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on Business Economics |
| By: | Pengfei Wang; Yi Wen |
| Abstract: | Empirical studies showed that firm-level volatility has been increasing but the aggregate volatility has been decreasing in the US for the post-war period. This paper proposes a unified explanation for these diverging trends. Our explanation is based on a story of financial development - measured by the reduction of borrowing constraints because of greater access to external financing and options for risk sharing. By constructing a dynamic stochastic general-equilibrium model of heterogenous firms facing borrowing constraints and investment irreversibility, it is shown that financial liberalization increases the lumpiness of firm-level investment but decreases the variance of aggregate output. Hence, the model predicts that financial development leads to a larger firm-level volatility but a lower aggregate volatility. In addition, our model is also consistent with the observed decline in volatility of private held firms which do not have (or have only limited) access to external funds. |
| Keywords: | Financial institutions ; Business cycles |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-022&r=bec |
| By: | Pengfei Wang; Yi Wen |
| Abstract: | We develop a general-equilibrium model of inventories with explicit micro-foundations by embedding the production-cost-smoothing motive (e.g., Eichenbaum, AER 1989) into an otherwise standard DSGE model. We show that firms facing idiosyncratic cost shocks have incentives to bunch production and smooth sales by carrying inventories. The optimal inventory target of a firm is derived explicitly. The model is broadly consistent with many of the observed stylized facts of aggregate inventory fluctuations, such as the procyclical inventory investment and the countercyclical inventory-sales ratio. In addition, the model yields novel predictions for the role of inventories in macroeconomic stability: Inventories may not only greatly amplify but also propagate the business cycle. That is, the incentive to accumulate inventories under the cost-smoothing motive can give rise to hump-shaped output dynamics and significantly higher volatility of GDP. Such predictions are in sharp contrast to the implications of the recent general-equilibrium inventory literature (e.g., Khan and Thomas, 2007; and Wen, 2008), which shows that inventory investment induced by traditional mechanisms (e.g., the stockout-avoidance motive and the (S,s) rule) does not increase the variance of aggregate output. |
| Keywords: | Equilibrium (Economics) ; Business cycles ; Inventories |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-010&r=bec |
| By: | Gian Luca Clementi; Thomas F. Cooley; Sonia Di Giannatale |
| Abstract: | We study the problem of an investor who buys an equity stake in an entrepreneurial venture, under the assumption that the former cannot monitor the latter’s operations. The dynamics implied by the optimal incentive scheme is rich and quite different from that induced by other models of repeated moral hazard. In particular, our framework generates a rationale for firm decline. As young firms accumulate capital, the claims of both investor (outside equity) and entrepreneur (inside equity) increase. At some juncture, however, even as the latter keeps on growing, invested capital and firm value start declining and so does the value of outside equity. The reason is that incentive provision is costlier the wealthier the entrepreneur (the greater is inside equity). In turn, this leads to a decline in the constrained–efficient level of effort and therefore to a drop in the return to investment. |
| JEL: | E0 L11 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15192&r=bec |
| By: | Feng, Shuaizhang (Princeton University); Zheng, Bingyong (Shanghai University of Finance and Economics) |
| Abstract: | We study a competitive labor market with imperfect information. In our basic model, the labor market consists of heterogeneous workers and ex ante identical firms who have only imperfect private information about workers' productivities. Firms compete by posting wages in order to cherry-pick more productive workers from the applicant pool. The model predicts many important empirical regularities, including non-degenerated firm size distribution, persistent wage dispersion, and employer size-wage premium. We also consider extensions of the model where firms differ in either productivity or information about worker types, both generating assortative matching with a positive but imperfect correlation of worker and firm types. The main insight of this paper is that identical workers can get different wages depending on productivities of their coworkers in a competitive market with informational frictions. Our model also sheds light on inter-industry wage differential and sorting between industry and worker characteristics. |
| Keywords: | imperfect information, cherry-picking, wage dispersion, size-wage premium, inter-industry wage differential |
| JEL: | D83 J31 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4309&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:2009-028&r=bec |
| By: | Gries, Thomas; Naude, Wim |
| Abstract: | The success of new start-up firms often depends on timing. It is valuable for the potential entrepreneur to wait for the right moment before starting a new firm. In this paper we provide a theoretical model to determine the optimal time for starting a new firm. We integrate insights from the real option theory with the theory on entrepreneurial market entry. An important and novel feature of our model is that it allows the start-up timing decisions of novice and serial entrepreneurs to be distinguished. |
| Keywords: | entrepreneurship, serial entrepreneurship, start-ups, real options, stochastic optimal control |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:rp2009-39&r=bec |
| By: | Andra C. Ghent; Michael T. Owyang |
| Abstract: | We analyze the relationship between housing and the business cycle in a set of 36 US cities. Most surprisingly, we find that falls in house prices are often not followed by declines in employment. We also find that the leading indicator property of residential investment is not consistent across cities and that, at the national level, the leading indicator property of residential investment is not robust to including financial factors as control variables. |
| Keywords: | Housing ; Housing - Prices ; Business cycles |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-007&r=bec |
| By: | Kohei Daido (School of Economics, Kwansei Gakuin University) |
| Abstract: | Abstract This paper studies the optimal organizational form and the optimal type of manager by considering the nonmaterial (psychological) payoff as well as the standard material payoff for agents. I compare two organizational forms: T-form, where all agents have the same job title so that they are in a single reference group; and H-form, where one agent is appointed to be the manager and the others are subordinates who form a reference group. I show that the principal should appoint a more (less) able agent to be the manager when the effects of peer pressure are more (less) critical. In addition, I find the conditions under which H-form is more likely to be preferred to T-form. Finally, I discuss the phenomenon of the proliferation of job titles in the context of this model. |
| Keywords: | Principal-agent Model, Multiagents, Moral Hazard, Reference Group, Peer Pressure, Identity, Proliferation of Job Titles. |
| JEL: | B49 D82 D86 M12 M54 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:kgu:wpaper:47&r=bec |
| By: | Takashi Kano; James M. Nason |
| Abstract: | This paper studies the implications of internal consumption habit for propagation and monetary transmission in New Keynesian dynamic stochastic general equilibrium (NKDSGE) models. We use Bayesian methods to evaluate the role of internal consumption habit in NKDSGE model propagation and monetary transmission. Simulation experiments show that internal consumption habit often improves NKDSGE model fit to output and consumption growth spectra by dampening business cycle periodicity. Nonetheless, habit NKDSGE model fit is vulnerable to nominal rigidity, the choice of monetary policy rule, the frequencies used for evaluation, and spectra identified by permanent productivity shocks. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2009-16&r=bec |
| By: | James D. Hamilton; Michael T. Owyang |
| Abstract: | This paper develops a framework for inferring common Markov-switching components in a panel data set with large cross-section and time-series dimensions. We apply the framework to studying similarities and differences across U.S. states in the timing of business cycles. We hypothesize that there exists a small number of cluster designations, with individual states in a given cluster sharing certain business cycle characteristics. We find that although oil-producing and agricultural states can sometimes experience a separate recession from the rest of the United States, for the most part, differences across states appear to be a matter of timing, with some states entering recession or recovering before others. |
| Keywords: | Business cycles ; Recessions |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-013&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:2009-029&r=bec |
| By: | Yi Wen |
| Abstract: | The profession has been longing for closed-form solutions to consumption functions under uncertainty and borrowing constraints. This paper proposes an analytical approach to solving buffer-stock saving models with both idiosyncratic and aggregate uncertainties. It is shown analytically that an individual’s optimal consumption plan under uncertainty follows the rule of thumb: Consumption is proportional to a target wealth with the marginal propensity to consume depending on the state of the macroeconomy. The method is applied to addressing two long- standing puzzles: the "excess smoothness" and "excess sensitivity" of consumption with respect to income changes. Some of my findings sharply contradict the conventional wisdom. |
| Keywords: | Saving and investment ; Income |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-026&r=bec |
| By: | Grund, Christian (University of Würzburg); Harbring, Christine (University of Cologne) |
| Abstract: | Based on two representative samples of employees, the German Socio Economic Panel and the European Social Survey, we explore the relation between certain measures of control in employment relationships (i.e. working time regulations, use of performance appraisal systems, monitoring by supervisors, autonomy to organize the work) and individuals’ inclination to trust others. Trust is measured by the general trust question like in most other economic studies based on surveys. We find that strict working time regulations, monitoring and lack of autonomy – all indicators for control at the workplace – are negatively related to trust. Moreover, we contribute to the literature on trust by gathering hints to other potential determinants of trust. |
| Keywords: | autonomy, control, monitoring, performance appraisal, regulation of working time, trust |
| JEL: | J81 M12 M5 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4297&r=bec |
| By: | Carola Frydman; Raven S. Molloy |
| Abstract: | Evidence since the 1980s suggests that the level and structure of executive compensation in U.S. public corporations are largely unresponsive to tax incentives. However, the relative tax advantage of different forms of pay has been relatively small during this period. Using a sample of top executives in large firms from 1946 to 2005, we find little response of salaries, qualified stock options, long-term incentive pay, or bonuses paid after retirement to changes in tax rates on labor income--even though tax rates were significantly higher and more heterogeneous across individuals in the first several decades following WWII. To explain this lack of response, we find suggestive evidence that concerns about within-firm equality may have limited firms' ability to differentiate top executives' compensation packages based on their marginal income tax rates. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2009-30&r=bec |