nep-bec New Economics Papers
on Business Economics
Issue of 2009‒08‒22
fifteen papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. The Granular Origins of Aggregate Fluctuations By Xavier Gabaix
  2. Real and Nominal Wage Rigidity in a Model of Equal-Treatment Contracting By Martins, Pedro S.; Snell, Andy; Thomas, Jonathan P.
  3. Effects of Organizational Change on Firm Productivity By Håkansson, Christina
  4. Employment Fluctuations with Downward Wage Rigidity: The Role of Moral Hazard By Costain, James; Jansen, Marcel
  5. Labor Market Pooling, Outsourcing and Labor Contracts By Picard, Pierre M.; Wildasin, David
  6. Labor-Market Matching with Precautionary Savings and Aggregate Fluctuations By Per Krusell; Toshihiko Mukoyama; Aysegul Sahin
  7. ICT, corporate restructuring and productivity By Laura Abramovsky; Rachel Griffith
  8. Bait Contracts By Marie-Louise Vierø
  9. Corporate Taxes and Union Wages in the United States By R. Alison Felix; James R. Hines, Jr.
  10. Nonparametric Identification of Multinomial Choice Demand Models with Heterogeneous Consumers By Steven T. Berry; Philip A. Haile
  11. A Tractable Model of Buffer Stock Saving By Christopher D. Carroll; Patrick Toche
  12. Financing Constraints and Entrepreneurship By William R. Kerr; Ramana Nanda
  13. International business cycles and the relative price of investment goods By Parantap Basu; Christoph Thoenissen
  14. Private Equity, Investment and Financial Constraints – Firm-Level Evidence for France and the United Kingdom By Dirk Engel; Joel Stiebale
  15. A Simple Model of an Oil Based Global Savings Glut – The “China Factor” and the OPEC Cartel By Ansgar Belke; Daniel Gros

  1. By: Xavier Gabaix
    Abstract: This paper proposes that idiosyncratic firm-level fluctuations can explain an important part of aggregate shocks, and provide a microfoundation for aggregate productivity shocks. Existing research has focused on using aggregate shocks to explain business cycles, arguing that individual firm shocks average out in aggregate. I show that this argument breaks down if the distribution of firm sizes is fat-tailed, as documented empirically. The idiosyncratic movements of the largest 100 firms in the US appear to explain about one third of variations in output and the Solow residual. This "granular" hypothesis suggests new directions for macroeconomic research, in particular that macroeconomic questions can be clarified by looking at the behavior of large firms. This paper's ideas and analytical results may also be useful to think about the fluctuations of other economic aggregates, such as exports or the trade balance.
    JEL: E32
    Date: 2009–08
  2. By: Martins, Pedro S. (Queen Mary, University of London); Snell, Andy (University of Edinburgh); Thomas, Jonathan P. (University of Edinburgh)
    Abstract: Following insights by Bewley (1999a), this paper analyses a model with downward rigidities in which firms cannot pay discriminate based on a year of entry to a firm, and develops an equilibrium model of wages and unemployment. We solve for the dynamics of wages and unemployment under conditions of downward wage rigidity, where forward looking firms take into account these constraints. Using simulated productivity data based on the post-war US economy, we analyse the ability of the model to match certain stylised labour market facts.
    Keywords: labour contracts, business cycle, unemployment, equal treatment, downward rigidity, cross-contract restrictions
    JEL: E32 J41
    Date: 2009–08
  3. By: Håkansson, Christina (Institute for International Economic Studies, IIES.)
    Abstract: An increasing use of IT facilitates firms to use more efficient organiza- tional forms. Significant reorganizations of business processes around IT capital can thereby boost productivity growth. The aim of this study is to empirically examine how …rm productivity growth is affected by orga- nizational changes and investments in IT using a Difference-in-Difference approach on a panel of Swedish firms over the years 1997-2005. The empirical results show a positive and significant effect on total factor pro- ductivity growth for firms that invested above median in IT and at the same time undertook organizational changes.
    Keywords: information technology; productivity; organizational change
    JEL: D24 E22 L22 O33
    Date: 2009–06–01
  4. By: Costain, James (Banco de Espana); Jansen, Marcel (Universidad Carlos III de Madrid)
    Abstract: This paper studies the cyclical dynamics of Mortensen and Pissarides' (1994) model of job creation and destruction when workers' effort is not perfectly observable, as in Shapiro and Stiglitz (1984). An occasionally-binding no-shirking constraint truncates the real wage distribution from below, making firms' share of surplus weakly procyclical, and may thus amplify fluctuations in hiring. It may also cause a burst of inefficient firing at the onset of a recession, separating matches that no longer have sufficient surplus for incentive compatibility. On the other hand, since marginal workers in booms know firms cannot commit to keep them in recessions, they place little value on their jobs and are expensive to motivate. For a realistic calibration, this last effect is by far the strongest; even a moderate degree of moral hazard can eliminate all fluctuation in the separation rate. This casts doubt on Ramey and Watson's (1997) "contractual fragility" mechanism, and means worker moral hazard only makes the "unemployment volatility puzzle" worse. However, moral hazard has potential to explain other labor market facts, because it is consistent with small but clearly countercyclical fluctuations in separation rates, and a robust Beveridge curve.
    Keywords: job matching, shirking, efficiency wages, endogenous separation, contractual fragility
    JEL: C78 E24 E32 J64
    Date: 2009–08
  5. By: Picard, Pierre M. (University of Luxembourg); Wildasin, David (University of Kentucky)
    Abstract: Economic regions, such as urban agglomerations, face external demand and price shocks that produce income risk. Workers in large and diversified agglomerations may benefit from reduced wage volatility, while firms may outsource the production of intermediate goods and realize benefits from Chamberlinian externalities. Firms may also protect workers from wage risks through fixed wage contracts. This paper explores the relationships between firms' risks, workers' contracts, and the structure of production in cities.
    Keywords: labor market, labor contracts, Chamberlinian externalities
    JEL: R12 R23 J31 J65
    Date: 2009–08
  6. By: Per Krusell; Toshihiko Mukoyama; Aysegul Sahin
    Abstract: We analyze a Bewley-Huggett-Aiyagari incomplete-markets model with labor-market frictions. Consumers are subject to idiosyncratic employment shocks against which they cannot insure directly. The labor market has a Diamond-Mortensen-Pissarides structure: firms enter by posting vacancies and match with workers bilaterally, with match probabilities given by an aggregate matching function. Wages are determined through Nash bargaining. We also consider aggregate productivity shocks, and a complete set of contingent claims conditional on this risk. We use the model to evaluate a tax-financed unemployment insurance scheme. Higher insurance is beneficial for consumption smoothing, but because it raises workers' outside option value, it discourages firm entry. We find that the latter effect is more potent for welfare outcomes; we tabulate the effects quantitatively for different kinds of consumers. We also demonstrate that productivity changes in the model---in steady state as well as stochastic ones---generate rather limited unemployment effects, unless workers are close to indifferent between working and not working; thus, recent findings are corroborated in our more general setting.
    JEL: D31 D52 E32 J63 J64
    Date: 2009–08
  7. By: Laura Abramovsky (Institute for Fiscal Studies); Rachel Griffith (Institute for Fiscal Studies and University College London)
    Abstract: <p><p>Stronger productivity growth in the US than the EU over the late 1990s is widely attributed to faster, more widespread adoption of information and communication technology (ICT). The literature has emphasised complementarities in production between ICT and internal restructuring as an important mechanism. We investigate the idea that increased use of ICT has facilitated outsourcing of business services, and that these are complementary activities in production because they allow firms to focus on their core competencies. This is consistent with evidence from the business literature and aggregate trends, and we show evidence from microdata that is consistent with this idea. </p></p>
    JEL: D2 O3 O4
    Date: 2009–04
  8. By: Marie-Louise Vierø (Queen's University)
    Abstract: The granting of stock options to employees who have negligible impact on company performance intuitively violates Holmstrom's (1979) sufficient statistic result. This paper revisits the sufficient statistic question of when to condition a contract on an outside signal in a principal-agent model in which I introduce imprecise (or vague) information. The paper applies a choice theoretic framework introduced in Olszewski (2007) and Ahn (2008) and extended by Viero (2009a), who denoted it vague environments. I show that if the signal is vague, Holmstrom's result can be overturned.
    Keywords: contracts, vagueness, optimism, incentives, signals, stock options
    JEL: D82 D80 D20 D86
    Date: 2009–08
  9. By: R. Alison Felix; James R. Hines, Jr.
    Abstract: This paper evaluates the effect of U.S. state corporate income taxes on union wages. American workers who belong to unions are paid more than their non-union counterparts, and this difference is greater in low-tax locations, reflecting that unions and employers share tax savings associated with low tax rates. In 2000 the difference between average union and non-union hourly wages was $1.88 greater in states with corporate tax rates below four percent than in states with tax rates of nine percent and above. Controlling for observable worker characteristics, a one percent lower state tax rate is associated with a 0.36 percent higher union wage premium, suggesting that workers in a fully unionized firm capture roughly 54 percent of the benefits of low tax rates.
    JEL: H22 H25 J31 J51
    Date: 2009–08
  10. By: Steven T. Berry; Philip A. Haile
    Abstract: We consider identification of nonparametric random utility models of multinomial choice using "micro data," i.e., observation of the characteristics and choices of individual consumers. Our model of preferences nests random coefficients discrete choice models widely used in practice with parametric functional form and distributional assumptions. However, the model is nonparametric and distribution free. It allows choice-specific unobservables, endogenous choice characteristics, unknown heteroskedasticity, and high-dimensional correlated taste shocks. Under standard "large support" and instrumental variables assumptions, we show identifiability of the random utility model. We demonstrate robustness of these results to relaxation of the large support condition and show that when it is replaced with a weaker "common choice probability" condition, the demand structure is still identified. We show that key maintained hypotheses are testable.
    JEL: C35
    Date: 2009–08
  11. By: Christopher D. Carroll; Patrick Toche
    Abstract: We present a tractable model of the effects of nonfinancial risk on intertemporal choice. Our purpose is to provide a simple framework that can be adopted in fields like representative-agent macroeconomics, corporate finance, or political economy, where most modelers have chosen not to incorporate serious nonfinancial risk because available methods were too complex to yield transparent insights. Our model produces an intuitive analytical formula for target assets, and we show how to analyze transition dynamics using a familiar Ramsey-style phase diagram. Despite its starkness, our model captures most of the key implications of nonfinancial risk for intertemporal choice.
    JEL: C61 D11 E24
    Date: 2009–08
  12. By: William R. Kerr (Harvard Business School, Entrepreneurial Management Unit); Ramana Nanda (Harvard Business School, Entrepreneurial Management Unit)
    Abstract: Abstract is not available at this time
    Date: 2009–08
  13. By: Parantap Basu; Christoph Thoenissen
    Abstract: Is the relative price of investment goods a good proxy for investment frictions? We model this relative price in a flexible price international economy with two fundamental shocks, namely the total factor productivity (TFP) shock and the investment specific technology (IST) shock. The paper argues that the one-to-one correspondence between investment friction and the relative price of investment goods breaks down in an international economy because of the short run correlation between the terms of trade and the relative price of investment goods. The data congruent negative correlation between the investment rate and the relative price of investment goods thus does not necessarily reflect decline in investment frictions (rise in IST) as suggested by many studies. A calibration experiment with the US data demonstrates that such an inverse relation between rate of investment and the relative price of investment goods basically reflects the positive effect of TFP on the terms of trade for a broad range of econ mies where the home bias in consumption exceeds investment and there is a sizable adjustment cost of investment. A regression experiment with major OECD countries provided empirical support of the fact that terms of trade effect on the relative price of investment is important
    Keywords: Investment frictions, investment specific technological progress, total factor productivity, relative price of investment goods terms of trade
    JEL: E22 E32 F41
    Date: 2009–09
  14. By: Dirk Engel; Joel Stiebale
    Abstract: The welfare effects of private equity transactions are debated controversially. We analyze the impact of expansion financing and buyouts by private equity investors on investment of portfolio firms in the UK and France – two countries with different financial systems. Unobserved heterogeneity and the endogeneity of private equity transactions financed by venture capital companies are addressed using dynamic panel data techniques. In both countries we find that portfolio firms display higher investment levels and a lower dependence on internal funds after expansion financing. Buyouts financed by venture capital companies are neither associated with a decrease in investment spending nor with an increase in the dependence on internal finance. In contrary, private equity based buyouts in the UK outperform non-private equity backed British firms in terms of both indicators. Contrasting the notion of several policy makers,we cannot detect that private equity based buyout financing yields higher financial constraints on average.
    Keywords: Investment, financial constraints, private equity employer-to-employer, linked employer-employee
    JEL: G32 D92 G23
    Date: 2009–07
  15. By: Ansgar Belke; Daniel Gros
    Abstract: The purpose of this contribution is to illustrate the mechanism by which higher oil prices might lead to lower interest rates in the context of a simple model that takes into account the global external savings equilibrium. The simple model has interesting implications for how one views the huge US current account deficit and how the emergence of China’s savings surplus and oil supply shocks impact the global economy.We show that the new equilibrium is located at a lower interest rate but also at a lower income level than without the China effect. Moreover, we argue that the lower real interest rates resulting from excess OPEC savings have facilitated the adjustment to the subprime crisis.
    Keywords: China factor, current account adjustment, interest rate, oil prices, saving glut
    JEL: E21 E43 F32 Q43
    Date: 2009–07

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