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on Business Economics |
| By: | Leena Rudanko (Boston University) |
| Abstract: | Recent research seeking to explain the strong cyclicality of US unemployment emphasizes the role of wage rigidity. This paper proposes a micro-founded model of wage rigidity – an equilibrium business cycle model of job search, where risk neutral firms post optimal long-term contracts to attract risk averse workers. Equilibrium contracts feature wage smoothing, limited by the inability of parties to commit to contracts. The model is consistent with aggregate wage data if neither worker nor firm can commit, producing too rigid wages otherwise. Wage rigidity does not lead to a substantial increase in the cyclical volatility of unemployment. |
| Keywords: | wage rigidity, unemployment fluctuations, long-term wage contracts, limited commitment, directed search |
| JEL: | E24 E32 J41 J64 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2008-003&r=bec |
| By: | Hui Chen (MIT Sloan School of Management); Jianjun Miao (Department of Economics, Boston University); Neng Wang (Columbia Business School and National Bureau of Economic Research) |
| Abstract: | Entrepreneurs face significant non-diversifiable business risks. We build a dynamic incompletemarkets model of entrepreneurial finance to demonstrate the important implications of nondiversifiable risks for entrepreneurs’ interdependent consumption, portfolio allocation, financing, investment, and business exit decisions. The optimal capital structure is determined by a generalized tradeoff model where leverage via risky non-recourse debt provides significant diversification benefits. More risk-averse entrepreneurs default earlier, but also choose higher leverage, even though leverage makes his equity more risky. Non-diversified entrepreneurs demand both systematic and idiosyncratic risk premium. Cash-out option and external equity further improve diversification and raise the entrepreneur’s valuation of the firm. Finally, entrepreneurial risk aversion can overturn the risk-shifting incentives induced by risky debt. |
| Keywords: | Default, diversification benefits, entrepreneurial risk aversion, incomplete markets, private equity premium, hedging, capital structure, cash-out option, precautionary saving |
| JEL: | G11 G31 E2 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:bos:iedwpr:dp-180&r=bec |
| By: | Zwick, Thomas |
| Abstract: | This paper characterises establishments that pay higher seniority wages than their competitors. It tests whether seniority wages are paid on the basis of agency, human capital or efficiency wage considerations. A representative linked employeremployee panel and an innovative two-step estimation strategy are used to first calculate individual seniority wages taking into account that match quality biases tenure effects on wages. Then individual seniority wages are aggregated to the establishment level. Finally, the seniority wage indicator is explained by establishment characteristics. This contribution shows that large, profitable and establishments with a highly qualified workforce pay high seniority wages. Also collective bargaining coverage and works councils have a positive impact and the share of foreigners, training intensity and initial wage levels have a negative correlation with seniority wages. The results support an agency based motivation for seniority wages. |
| Keywords: | Seniority Wages, Establishment Characteristics, Linked Employer-Employee Data |
| JEL: | J14 J21 J31 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:7531&r=bec |
| By: | Fresard, L.; Salva, C. (Vlerick Leuven Gent Management School) |
| Abstract: | We examine whether and, if so, how a U.S. cross-listing mitigates the risk that managers will squander corporate cash holdings. We find strong evidence that the value investors attach to excess cash reserves is substantially larger for foreign firms listed on U.S. exchanges and over the counter than for their domestic peers. Further, we show that this excess-cash premium stems not only from the strength of U.S. legal rules and disclosure requirements designed to safeguard investors’ money, but also from increased monitoring by financial analysts and large investors. Overall, since investors’ valuation of excess cash mirrors how they expect the cash to be used, our analysis shows that a U.S. listing constrains managers’ inefficient allocation of corporate cash reserves significantly. |
| Keywords: | International cross-listing, corporate governance, cash holdings, liquidity |
| Date: | 2009–04–03 |
| URL: | http://d.repec.org/n?u=RePEc:vlg:vlgwps:2009-09&r=bec |
| By: | François Gourio (Department of Economics, Boston University); Jianjun Miao (Department of Economics, Boston University) |
| Abstract: | To study the long-run effect of dividend taxation on aggregate capital accumulation, we build a dynamic general equilibrium model in which there is a continuum of firms subject to idiosyncratic productivity shocks. We find that a dividend tax cut raises aggregate productivity by reducing the frictions in the reallocation of capital across firms. Our baseline model simulations show that when both dividend and capital gains tax rates are cut from 25 and 20 percent, respectively, to the same 15 percent level permanently, the aggregate long-run capital stock increases by about 4 percent. |
| Keywords: | firm heterogeneity, finance regime, dividend tax reform, general equilibrium |
| JEL: | E22 E62 G31 G35 H32 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2008-002&r=bec |
| By: | Metzger, Georg |
| Abstract: | Many entrepreneurs who close a business are actually willing to venture anew. However, to realize a restart is not only a matter of willingness on the part of the entrepreneur but also of its feasibility. Regarding the feasibility of a restart, the aspect of capital acquisition might be particularly precarious for renascent entrepreneurs since business closures are likely to come up with financial losses. Financial losses arising from business closure can befall various stakeholders : shareholders, banks and public institutions, or suppliers and other stakeholders. The major finding of this analysis is that financial losses due to business closure strongly influence the likelihood of entrepreneurial restart – yet only when losses are incurred by banks. Losses which are incurred privately by the entrepreneurs or by other stakeholders do not influence the restart likelihood. Entrepreneurs who would seek to continue their entrepreneurial career after a business closure would be well advised to avoid causing losses at banks. |
| Keywords: | Firm closure, financial loss, restart |
| JEL: | G33 L26 M13 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:7436&r=bec |
| By: | Alejandra A. Traferri (Department of Economics, Universidad Carlos III de Madrid) |
| Abstract: | This paper analyzes the differences on the proportion of temporary employees in the Spanish manufacturing sector according to firm ownership nationality. Standard censored Tobit and Heckman sample selection models are estimated using data from the Survey on Managerial Strategies (ESSE) in the period 1991 to 2005. The results show there is a clear relation between the nationality of the owners of the firm and the type of labor offered, even after controlling for a large number of observable firm characteristics and unobservable fixed effects. In particular, the share of temporary employees is significantly lower for foreign firms and this effect decreases with firm size. |
| Keywords: | Firm nationality, fixed-term contracts, temporary employment |
| JEL: | J23 C20 C24 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:bos:iedwpr:dp-186&r=bec |
| By: | Paola Conconi (Universite Libre de Bruxelles (ECARES) and CEPR); Patrick Legros (Universite Libre de Bruxelles (ECARES) and CEPR); Andrew F. Newman (Boston University and CEPR) |
| Abstract: | We embed a simple incomplete-contracts model of organization design in a standard two-country, perfectly-competitive trade model to examine how the liberalization of product and factor markets affects the ownership structure of firms. In our model, managers decide whether or not to integrate their firms, trading off the pecuniary benefits of coordinating production decisions with the private benefits of operating in their preferred ways. The price of output is a crucial determinant of this choice, since it affects the size of the pecuniary benefits. In particular, non-integration is chosen at "low" and "high" prices, while integration occurs only at moderate prices. Organizational choices also depend on the terms of trade in supplier markets, which affect the division of surplus between managers. We obtain three main results. First, joint product and factor market integration leads to the convergence of organization design across countries. Second, even in the absence of factor movements, the price changes triggered by liberalization of product markets can lead to significant organizational restructuring within countries. Third, the removal of barriers to factor mobility can induce further organizational changes, sometimes adversely affecting consumers, which suggests a potential complementarity between trade policy and corporate governance policy. |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:bos:iedwpr:dp-172&r=bec |
| By: | James Morley (Washington University in St. Louis); Jeremy Piger (University of Oregon); Pao-Lin Tien (Department of Economics, Wesleyan University) |
| Abstract: | In this paper, we consider the ability of time-series models to generate simulated data that display the same business cycle features found in U.S. real GDP. Our analysis of a range of popular time-series models allows us to investigate the extent to which multivariate information can account for the apparent univariate evidence of nonlinear dynamics in GDP. We find that certain nonlinear specifications yield an improvement over linear models in reproducing business cycle features, even when multivariate information inherent in the unemployment rate, inflation, interest rates, and the components of GDP is taken into account. |
| JEL: | E30 C52 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:wes:weswpa:2009-003&r=bec |
| By: | Mark Bils (University of Rochester); Yongsung Chang (University of Rochester); Sun-Bin Kim (Department of Economics, Korea University) |
| Abstract: | We model unemployment allowing workers to differ by comparative advantage in market work. Workers with comparative advantage are identified by who works more hours when employed. This enables us to test the model by grouping workers based on their long-term wages and hours from panel data. The model captures the greater cyclicality of employment for workers with low comparative advantage. But the model fails to explain the magnitude of countercyclical separations for high-wage workers or the magnitude of procyclical findings for high-hours workers. As a result, it only captures the cyclicality of the extensive, employment margin for low-wage, low-hours workers. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:roc:rocher:547&r=bec |
| By: | Norbäck, Pehr-Johan (Research Institute of Industrial Economics (IFN)); Persson, Lars (Research Institute of Industrial Economics (IFN)) |
| Abstract: | We construct a model where incumbents can either acquire basic innovations from entrepreneurs, or wait and acquire developed innovations from entrepreneurial firms supported by venture capitalists. We show that venture-backed entrepreneurial firms have an incentive to overinvest in development vis à vis incumbents due to strategic product market effects on the sales price of a developed innovation. This will trigger preemptive acquisitions by incumbents, thus increasing the reward for entrepreneurial innovations. We also show that venture capital can emerge in equilibrium if venture capitalists have cost advantages, or if development is associated with double moral hazard problems. |
| Keywords: | Acquisitions; Entrepreneurship; Innovation; Venture Capital |
| JEL: | G24 L10 L20 M13 O30 |
| Date: | 2009–01–02 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:0783&r=bec |
| By: | Beck, T.H.L.; Büyükkarabacak, B.; Rioja, F.; Valev, N. (Tilburg University, Center for Economic Research) |
| Abstract: | While theory predicts different effects of household credit and enterprise credit on the economy, the empirical literature has mainly used aggregate measures of overall bank lending to the private sector. We construct a new dataset from 45 developed and developing countries, decomposing bank lending into lending to enterprises and lending to households and assess the different effects of these two components on real sector outcomes. We find that: 1) enterprise credit raises economic growth whereas household credit has no effect; 2) enterprise credit reduces income inequality whereas household credit has no effect; and 3) household credit is negatively associated with excess consumption sensitivity, while there is no relationship between enterprise credit and excess consumption sensitivity. |
| Keywords: | Financial Intermediation; Household Credit; Firm Credit |
| JEL: | D14 G21 G28 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:200941&r=bec |
| By: | van Quaquebeke, N.; Eckloff, T. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | Research on work values shows that respectful leadership is highly desired by employees. On the applied side, however, the extant research does not offer many insights as to which concrete leadership behaviours are perceived by employees as indications of respectful leadership. Thus, to offer such insights, we collected and content analyzed employees’ narrations of encounters with respectful leadership (N1 = 426). The coding process resulted in 19 categories of respectful leadership spanning 149 leadership behaviours. Furthermore, to also harness this comprehensive repertoire for quantitative organizational research, we undertook two more studies (N2a = 228; N2b = 412) to empirically derive a feasible item-based measurement of respectful leadership and assess its psychometric qualities. In these studies, we additionally investigated the relationships between respectful leadership as assessed with this new measurement and employees’ vertical and contextual followership as assessed via subordinates’ identification with their leaders, their appraisal respect for their leaders, their feeling of self-determination, and their job-satisfaction. |
| Keywords: | interpersonal respect;leadership;vertical followership;contextual followership;self-determination;appraisal respect;identification;satisfaction |
| Date: | 2009–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:1765015942&r=bec |
| By: | Sachs, Andreas; Schleer, Frauke |
| Abstract: | We focus on the influence of institutional variables on business cycle synchronisation for 20 OECD countries from 1979 to 2003. More precisely, this paper derives measures for similarity of institutions and structural reforms, and investigates direct and delayed reform effects on synchronisation by applying robustness tests to a panel data framework with bilateral data. Our findings indicate a strong instantaneous relationship between both similarity of institutions as well as common structural reforms and business cycle correlation. |
| Keywords: | Business cycle synchronisation, Institutions, Structural reforms, Robustness test |
| JEL: | E32 F42 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:7533&r=bec |
| By: | Susanne Neckermann; Reto Cueni; Bruno S. Frey |
| Abstract: | Behavioral economics documents the importance of status and self-image concerns in the workplace, but is largely silent about how to instrumentalize them to induce effort. Awards|widespread in the corporate sector and elsewhere are motivators that derive their value from such social concerns. Panel data from the call center of a large international bank allow us to estimate the impact of receiving an award on e ort. The performance of winners proves to be signi cantly higher than that of comparable nonrecipients after the award has been presented. This increase in work e ort is sizeable, robust, and not driven by reverse causation. |
| Keywords: | Awards; Motivation; Non-monetary Compensation; Event-Study; Incentives |
| JEL: | C23 J33 M52 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:cra:wpaper:2009-09&r=bec |
| By: | Thomas Gall (University of Bonn); Marc Schiffbauer (Economic & Social Research Institute, Dublin, Ireland); Julia Kubny (German Development Institute, Bonn, Germany) |
| Abstract: | This paper argues that foreign direct investment in economies with credit market imperfections may increase their vulnerability to capital flow shocks. Due to better access to financial markets foreign firms can use different wage contracts than domestic ones. This alters the domestic wage composition and the subsequent wealth distribution. Under credit market imperfections the wealth distribution typically determines an economy’s growth potential in autarky; hence high exposure to foreign direct investment may substantially impede the capability to recover from sudden withdrawals of foreign capital. This is substantiated by empirical evidence on durations of output recovery after systemic sudden stops. |
| Keywords: | Credit market imperfections, foreign direct investment, growth, occupational choice, sudden stops |
| JEL: | F43 F23 O16 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:bos:iedwpr:dp-188&r=bec |
| By: | Leena Rudanko (Boston University, Department of Economics) |
| Abstract: | Economists face difficulties explaining the strong cyclicality of US unemployment. This paper contributes both by developing modeling tools and evaluating a potentially important explanation. The paper develops a parsimonious equilibrium model of job search with aggregate productivity shocks, where i) workers face incomplete markets, and ii) wages are determined via optimal long-term contracts. Despite the large state space associated with long-term contracting, the equilibrium has a simple representation as a small system of differential equations. Incomplete markets amplify fluctuations in unemployment, and the results suggest an upper bound on how far they can go in explaining unemployment cyclicality. |
| Keywords: | Unemployment, Wages, Business Cycles, Search, Dynamic Contracts, Incomplete Markets |
| JEL: | D52 E24 E32 J41 J64 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2008-009&r=bec |
| By: | Bottazzi, L.; Da Rin, M.; Hellmann, T. (Tilburg University, Center for Economic Research) |
| Abstract: | We examine the effect of trust on financial investment and contracting decisions in a micro-economic environment where trust is exogenous. Using hand-collected data on European venture capital, we show that the Eurobarometer measure of trust among nations significantly affects investment decisions. This holds even after controlling for investor and company fixed effects, geographic distance, information and transaction costs. The national identity of venture capital firms’ individual partners further contributes to the effect of trust. Education and work experience reduce the effect of trust but do not eliminate it. We also examine the relationship between trust and sophisticated contracts involving contingent control rights and find that, even after controlling for endogeneity, they are complements, not substitutes. |
| Keywords: | Venture Capital;Social Capital;Trust;Financial Contracts;Corporate Governance. |
| JEL: | G24 G34 K22 M13 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:200943&r=bec |
| By: | Zhou, H.; Uhlaner, L.M. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | In this study, we examine the prevalence of different KM practices and the organizational determinants of KM among SMEs by conducting a quantitative study of empirical data from nearly 500 Dutch SMEs. Our empirical results show that knowledge is managed in a people-based approach in SMEs. SMEs are most likely to acquire knowledge by staying in touch with professionals and experts outside the company and they incline to share knowledge and experience by talking to each other. Furthermore, KM is dependent on other organizational resources and processes. Organizational learning and competitive strategy with a formality approach are the positive determinants of KM while family orientation is a negative determinant of it. One of the challenges in the current study was to clearly distinguish, on an empirical basis, the previously defined concepts of knowledge management practices and organizational learning. Although in theory, they are distinct, the results of this study lead us to conclude that they may overlap in practice. In the conclusion, we recommend a learning-oriented knowledge management model for SMEs which combines aspects of the two literatures. |
| Keywords: | knowledge management;strategy;family orientation;organizational learning;SMEs |
| Date: | 2009–05–11 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:1765015914&r=bec |
| By: | Masami Imai (Department of Economics, Wesleyan University); Seitaro Takarabe |
| Abstract: | Finding the causal effects of liquidity shocks on credit supply is complicated by the endogenous relation between loan demand and liquidity position of banks. This paper attempts to overcome this problem by exploiting, as a natural experiment, the exogenous deposit outflow prompted by the removal of a blanket deposit guarantee on time deposits in Japan. We find that just as the government placed a cap on insurance for time deposits in 2002, weak banks suffered from a large outflow of partially insured time deposits. More importantly, we find that those weak banks were not able to raise a sufficient amount of fully insured ordinary deposits to make up for the loss of time deposits, which, consequently, forced them to cut back on loan supply. These results are consistent with the theory that the imperfect substitutability of insured deposits and uninsured deposits affects the tightness of banks’ financing constraints and ultimately the supply of bank loans. |
| Keywords: | Deposit Insurance, Bank Lending Channel, Japan, Natural Experiment |
| JEL: | E44 G21 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:wes:weswpa:2009-001&r=bec |
| By: | Bruno Feunou; Jean-Sébastien Fontaine; Roméo Tedongap |
| Abstract: | We introduce the Homoscedastic Gamma [HG] model where the distribution of returns is characterized by its mean, variance and an independent skewness parameter under both measures. The model predicts that the spread between historical and risk-neutral volatilities is a function of the risk premium and of skewness. In fact, the equity premium is twice the ratio of the volatility spread to skewness. We measure skewness from option prices and test these predictions. We find that conditioning on skewness increases the predictive power of the volatility spread and that coefficient estimates accord with theory. In short, the data do not reject the model's implications for the equity premium. We also check the model's implications for option pricing and show that the information content of skewness leads to improved in-sample and out-of-sample pricing performances as well as improved hedging performances. Our results imply that expanding around the Gaussian density is restrictive and does not offer sufficient flexibility to match the skewness and kurtosis implicit in option data. Finally, we document the term structure of option-implied volatility, skewness and kurtosis and find that time-dependence in returns has a greater impact on skewness. |
| Keywords: | Financial markets |
| JEL: | G12 G13 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:09-20&r=bec |
| By: | Markus Leibrecht (Department of Economics, Vienna University of Economics & B.A.); Johann Scharler (Department of Economics, University of Linz) |
| Abstract: | In this paper we empirically explore how characteristics of the domestic financial system influence the international allocation of consumption risk using a sample of OECD countries. Our results show that the extent of risk sharing achieved does not depend on the overall development of the domestic financial system per se. Rather, it depends on how the financial system is organized. Specifically, we find that countries characterized by developed financial markets are less exposed to idiosyncratic risk, whereas the development of the banking sector contributes little to the international diversification of consumption risk. We also find that countries with market-based financial systems manage to share a significantly larger fraction of their country-specific risk than bank-based economies. |
| JEL: | F36 F41 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp128&r=bec |
| By: | Nicholas Apergis (Department of Financial & Banking Management, University of Piraeus); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas) |
| Abstract: | This paper investigates how explicit structural shocks that characterize the endogenous character of oil price changes affect stock-market returns in a sample of eight countries – Australia, Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. For each country, the analysis proceeds in two steps. First, modifying the procedure of Kilian (2008a), we employ a vector error-correction or vector autoregressive model to decompose oil-price changes into three components: oil-supply shocks, global aggregate-demand shocks, and global oil-demand shocks. The last component relates to specific idiosyncratic features of the oil market, such as changes in the precautionary demand concerning the uncertainty about the availability of future oil supplies. Second, recovering the oil-supply shocks, global aggregate-demand shocks, and global oil-demand shocks from the first analysis, we then employ a vector autoregressive model to determine the effects of these structural shocks on the stock market returns in our sample of eight countries. We find that international stock market returns do not respond in a large way to oil market shocks. That is, the significant effects that exist prove small in magnitude. |
| Keywords: | real stock returns; structural oil-price shocks; variance decomposition |
| JEL: | G12 Q43 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:nlv:wpaper:0917&r=bec |
| By: | Entorf, Horst; Groß, Anne; Steiner, Christian |
| Abstract: | This article contributes to the literature on macroeconomic announcements and their impact on asset prices by investigating how the 15-second Xetra DAX returns reflect the monthly announcements of the two best known business cycle forecasts for Germany, i.e. the ifo Business Climate Index and the ZEW Indicator of Economic Sentiment. From the methodological point of view, the main innovation lies in disentangling ‘good’ macroeconomics news from ‘bad’ news, and, simultaneously, considering time intervals with and without confounding announcements from other sources. Releases from both institutes lead to an immediate response of returns occurring 15 seconds after the announcements, i.e. within the first possible time interval. Announcements of both institutes are also clearly and immediately reflected in the volatility, which remains at a significantly higher level for approximately two minutes slightly elevated for approximately 15 minutes. Combining returns and volatility in a GARCH(1,1)-model, the paper reveals that significant increases in volatility only show up in the presence of simultaneous news released by other sources, whereas return reactions can be observed irrespective of whether confounding announcements are published or not. |
| Keywords: | event study, announcement effect, high-frequency data, intraday data |
| JEL: | E44 G12 G14 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:7535&r=bec |
| By: | Césaire Meh; Vincenzo Quadrini; Yaz Terajima |
| Abstract: | We study a model with repeated moral hazard where financial contracts are not fully indexed to inflation because nominal prices are observed with delay as in Jovanovic & Ueda (1997). More constrained firms sign contracts that are less indexed to the nominal price and, as a result, their investment is more sensitive to nominal price shocks. We also find that the overall degree of nominal indexation increases with the uncertainty of the price level. An implication of this is that economies with higher price-level uncertainty are less vulnerable to a price shock of a given magnitude, that is, aggregate investment and output respond to a lesser degree. |
| Keywords: | Economic models; Monetary policy framework; Financial markets; Transmission of monetary policy |
| JEL: | E21 E31 E44 E52 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:09-16&r=bec |
| By: | Alejandro Saporiti (University of Manchester); German Coloma (Universidad del CEMA) |
| Abstract: | This paper provides necessary and sufficient conditions for the existence of a pure strategy Bertrand equilibrium in a model of price competition with fixed costs. It unveils an interesting and unexplored relationship between Bertrand competition and natural monopoly. That relationship points out that the non-subadditivity of the cost function at the output level corresponding to the oligopoly break-even price, denoted by D(pL (n)), is sufficient to guarantee that the market supports a (not necessarily symmetric) Bertrand equilibrium in pure strategies with two or more firms supplying at least D(pL (n)). Conversely, the existence of a pure strategy equilibrium ensures that the cost function is not subadditive at every output greater than or equal to D(p(n)). |
| Keywords: | Bertrand competition, cost subadditivity, fixed costs, natural monopoly. |
| JEL: | D43 L13 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:roc:rocher:549&r=bec |