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on Business Economics |
| By: | Chongwoo Choe; Gloria Tian; Xiangkang Yin |
| Abstract: | This paper studies theoretically and empirically the relation among CEO power, CEO compensation and firm performance. Our theoretical model follows the rent extraction view of CEO compensation put forward by the managerial power theory, and proxies CEO power by the bargaining power the CEO exercises in the determination of his compensation contract. We show (i) when there is no constraint on the CEO’s salary, the CEO’s stock-based compensation and the pay-performance sensitivity of CEO compensation are both independent of CEO power, although firm performance net of CEO compensation worsens as CEO power increases, and (ii) when the CEO’s salary has a binding cap, the CEO’s stock-based compensation and the pay-performance sensitivity of CEO compensation are both increasing in CEO power, resulting in better firm performance gross of CEO compensation, but worse firm performance net of CEO compensation. We test our theoretical findings using the sample of S&P1500 firms over the period of 2001-2005. The predicted relation between power and pay is largely supported. However, the relation between power and firm performance as predicted by theory has mixed support. This suggests that, while the managerial power theory has clear relevance in explaining the relation between power and pay, the scope of power needs to be broadened to have better understanding of how managerial power affects firm performance. |
| Keywords: | Managerial power, agency theory, stock-based incentives, firm performance, pay-performance sensitivity. |
| JEL: | D82 G32 J33 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:mos:moswps:2008-21&r=bec |
| By: | Jung, Sven (University of Erlangen-Nuremberg); Schnabel, Claus (University of Erlangen-Nuremberg) |
| Abstract: | Using a representative establishment data set for Germany, we show that more than 40 percent of plants covered by collective agreements pay wages above the level stipulated in the agreement, which gives rise to a wage cushion between the levels of actual and contractual wages. Cross-sectional and fixed-effects estimations for the period 2001-2006 indicate that the wage cushion mainly varies with the profit situation of the plant and with indicators of labour shortage and the business cycle. While plants bound by multi-employer sectoral agreements seem to pay wage premiums in order to overcome the restrictions imposed by the rather centralized system of collective bargaining in Germany, plants which make use of single-employer agreements are significantly less likely to have wage cushions. |
| Keywords: | wages, wage cushion, wage determination, bargaining, Germany |
| JEL: | J30 J31 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4278&r=bec |
| By: | Chongwoo Choe; Shingo Ishiguro |
| Abstract: | This paper studies internal organization of a firm using an incomplete contracting approach `a la Grossman-Hart-Moore and Aghion-Tirole. The two key ingredients of our model are externalities among tasks that require coordination, and investment in task-specific human capital. We compare three types of organizational structures: centralization where the decision authority for all tasks is given to the party without task-specific human capital, decentralization where the decision authority for each task is given to the party with necessary human capital, and hierarchical delegation where the decision authority is allocated in a hierarchical fashion. Centralization is optimal when externalities and the requisite coordination are the main issue in organization design. Decentralization is optimal if the investment in human capital is more important. Hierarchical delegation is optimal in the intermediate case. We also discuss the optimal pattern of hierarchical delegation as well as several directions extending the basic model. |
| Keywords: | Delegation, Incomplete Contracts, Hierarchy |
| JEL: | C70 D23 L22 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:mos:moswps:2008-18&r=bec |
| By: | Chongwoo Choe; In-Uck Park |
| Abstract: | In a typical corporate hierarchy, the manager is delegated the authority to make strategic decisions, and to contract with other employees. We study when such delegation can be optimal. In centralization, the owner retains the authority, which fails to motivate the manager to acquire valuable information, leading to suboptimal decisions and inefficient incentive provision to the worker. Beneficial delegation should necessarily motivate the manager to acquire information, which is possible only when the authority is delegated to the manager. We also document comparative statics results regarding the benefits of delegation and discuss when delegation is more likely to dominate centralization. |
| Keywords: | Corporate hierarchies, information gathering, delegation, centralization. |
| JEL: | C72 D21 D82 L22 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:mos:moswps:2008-19&r=bec |
| By: | Costas Azariadis; Leo Kaas |
| Abstract: | We propose a sectoral–shift theory of aggregate factor productivity for a class of economies with AK technologies, limited loan enforcement, a constant production possibilities frontier, and finitely many sectors producing the same good. Both the growth rate and total factor productivity in these economies respond to random and persistent endogenous fluctuations in the sectoral distribution of physical capital which, in turn, responds to persistent and reversible exogenous shifts in relative sector productivities. Surplus capital from less productive sectors is lent to more productive ones in the form of secured collateral loans, as in Kiyotaki–Moore (1997), and also as unsecured reputational loans suggested in Bulow–Rogoff (1989). Endogenous debt limits slow down capital reallocation, preventing the equalization of risk– adjusted equity yields across sectors. Economy–wide factor productivity and the aggregate growth rate are both negatively correlated with the dispersion of sectoral rates of return, sectoral TFP and sectoral growth rates. If sector productivities follow a symmetric two–state Markov process, many of our economies converge to a limit cycle alternating between mild expansions and abrupt contractions. We also find highly periodic and volatile limit cycles in economies with small amounts of collateral. |
| Keywords: | Industrial productivity |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-28&r=bec |
| By: | George Symeonidis |
| Abstract: | I analyse the effects of a downstream merger in a differentiated oligopoly when there is bargaining between downstream firms and upstream agents (firms or unions). Bargaining outcomes can be observable or unobservable by rivals. When competition is in quantities, upstream agents are independent and bargaining is over a uniform input price, a merger between downstream firms may raise consumer surplus and overall welfare. However, when competition is in prices or the upstream agents are not independent or bargaining is over a two-part tariff or bargaining covers both the input price and the level of output, the standard welfare results are restored: a downstream merger always reduces consumer surplus and overall welfare. |
| Date: | 2009–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:esx:essedp:671&r=bec |
| By: | INABA Masaru; NUTAHARA Kengo |
| Abstract: | Many researches that apply business cycle accounting (hereafter, BCA) to actual data conclude that models with investment frictions or investment wedges are not promising for modeling business cycle dynamics. In this paper, we apply BCA to artificial data generated by a variant model of Carlstrom and Fuerst (1997, American Economic Review), which is one of the representative models with investment frictions. Based on our findings, BCA leads us to conclude that models with investment wedges are not promising according to the criteria of BCA, even though the true model contains investment frictions. |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:09027&r=bec |
| By: | Aghion, Philippe; Hemous, David; Kharroubi, Enisse |
| Abstract: | This paper evaluates whether the cyclical pattern of fiscal policy can affect growth. We first build a simple endogenous growth model where entrepreneurs can invest either in short-run projects or in long-term growth enhancing projects. Long-term projects involve a liquidity risk which credit constrained firms try to overcome by borrowing on the basis of their short-run profits. By increasing firms' market size in recessions, a countercyclical fiscal policy will boost investment in productivity-enhancing long-term projects, and the more so in sectors that rely more on external financing or which display lower asset tangibility. Second, the paper tests this prediction using Rajan and Zingales (1998)'s diff-and-diff methodology on a panel data sample of manufacturing industries across 17 OECD countries over the period 1980-2005. The evidence confirms that the positive effects of a more countercyclical fiscal policy on value added growth, productivity growth, and R&D expenditure, are indeed larger in industries with heavier reliance on external finance or lower asset tangibility. |
| Keywords: | counter-cyclicality; financial dependence; fiscal policy; growth |
| JEL: | E32 E62 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7359&r=bec |
| By: | Guiso, Luigi; Sapienza, Paola; Zingales, Luigi |
| Abstract: | We use survey data to study American households’ propensity to default when the value of their mortgage exceeds the value of their house even if they can afford to pay their mortgage (strategic default). We find that 26% of the existing defaults are strategic. We also find that no household would default if the equity shortfall is less than 10% of the value of the house. Yet, 17% of households would default, even if they can afford to pay their mortgage, when the equity shortfall reaches 50% of the value of their house. Besides relocation costs, the most important variables in predicting strategic default are moral and social considerations. Ceteris paribus, people who consider it immoral to default are at 77% less likely to declare their intention to do so, while people who know someone who defaulted are 82% more likely to declare their intention to do so. The willingness to default increases nonlinearly with the proportion of foreclosures in the same ZIP code. That moral attitudes toward default do not change with the percentage of foreclosures is likely to derive from a contagion effect that reduces the social stigma associated with default as defaults become more common. |
| Keywords: | foreclosure; moral constraint; mortgage; social constraint; strategic default |
| JEL: | D12 G18 G21 G33 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7352&r=bec |
| By: | Ben R Craig; Valeriya Dinger |
| Abstract: | This paper presents an empirical examination of the effects of both deposit market competition and of wholesale funding on bank risk simultaneously. The traditional view of the relation between competition and risk has focused on the disciplining role of the charter value. In this project we argue that if the structure of bank liabilities and the costs of retail and wholesale funding are jointly determined with bank risk, the omission of wholesale funding in the empirical analysis of the relation between deposit market competition and risk may give rise to a substantial bias in the estimated results. This will be especially the case where wholesale lenders “screen” their borrowers’ risk as argued by the market discipline literature. We propose a new approach to the estimation of the relation between deposit market competition and bank risk which accounts for the opportunity of banks to shift to wholesale funding when deposit market competition is intense. The analysis is based on a unique comprehensive dataset which combines retail deposit rates data with data on bank characteristics and with data on local deposit market features for a sample of 589 US banks. Our results support the notion of a risk-enhancing effect of deposit market competition. |
| Keywords: | Bank competition ; Bank deposits |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0905&r=bec |
| By: | Pengfei Wang; Yi Wen |
| Abstract: | Why are asset prices so much more volatile and so often detached from their fundamentals? Why does the burst of financial bubbles depress the real economy? This paper addresses these questions by constructing an infinite-horizon heterogeneous-agent general-equilibrium model with speculative bubbles. We show that agents are willing to invest in asset bubbles even though they have positive probability to burst. We prove that any storable goods, regardless of their intrinsic values, may give birth to bubbles with market prices far exceeding their fundamental values. We also show that perceived changes in the bubbles probability to bust can generate boom-bust cycles and produce asset price movements that are many times more volatile than the economy's fundamentals, as in the data. |
| Keywords: | Financial crises ; Speculation ; Asset pricing |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-29&r=bec |
| By: | José Emilio Boscá (University of Valencia, Spain); Javier Ferri (University of Valencia, Spain); Rafa Doménech (BBVA Economic Research Department, Spain) |
| Abstract: | This paper analyses the effects of introducing typical Keynesian features, namely rule-of-thumb consumers and consumption habits, into a standard labour market search model. It is a well-known fact that labour market matching with Nash-wage bargaining improves the ability of the standard real business cycle model to replicate some of the cyclical properties featuring the labour market. However, when habits and rule-of-thumb consumers are taken into account, the labour market search model gains extra power to reproduce some of the stylised facts characterising the US labour market, as well as other business cycle facts concerning aggregate consumption and investment behaviour. |
| Keywords: | general equilibrium, labour market search, habits, rule-of-tumb consumers |
| JEL: | E24 E32 E62 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:iei:wpaper:0901&r=bec |
| By: | John T. Addison; Ralph W. Bailey; W. Stanley Siebert |
| Abstract: | Taking as our point of departure a model proposed by David Card (2001), we suggest new methods for analyzing wage dispersion in a partially unionized labor market. Card's method disaggregates the la- bor population into skill categories, which procedure entails some loss of information. Accordingly, we develop a model in which each worker individually is assigned a union-membership probability and predicted union and nonunion wages. The model yields a natural three-way de- composition of variance. The decomposition permits counterfactual analysis, using concepts and techniques from the theory of factorial experimental design. We examine causes of the increase in U.K. wage dispersion between 1983 and 1995. Of the factors initially considered, the most influential was a change in the structure of remuneration inside both the union and nonunion sectors. Next in importance was the decrease in union membership. Finally, exogenous changes in la- bor force characteristics had, for most groups considered, only a small negative effect. We supplement this preliminary three-factorial analy- sis with a ?ve-factorial analysis that allows us to examine effects from the wage-equation parameters in greater detail. |
| Keywords: | wage dispersion, three-way variance decomposition, bivariate kernal density smoothing, union membership, deunionization, factorial experimental design |
| JEL: | D3 J31 J51 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:bir:birmec:09-04&r=bec |