nep-bec New Economics Papers
on Business Economics
Issue of 2009‒04‒25
twenty papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Unobservable Persistant Productivity and Long Term Contracts By Hugo H. Hopenhayn; Arantxa Jarque
  2. The Flattening Firm and Product Market Competition By Guadalupe, Maria; Wulf, Julie
  3. Reconceptualizing Entrepreneurial Exit: Divergent Exit Routes and Their Drivers By Wennberg, Karl; Wiklund, Johan; DeTienne, Dawn; Cardon, Melissa
  4. Cumulative Leadership and Entry Dynamics By Bruno Versaevel
  5. Exclusivity as Inefficient Insurance By Argenton, C.; Willems, B.R.R.
  6. Firm Heterogeneity and Country Size Dependent Market Entry Costs By Akerman, Anders; Forslid, Rikard
  7. Adaptation and the Boundary of Multinational Firms By Costinot, Arnaud; Oldenski, Lindsay; Rauch, James
  8. Product Innovation Incentives: Monopoly vs. Competition By Marius Schwartz
  9. Incorporating the Dynamics of Leverage into Default Prediction By Gunter Löffler; Alina Maurer
  10. The Determinants and Effects of Training at Work: Bringing the Workplace Back In By O'Connell, Philip J.; Byrne, Delma
  11. Sunk Entry Costs, Sunk Depreciation costs, and Industry Dynamics By Adelina Gschwandtner; Val E. Lambson
  12. Credit Crunch, Creditor Protection, and Asset Prices By Galina Hale; Assaf Razin; Hui Tong
  13. A Real Options Perspective On R&D Portfolio Diversification By Bekkum, S. van; Pennings, H.P.G.; Smit, J.T.J.
  14. Job Mobility and hours of work: the effect of Dutch legislation By Fouarge Didier; Baaijens Christine
  15. Optimal Collusion with Limited Severity Constraint By Etienne Billette De Villemeur; Laurent Flochel; Bruno Versaevel
  16. By What Measure? A Comparison of French and U.S. Labor Market Performance With New Indicators of Employment Adequacy By David Howell and Ana Okatenko
  17. The role of the United States in the global economy and its evolution over time. By Stéphane Dées; Arthur Saint-Guilhem
  18. The Ethics of Organizations: A Longitudinal Study of the U.S. Working Population By Kaptein, M.
  19. U.S. Stock Market Crash Risk, 1926-2006 By David S. Bates
  20. Experts and Their Records By Alexander Frankel; Michael Schwarz

  1. By: Hugo H. Hopenhayn; Arantxa Jarque
    Abstract: We study the problem of a firm that faces asymmetric information about the productivity of its potential workers. In our framework, a worker’s productivity is either assigned by nature at birth, or determined by an unobservable initial action of the worker that has persistent effects over time. We provide a characterization of the optimal dynamic compensation scheme that attracts only high productivity workers: consumption –regardless of time period– is ranked according to likelihood ratios of output histories, and the inverse of the marginal utility of consumption satisfies the martingale property derived in Rogerson (1985). However, in the case of i.i.d. output and square root utility we show that, contrary to the features of the optimal contract for a repeated moral hazard problem, the level and the variance of consumption are negatively correlated, due to the influence of early luck into future compensation. Moreover, in this example long-term inequality is lower under persistent private information
    Keywords: Mechanism design, Moral hazard, Persistence
    JEL: D80 D82
    Date: 2009–03
  2. By: Guadalupe, Maria; Wulf, Julie
    Abstract: This paper establishes a causal effect of product market competition on various characteristics of organizational design. Using a unique panel dataset on firm hierarchies of large U.S. firms (1986-1999) and a quasi-natural experiment (trade liberalization), we find that increasing competition leads firms to flatten their hierarchies, i.e., (i) firms reduce the number of positions between the CEO and division managers and (ii) increase the number of positions reporting directly to the CEO (span of control). Firms also alter the structure and level of division manager compensation, increasing total pay as well as local (division-level) and global (firm-level) incentives. Our estimates show that for the average firm, span of control increased by 6% and depth decreased by 11% as a result of the quasi-natural experiment.
    Keywords: competition; complementarities; decentralization; hierarchy; incentives; organizational change; organizational structure; performance-related pay
    JEL: L2 M2 M52
    Date: 2009–04
  3. By: Wennberg, Karl (Dept. of Business Administration, Stockholm School of Economics); Wiklund, Johan (Whitman School of Management); DeTienne, Dawn (Colorado State University); Cardon, Melissa (Pace University)
    Abstract: We develop a conceptual model of entrepreneurial exit which includes exit through liquidation and firm sale for both firms in financial distress and firms performing well. This represents four distinct exit routes. In developing the model, we complement the prevailing theoretical framework of exit as a utility-maximizing problem among entrepreneurs with prospect theory and its recent applications in liquidation of investment decisions. We empirically test the model using two Swedish databases which follow 1,735 new ventures and their founders over eight years. We find that entrepreneurs exit from both firms in financial distress and firms performing well. In addition, commonly examined human capital factors (entrepreneurial experience, age, education) and failure-avoidance strategies (outside job, reinvestment) differ substantially across the four exit routes, explaining some of the discrepancies in earlier studies
    Keywords: Entrepreneurial Exit; Prospect Theory; Human Capital
    Date: 2009–02–10
  4. By: Bruno Versaevel (EMLYON Business School, Ecully, F-69134 and University of Lyon, Lyon, F-69003, France; CNRS, UMR 5824, GATE, Ecully, F-69130, France; ENS LSH, Lyon, F-69007, France)
    Abstract: This paper investigates the combined impact of a first-mover advantage and of firms’ limited mobility on the equilibrium outcomes of a continuous-time model adapted from by Boyer, Lasserre, and Moreaux (2007). Two firms face market development uncertainty and may enter by investing in lumpy capacity units. With perfect mobility, when the first entrant plays as a Stackelberg leader a Markov perfect preemption equilibrium obtains in which the leader invests earlier, and the follower later, than in the Cournot benchmark scenario. There is rent equalization, and the two firms’ equilibrium value is lower. This result is not robust to the introduction of firm-specific limited mobility constraints. If one firm is sufficiently less able than its rival to mobilize resources at early stages of the market development process, there is less rent dissipation, and no equalization, in a constrained preemption equilibrium. The first-mover advantage on the product market then results in more value for the less constrained firm, and in less value for the follower than when they play `a la Cournot with perfect mobility. The leading firm maximizes value by entering immediately before its constrained rival, though later than made possible by its superior mobility. Greater uncertainty reduces the value differential to the benefit of the follower. It also increases the distance between the firms’ respective investment triggers. The specifications and results are discussed in light of recent developments in the market for music downloads.
    Keywords: Real options, Preemption, First-mover advantage, Mobility
    JEL: C73 D43 D92 L13
    Date: 2009
  5. By: Argenton, C.; Willems, B.R.R. (Tilburg University, Center for Economic Research)
    Abstract: It is well established that an incumbent firm may use exclusivity contracts so as to monopolize an industry or deter entry. Such an anticompetitive practice could be tolerated if it were associated with sufficiently large efficiency gains, e.g. insuring buyers against price volatility. In this paper we study the trade-off between positive effects (risk sharing) and negative effects (exclusion) of exclusivity contracts. We revisit the seminal model of Aghion and Bolton (1987) under risk-aversion and show that although exclusivity contracts induce optimal risk-sharing, they can be used not only to deter the entry of a more efficient rival on the product market but also to crowd out financial investors willing to insure the buyer at competitive rates. We further show that in a world without financial investors, purely financial bilateral instruments, such as forward contracts, achieve optimal risk sharing without distorting product market outcomes. Thus, there is no room for an insurance defense of exclusivity contracts.
    Keywords: exclusivity;contracts;monopolization;risk-aversion;risk-sharing;damages
    JEL: D43 D86 K21 L12 L42
    Date: 2009
  6. By: Akerman, Anders; Forslid, Rikard
    Abstract: This paper introduces a market size dependent firm entry cost into the Helpman, Melitz and Yeaple (2004) (HMY) version of the Melitz (2003) model. This is a relatively small generalisation, which preserves the analytical solvability of the model. Nevertheless, our model yields several new results that are in line with data. First, the average productivity of firms located in a market increases in the size of the market. Second, the productivity of exporters is U-shaped with reference to export market size. Third, the productivity premium (the difference in average productivity) between exporters and non-exporters decreases in the home country size. Fourth, we derive a set of new results related to trade volume. It is shown that when the fixed entry cost of exporting declines, for instance as the result of economic integration, export shares converge. This prognosis is supported by the empirical section of the paper. Fifth, we use a multicountry version of our model to derive a gravity equation. Our specification yields a gravity equation a la Anderson and van Wincoop (2003), but where GDP per capita enters as an additional explanatory variable.
    Keywords: heterogenous firms, market size, market entry costs
    JEL: D21 F12 F15
    Date: 2009–04
  7. By: Costinot, Arnaud; Oldenski, Lindsay; Rauch, James
    Abstract: What determines the boundary of multinational firms? According to Williamson (1975), a potential rationale for vertical integration is to facilitate adaptation in a world where uncertainty is resolved over time. This paper offers the first empirical analysis of the impact of adaptation on the boundary of multinational firms. To do so, we first develop a ranking of sectors in terms of their "routineness" by merging two sets of data: (i) ratings of occupations by their intensities in "problem solving" from the U.S. Department of Labor's Occupational Information Network; and (ii) U.S. employment shares of occupations by sectors from the Bureau of Labor Statistics Occupational Employment Statistics. Using U.S. Census trade data, we then demonstrate that, in line with adaptation theories of the firm, the share of intrafirm trade tends to be higher in less routine sectors. This result is robust to inclusion of other variables known to influence the U.S. intrafirm import share such as capital intensity, R&D intensity, relationship specificity, intermediation and productivity dispersion. Our most conservative estimate suggests that a one standard deviation decrease in average routineness raises the share of intrafirm imports by 0.26 standard deviations, or an additional 7% of import value that is intrafirm.
    Date: 2009–04
  8. By: Marius Schwartz (Department of Economics, Georgetown University)
    Abstract: Arrow (1962) showed that a secure monopolist (unconcerned with preemption) has a weaker incentive than would a competitive firm to invest in a patentable process innovation. This paper shows that the ranking can be reversed for product innovations. Only the innovator sells the new product, a differentiated substitute for the old. Under alternative market structures considered, the old product is sold only by that same firm (two-product monopoly), only by a different firm (post-innovation duopoly), or in perfect competition. In an asymmetric Hotelling model, the innovation incentive under monopoly is greater than under duopoly if and only if the new product has the higher quality, and is always greater than under perfect competition. Classification-JEL Codes: D4, L1
    Date: 2009–04–02
  9. By: Gunter Löffler; Alina Maurer
    Abstract: A firm’s current leverage ratio is one of the core characteristics of credit quality used in statistical default prediction models. Based on the capital structure literature, which shows that leverage is mean-reverting to a target leverage, we forecast future leverage ratios and include them in the set of default risk drivers. The analysis is done with a discrete duration model. Out-of-sample analysis of default events two to five years ahead reveals that the discriminating power of the duration model increases substantially when leverage forecasts are included. We further document that credit ratings contain information beyond the one contained in standard variables but that this information is unrelated to forecasts of leverage ratios.
    Keywords: default prediction, discrete duration model, leverage targeting, mean reversion, credit rating
    JEL: G32 G33
    Date: 2009–04
  10. By: O'Connell, Philip J. (ESRI); Byrne, Delma (ESRI)
    Abstract: This paper brings together two research fields: on work-related training and high performance work practices (HPWP), respectively. We estimate models of both the determinants and the impact of training using the NCPP/ESRI Changing Workplace Survey. Our models of the determinants of training confirm previous research: age, education, contract, tenure, and firm size all influence training. Several components of HPWP are associated with a higher probability of training, specifically, general (non-firm-specific) training. Participation in general training is associated with higher earnings, as is involvement in highly participative and consultative working arrangements, and performance reward systems. These patterns of training, and returns to training, are broadly consistent with HPWP approaches and represent a challenge to human capital theory.
    Date: 2009–04
  11. By: Adelina Gschwandtner; Val E. Lambson
    Abstract: Dynamic competitive models of industry evolution predict higher variability of firm value over time and lower variability of firm activity over time in industries where sunk entry costs are higher. These predictions have done well empirically. Here we extend the theory to allow an additional category of sunk costs---depreciation---and argue that this generates countervailing effects. We test this assertion empirically and find the results are consistent with the theory.
    JEL: L00
    Date: 2009–03
  12. By: Galina Hale (Federal Reserve Bank of San Francisco); Assaf Razin (Tel-Aviv University); Hui Tong (International Monetary Fund)
    Abstract: In a Tobin's q model with productivity and liquidity shocks, we study the mechanism through which strong creditor protection increases the level and lowers the volatility of stock market prices. There are two channels at work: (1) the Tobin's q value under a credit crunch regime increases with creditor protection; and, (2) the probability of a credit crunch falls for given stochastic processes of underlying shocks when creditor protection improves. We test these predictions by using cross-country panel regressions of the stock market price level and volatility, in 40 countries, over the period from 1984 to 2004, at annual frequency. We create indicators for liquidity shocks based on quantity and price measures. Estimated probabilities of big shocks to liquidity are used as forecasts of credit crunch. We find broad empirical support for the hypothesis that creditor protection increases the stock market price level and reduces its volatility directly and via its negative effect on the probability of credit crunch. Our empirical findings are robust to multiple specifications.
    Date: 2008–08
  13. By: Bekkum, S. van; Pennings, H.P.G.; Smit, J.T.J. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: This paper shows that the conditionality of investment decisions in R&D has a critical impact on portfolio risk, and implies that traditional diversification strategies should be reevaluated when a portfolio is constructed. Real option theory argues that research projects have conditional or option-like risk and return properties, and are different from unconditional projects. Although the risk of a portfolio always depends on the correlation between projects, a portfolio of conditional R&D projects with real option characteristics has a fundamentally different risk than a portfolio of unconditional projects. When conditional R&D projects are negatively correlated, diversification only slightly reduces portfolio risk. When projects are positively correlated, however, diversification proves more effective than conventional tools predict.
    Keywords: real options;portfolio analysis;research & development
    Date: 2009–04–03
  14. By: Fouarge Didier; Baaijens Christine (ROA rm)
    Abstract: Previous research has pointed to the existence of hours constraints on the labour market: not all employees’ preferences with respect to the length of the working week seem to be fulfilled, and changes in the number of working hours often coincide with job mobility. In this paper, we test whether or not a recently introduced Dutch legislation providing employees with the right to adjust working hours within their job has reduced the correlation between changes in working hours and job mobility. We do this by implementing a difference-in-differences methodology to the job and hours mobility behaviour of Dutch workers prior and after the introduction of the new law. We find no evidence suggesting that this is indeed the case, regardless of gender.
    Keywords: education, training and the labour market;
    Date: 2009
  15. By: Etienne Billette De Villemeur (GREMAQ - Groupe de recherche en économie mathématique et quantitative - CNRS : UMR5604 - Université des Sciences Sociales - Toulouse I - Ecole des Hautes Etudes en Sciences Sociales); Laurent Flochel (CRA - Charles River Associates International - Charles River Associates International); Bruno Versaevel (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: Collusion sustainability depends on ï¬rms' aptitude to impose sufficiently severe punishments in case of deviation from the collusive rule. We characterize the ability of oligopolistic ï¬rms to implement a collusive strategy when their ability to punish deviations over one or several periods is limited by a severity constraint. It captures all situations in which either structural conditions (the form of payoff functions), institutional circumstances (a regulation), or ï¬nancial considerations (proï¬tability requirements) set a lower bound to ï¬rms' losses. The model speciï¬cations encompass the structural assumptions (A1-A3) in Abreu (1986) [Journal of Economic Theory, 39, 191-225]. The optimal punishment scheme is characterized, and the expression of the lowest discount factor for which collusion can be sustained is computed, that both depend on the status of the severity constraint. This extends received results from the literature to a large class of models that include a severity constraint, and uncovers the role of structural parameters that facilitate collusion by relaxing the constraint.
    Keywords: Collusion ; Oligopoly ; Penal codes
    Date: 2009
  16. By: David Howell and Ana Okatenko (New School for Social Research, New York, NY)
    Keywords: labor markets; Europe
    Date: 2008–09
  17. By: Stéphane Dées (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Arthur Saint-Guilhem (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper aims at assessing the role of the United States in the global economy and its evolution over time. The emergence of large economic players, like China, is likely to have weakened the role of the U.S. economy as a driver of global growth. Based on a Global VAR modelling approach, this paper shows first that the transmission of U.S. cyclical developments to the rest of the world tends to fluctuate over time but remains large overall. Second, although the size of the spillovers might have decreased in the most recent periods, the effects of changes in U.S. economic activity seem to have become more persistent. Actually, the increasing economic integration at the world level is likely to have fostered second-round and third-market effects, making U.S. cyclical developments more global. Finally, the slightly decreasing role of the U.S. has been accompanied by an increasing importance of third players. Regional integration might have played a significant role by giving more weights to non-U.S. trade partners in the sensitivity of the various economies to their international environment. JEL Classification: E32, E37, F41.
    Keywords: International transmission of shocks, Business cycle, Global VAR (GVAR).
    Date: 2009–03
  18. By: Kaptein, M. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: The ethics of organizations has received much attention in recent years. This raises the question whether the ethics of organizations has also improved. In 1999, 2004 and 2008, a survey was conducted of 12,196 U.S. managers and employees. The results show that the ethical culture of organizations only improved in the period between 1999 and 2004. Unethical behavior and its consequences, however, declined between 2004 and 2008, while the scope of ethics programs expanded in that period. The paper concludes with a discussion of the implications of these findings for further research and practice.
    Keywords: ethical culture;ethics program;unethical behavior;ethical reputation;ethics management;virtue theory;stakeholder theory
    Date: 2009–04–01
  19. By: David S. Bates
    Abstract: This paper applies the Bates (RFS, 2006) methodology to the problem of estimating and filtering time- changed Lévy processes, using daily data on U.S. stock market excess returns over 1926-2006. In contrast to density-based filtration approaches, the methodology recursively updates the associated conditional characteristic functions of the latent variables. The paper examines how well time-changed Lévy specifications capture stochastic volatility, the “leverage†effect, and the substantial outliers occasionally observed in stock market returns. The paper also finds that the autocorrelation of stock market excess returns varies substantially over time, necessitating an additional latent variable when analyzing historical data on stock market returns. The paper explores option pricing implications, and compares the results with observed prices of options on S&P 500 futures.
    JEL: C22 C46 G1 G13
    Date: 2009–04
  20. By: Alexander Frankel; Michael Schwarz
    Abstract: Consider an environment where long-lived experts repeatedly interact with short-lived customers. In periods when an expert is hired, she chooses between providing a profitable major treatment or a less profitable minor treatment. The expert has private information about which treatment best serves the customer, but has no direct incentive to act in the customer's interest. Customers can observe the past record of each expert's actions, but never learn which actions would have been appropriate. We find that there exists an equilibrium in which experts always play truthfully and choose the customer's preferred treatment. The expert is rewarded for choosing the less profitable action with future business: customers return to an expert with high probability if the previous treatment was minor, and low probability if it was major. If experts have private information regarding their own payoffs as well as what treatments are appropriate, then there is no equilibrium with truthful play in every period. But we construct equilibria where experts are truthful arbitrarily often as their discount factor converges to one.
    JEL: C7 C73 D82 J01
    Date: 2009–04

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