authors propose specific selection dynamics to analyze this case. Vriend (2000) proposes using a genetic algorithm for studying learning dynamics in this game and obtains convergence to Cournot equilibrium with individual learning. The resulting convergence has been questioned by Arifovic and Maschek (2006). The aim of this article is to clarify this controversy: it analyzes the mechanisms that are behind these contradictory results and underlines the specific role of the spite effect. We show why social learning gives rise to the Walrasian equilibrium and why, in a general setup, individual learning can effectively yield convergence to the Cournot equilibrium. We also illustrate these general results by systematic computational experiments.
    Keywords: Cournot oligopoly; Learning; Evolution; Selection; Evolutionary stability; Nash equilibrium; Genetic algorithms
    Date: 2009–03–15

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