nep-bec New Economics Papers
on Business Economics
Issue of 2009‒11‒14
25 papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Inter-industry Wage Differentials - How Much Does Rent Sharing Matter? By Philip Du Caju; François Rycx; Ilan Tojerow
  2. Capital structure, corporate taxation and firm age By Pfaffermayr, Michael; Stoeckl, Matthias; Winner, Hannes
  3. Dynamic Debt Runs By Zhiguo He; Wei Xiong
  4. How Long Do External Capital Constraints Matter? By Tobias Stucki
  5. Labor supply heterogeneity and macroeconomic comovement By Stefano Eusepi; Bruce Preston
  6. The Extent of Collective Bargaining and Workplace Representation: Transitions between States and their Determinants. A Comparative Analysis of Germany and Great Britain By Addison, John T.; Bryson, Alex; Teixeira, Paulino; Pahnke, André; Bellmann, Lutz
  7. Ownership, Control, and Incentive By Tianxi Wang
  8. Competition and Gender Prejudice: Are Discriminatory Employers Doomed to Fail? By Weber, Andrea; Zulehner, Christine
  9. Beyond the Need to Boast: Cost Concealment Incentives and Exit in Cournot Duopoly By Jos Jansen
  10. Company strategy: Business model reconfiguration for innovation and internationalization By Casadesus-Massanell, Ramon; Ricart, Joan E.
  11. Personal Character and Firm Performance. The Economic Implications of Having Fraudulent Board Members By Amir, Eli; Kallunki, Juha-Pekka; Nilsson, Henrik
  12. The Relationship between the Ownership Structure and the Role of the Board By Desender, Kurt A.
  13. Why Do Foreign Firms Have Less Idiosyncratic Risk Than U.S. Firms? By Bartram, Sohnke M.; Brown, Gregory; Stulz, Rene M.
  14. Inflation, Human Capital and Tobin's q By Parantap Basu; Max Gillman; Joseph Pearlman
  15. Flexible contracts By Piero Gottardi; Jean-Marc Tallon; Paolo Ghirardato
  16. What Does CEOs' Personal Leverage Tell Us about Corporate Leverage? By Cronqvist, Henrik; Makhija, Anil K.; Yonker, Scott E.
  17. Do Target CEOs Sell Out Their Shareholders to Keep Their Job in a Merger? By Bargeron, Leonce L.; Schlingemann, Frederik P.; Stulz, Rene M.; Zutter, Chad J.
  18. Layoff Costs and Efficiency with Asymmetric Information By Delacroix, Alain; Wasmer, Etienne
  19. The US Productivity Slowdown, the Baby Boom, and Management Quality By James Feyrer
  20. Multi-agent contracting with countervailing incentives and limited liability By Daniel Danau; Annalisa Vinella
  21. Cross-Country Differences in Productivity: The Role of Allocation and Selection By Eric J. Bartelsman; John C. Haltiwanger; Stefano Scarpetta
  22. Risk aversion, the labor margin, and asset pricing in DSGE models By Eric T. Swanson
  23. Ownership structure, profit maximization, and competitive behavior By Vroom, Govert; Mccann, Brian T.
  24. Bubbly Liquidity By Farhi, Emmanuel; Tirole, Jean
  25. Social Interaction, Co-Worker Altruism, and Incentives By Dur, Robert; Sol, Joeri

  1. By: Philip Du Caju (National Bank of Belgium (NBB), Boulevard de Berlaimont 14, B-1000 Brussels, Belgium.); François Rycx (Free University of Brussels, avenue F.D. Roosevelt 50, B-1050 Brussels, Belgium.); Ilan Tojerow (Free University of Brussels, avenue F.D. Roosevelt 50, B-1050 Brussels, Belgium.)
    Abstract: This paper investigates inter-industry wage differentials in Belgium, taking advantage of access to a unique matched employer-employee data set covering all the years from 1999 to 2005. Findings show the existence of large wage differentials among workers with the same observed characteristics and working conditions, employed in different sectors. These differentials are persistent and no particular downward or upward trend is observed. Further results indicate that ceteris paribus, workers earn significantly higher wages when employed in more profitable firms. The time dimension of our matched employer-employee data allows us to instrument firms' profitability by its lagged value. The instrumented elasticity between wages and profits is found to be quite stable over time and varies between 0.034 and 0.043. It follows that Lester’s range of pay due to rent sharing fluctuates between about 24 and 37 percent of the mean wage. This rent-sharing phenomenon accounts for a large fraction of the industry wage differentials. We find indeed that the magnitude, dispersion and significance of industry wage differentials decreases sharply when controlling for profits. JEL Classification: D31, J31, J41.
    Keywords: Industry wage differentials, Rent-sharing, Matched employer-employee data.
    Date: 2009–10
  2. By: Pfaffermayr, Michael (Department of Economics and Statistics, University of Innsbruck); Stoeckl, Matthias (University of Salzburg); Winner, Hannes (University of Salzburg)
    Abstract: This paper analyzes the relationship between corporate taxation, firm age and debt. We adapt a standard model of capital structure choice under corporate taxation, focusing on the financing and investment decisions a firm is typically faced with. Our model suggests that the debt ratio is positively associated with the corporate tax rate, and negatively with firm age. Further, we predict that the tax-induced advantage of debt is more important for older than for younger firms. To test these hypotheses empirically, we use a cross-section of 405,000 firms from 35 European countries and 126 NACE 3-digit industries. In line with previous research, we and that a firm's debt ratio increases with the corporate tax rate. Further, we observe that older firms exhibit smaller debt ratios than their younger counterparts. Finally, consistent with our theoretical model, we and a positive interaction between corporate taxation and firm age, indicating that the impact of corporate taxation on debt is increasing over a firm's life-time.
    Keywords: Corporate taxation; Capital structure; Firm age
    JEL: C31 G32 H20 H32
    Date: 2009–11–11
  3. By: Zhiguo He; Wei Xiong
    Abstract: We develop a dynamic model of debt runs on a firm, which invests in an illiquid asset by rolling over staggered short-term debt contracts. We derive a unique threshold equilibrium, in which creditors coordinate their asynchronous rollover decisions based on the firm's publicly observable and time-varying fundamental. Fear of the firm's future rollover risk motivates each maturing creditor to run ahead of others even when the firm is still solvent. Our model provides implications on the roles played by volatility, illiquidity and debt maturity in driving debt runs, as well as on firms' capital adequacy standards and credit risk.
    JEL: G20
    Date: 2009–11
  4. By: Tobias Stucki (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: Start-ups mostly have only limited internal financing. Post-entry performance should thus strongly depend on the availability of new external capital. In this study we analyze the impact of financial constraints on the performance of Swiss start-ups. Since we use cohort data, we have for some start-ups data at different points in time. This allows us to analyze whether the effect of the availability of external capital on firm performance changes with increasing age of the firms. To measure the impact of external capital as a whole, we include separate indicators for debt and venture capital constraints. Using different performance measures, we find that debt constraints are not only a problem of the first years. While the negative impact of debt constraints on firm survival disappears with increasing age of the firms, profit is persistently negative affected by debt constraints. Debt constraints, however, do not impact employment growth of the firms, not even in the first years. The availability of venture capital is of lower relevance for the post-entry performance. Surviving and growth of the start-ups is not affected by venture capital constraints. However, firms with limited access to venture capital persistently have problems to attain profit break-even.
    Keywords: start-ups, performance, financial constraints, firm age
    JEL: M13 L25 G32
    Date: 2009–11
  5. By: Stefano Eusepi; Bruce Preston
    Abstract: Standard real business cycle models must rely on total factor productivity (TFP) shocks to explain the observed comovement of consumption, investment, and hours worked. This paper shows that a neoclassical model consistent with observed heterogeneity in labor supply and consumption can generate comovement in the absence of TFP shocks. Intertemporal substitution of goods and leisure induces comovement over the business cycle through heterogeneity in the consumption behavior of employed and unemployed workers. This result owes to two model features introduced to capture important characteristics of U.S. labor market data. First, individual consumption is affected by the number of hours worked: Employed agents consume more on average than the unemployed do. Second, changes in the employment rate, a central factor explaining variation in total hours, affect aggregate consumption. Demand shocks--such as shifts in the marginal efficiency of investment, as well as government spending shocks and news shocks--are shown to generate economic fluctuations consistent with observed business cycles.
    Keywords: Labor market ; Consumption (Economics) ; Productivity ; Business cycles ; Employment
    Date: 2009
  6. By: Addison, John T. (University of South Carolina); Bryson, Alex (National Institute of Economic and Social Research); Teixeira, Paulino (University of Coimbra); Pahnke, André (IAB, Nürnberg); Bellmann, Lutz (IAB, Nürnberg)
    Abstract: Industrial relations are in flux in many nations, perhaps most notably in Germany and the Britain. That said, comparatively little is known in any detail of the changing pattern of the institutions of collective bargaining and worker representation in Germany and still less in both countries about firm transitions between these institutions over time. The present paper maps changes in the importance of the key institutions, 1998-2004, and explores the correlates of two-way transitions, using successive waves of the German IAB Establishment Panel and both cross-sectional and panel components of the British Workplace Employment Relations Survey. We identify the workplace correlates of the demise of collective bargaining in Britain and the erosion of sectoral bargaining in Germany, and identify the respective roles of behavioral and compositional change.
    Keywords: union recognition, union coverage, sectoral and firm-level collective bargaining, works councils, joint consultative committees, changes in collective bargaining/worker representation states, bargaining transitions and their determinants
    JEL: J50 J53
    Date: 2009–10
  7. By: Tianxi Wang
    Abstract: The paper shows that the principal can enhance her control over the agent's human capital by acquiring the physical capital that is critical for him to create value. However, the enhancement in the control necessarily reduces his incentive to make human capital investment ex ante and to exert e¤ort ex post. This trade-off between control and incentive thus decides the boundary of the firm. The paper also presents a rationale for M-form firms: centralized ownership of physical capital to facilitate coordination, and dispersed payoff rights to incentivize divisions.
    Date: 2009–11–03
  8. By: Weber, Andrea (RWI Essen); Zulehner, Christine (University of Vienna)
    Abstract: According to Becker's (1957) famous theory on discrimination, entrepreneurs with a strong prejudice against female workers forgo profits by submitting to their tastes. In a competitive market their firms lack efficiency and are therefore forced to leave. We present new empirical evidence for this prediction by studying the survival of startup firms in a large longitudinal matched employer-employee data set from Austria. Our results show that firms with strong preferences for discrimination, i.e. a low share of female employees relatively to the industry average, have significantly shorter survival rates. This is especially relevant for firms starting out with female shares in the lower tail of the distribution. They exit about 18 months earlier than firms with a median share of females. We see no differences in survival between firms at the top of the female share distribution and at the median, though. We further document that highly discriminatory firms that manage to survive submit to market powers and increase their female workforce over time.
    Keywords: firm survival, profitability, female employment, discrimination, market test, matched employer-employee data
    JEL: J16 J71 L25
    Date: 2009–10
  9. By: Jos Jansen (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: This paper studies the incentives for production cost disclosure in an asymmetric Cournot duopoly. Whereas the efficient firm (consumers) prefers information sharing (concealment) when the firms choose accommodating strategies in the product market, the firm (consumers) may prefer information concealment (sharing) when it can exclude its competitor from the market. Hence, the rankings of expected profit and consumer surplus can be reversed if exit of the inefficient firm is possible. Although the efficient firm has stronger incentives to share information when it shares strategically, there remain cases in which the firm conceals information in equilibrium to induce exit.
    Keywords: cost asymmetry, Cournot duopoly, exit, information disclosure, precommitment
    JEL: D82 L13
    Date: 2009–10
  10. By: Casadesus-Massanell, Ramon (Harvard Business School); Ricart, Joan E. (IESE Business School)
    Abstract: The competitiveness of a country is the result of the competitiveness of its firms. The competitiveness of firms is partly determined by how their business models interact with the environment to produce offerings with added value. This chapter contributes to the reflection on Catalonia's competitiveness by using the business model concept to highlight the need to adapt business models to new realities in the Catalan environment. Catalan firms have made little effort to reconfigure their business models after being affected by important external shocks. We derive recommendations by presenting and analyzing examples of companies that have innovated in their business models. Business models sit at the core of competitiveness and should be the focus of managers willing to create efficient firms that foster sustained wealth in Catalonia.
    Keywords: Strategy; Business; Innovation; Internationalization; competitiveness; Firms;
    Date: 2009–07–17
  11. By: Amir, Eli (London Business School); Kallunki, Juha-Pekka (University of Oulu, Department of Accounting and Finance); Nilsson, Henrik (Umeå School of Business)
    Abstract: Unique proprietary data on Swedish board members reveal that a non-trivial proportion of board members in Swedish listed firms have been convicted of serious crimes. Analyzing the data shows that board members with personal fraudulent behavior are more likely to be males than females. We also find that the greater the proportion of fraudulent board members, the lower is the profitability and the higher are the earnings (and cash flows) volatility of the firm. However, the negative effect of fraudulent behavior on profitability is mitigated when fraudulent board members have a larger stake in the firm’s equity. Finally, we find that the earnings of firms with more fraudulent board members are lower and less value-relevant. Given the strong legal enforcement in Sweden, our results raise serious concerns about the effects of board members’ personal fraudulent behavior on firm performance and risk-taking in other countries, particularly the United States and the United Kingdom.
    Keywords: Fraudulent behavior; Fraud; Crimes; Convicted board members; Corporate governance; Profitability; Earnings volatility
    Date: 2009–10–27
  12. By: Desender, Kurt A. (V.K. Zimmerman Center for International Education and Research in Accounting, University of Illinois, Champaign)
    Abstract: This paper develops a theoretical model to better understand how the priorities of the board of directors are influenced by the ownership structure and how that affects firm performance. Most corporate governance research focuses on a universal link between corporate governance practices (e.g., board structure, shareholder activism) and performance outcomes, but neglects how the specific context of each company and diverse environments lead to variations in the effectiveness of different governance practices. This study suggests that the ownership structure has an important influence on the priorities set by the board, and that these priorities will determine the optimal composition of the board of directors. In contrast to a board prioritizing monitoring, where directors with financial experience and a duality are important, a board prioritizing the provision of resources could benefit from directors with different characteristics, the presence of the CEO on the board of directors and a larger board size. Understanding the influence of the board of directors on firm performance requires greater sensitivity to how corporate governance affects different aspects of effectiveness for different stakeholders and in different contexts. The insights on the interaction between the ownership structure and board composition can shed new light onto the contradictory empirical results of past research that has tried to link board composition or structure to firm performance directly. In an effort to increase the relevance of future research on boards and firm performance, we provide a framework on the interaction between ownership, corporate boards and firm performance. In light of scandals and perceived advantages in reforming governance systems, debates have emerged over the appropriateness of implementing corporate governance recommendations mainly based on an Anglo-Saxon context characterized by dispersed ownership where markets for corporate control, legal regulation, and contractual incentives are key governance mechanisms. This paper adds to the literature that argues in favor of the need to adapt corporate governance policies to the local contexts of firms.
    JEL: G30 G32 G34
    Date: 2009
  13. By: Bartram, Sohnke M. (Lancaster University and SSgA); Brown, Gregory (Unviersity of North Carolina at Chapel Hill); Stulz, Rene M. (Ohio State University and ECGI)
    Abstract: Using a large panel of firms across the world from 1991-2006, we show that the median foreign firm has lower idiosyncratic risk than a comparable U.S. firm. Country characteristics help explain variation in the level of idiosyncratic risk, but less so than firm characteristics. Idiosyncratic risk falls as government stability and respect for the rule of law improve. Idiosyncratic risk is positively related to stock market development but negatively related to bond market development. Surprisingly, we find that idiosyncratic risk is generally negatively related to corporate disclosure quality. Finally, idiosyncratic risk generally increases with shareholder protection. Though there is evidence that R[superscript 2] increases with creditor rights and falls with the quality of disclosure, these results are driven by the relations between these variables and systematic risk rather than by the impact of these variables on idiosyncratic risk.
    Date: 2009–04
  14. By: Parantap Basu; Max Gillman; Joseph Pearlman
    Abstract: A pervasive empirical finding for the US economy is that inflation is negatively correlated with the normalized market price of capital (Tobin's q) and growth. A dynamic stochastic general equilibrium model of endogenous growth is developed to explain these stylized facts. In this model, human capital is the principal driver of self-sustained growth. Long run comparative statics analysis suggests that inflation diverts scarce time resource to leisure which lowers human capital utilization. This impacts growth adversely and modulates cap¬ital adjustment cost downward resulting in a decline in Tobin's q. For the short run, a Tobin effect of inflation on growth weakens the negative association between inflation and q.
    Date: 2009–05
  15. By: Piero Gottardi (European University Institute - Department of Economics); Jean-Marc Tallon (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Paolo Ghirardato (Collegio Carlo Alberto - Via Real Collegio 30)
    Abstract: This paper studies the costs and benefits of delegating decisions to superiorly informed agents relative to the use of rigid, non discretionary contracts. Delegation grants some flexibility in the choice of the action by the agent, but also requires the use of an appropriate incentive contract so as to realign his interests with those of the principal. The parties' understanding of the possible circumstances in which actions will have to be chosen and their attitude towards risk and uncertainty play then an important role in determining the costs of delegation. The main focus of the paper lies indeed in the analysis of these costs and the consequences for whether or not delegation is optimal. We determine and characterize the properties of the optimal flexible contract both when the parties have sharp probabilistic beliefs over the possible events in which the agent will have to act and when they only have a set of such beliefs. We show that the higher the agent's degree of risk aversion, the higher the agency costs for delegation and hence the less profitable is a flexible contract versus a rigid one. The agent's imprecision aversion in the case of multiple priors introduces another, additional agency costs ; it again implies that the higher the degree of imprecision aversion the less profitable flexible contracts versus rigid ones. Even though, with multiple priors, the contract may be designed in such a way that principal and agent end up using "different beliefs" and hence engage in speculative trade, this is never optimal, in contrast with the case where the parties have sharp heterogeneous beliefs.
    Keywords: Delegation, flexibility, agency costs, multiple priors, imprecision aversion.
    Date: 2009–09
  16. By: Cronqvist, Henrik (Claremont McKenna College); Makhija, Anil K. (Ohio State University); Yonker, Scott E. (Ohio State University)
    Abstract: We find that firms behave remarkably similarly to how their CEOs behave personally when it comes to leverage choices. We start our analysis by compiling a comprehensive sample of home purchases and financings among S&P 1,500 CEOs. Debt financing in a CEO's most recent home purchase is used as a revealed preference of the CEO's personal attitude towards debt. We find a robust positive relation between personal and corporate leverage. We also find that firms tend to hire CEOs with a similar personal attitude towards debt as the previous CEO. When the new and previous CEOs have different personal preferences, corporate leverage changes in the direction of the new CEO's personal leverage. These results support a model with endogenous matching of CEOs to firms. We also find that the positive relation between CEOs' personal leverage and corporate leverage is stronger in firms with poor governance, suggesting that CEOs imprint their personal preferences on the firms they manage when they are able to do so. These results suggest that heterogeneity in CEOs' personal attitudes towards debt partly explains differences in corporate capital structures, and suggest more generally that an analysis of CEOs' personalities and personal traits may provide important information about the financial policies of the firms they manage.
    Date: 2009–07
  17. By: Bargeron, Leonce L. (University of Pittsburgh); Schlingemann, Frederik P. (University of Pittsburgh); Stulz, Rene M. (Ohio State University); Zutter, Chad J. (University of Pittsburgh)
    Abstract: CEOs have a potential conflict of interest when their company is acquired: They can bargain to be retained by the acquirer and for private benefits rather than for a higher premium to be paid to the shareholders. We investigate the determinants of target CEO retention by the acquirer and whether target CEO retention affects the premium paid by the acquirer. The probability that a CEO is retained increases with a private bidder, the performance of the target, and with the fraction of target shares held by insiders. Regardless of the bidder type, we find no evidence that the premium paid is lower when the CEO is retained by the acquirer. Strikingly, the target stock price increases more at the announcement of an acquisition by a private firm when the CEO is retained than when she is not. This result holds whether the private acquirer is a private equity firm or an operating company and for management buyouts.
    JEL: G30 G34
    Date: 2009–09
  18. By: Delacroix, Alain (University of Québec at Montréal); Wasmer, Etienne (Sciences Po, Paris)
    Abstract: Wage determination under asymmetric information generates inefficiencies due to excess turnover. Severance pay and layoff taxes can improve efficiency. We show that inefficient separations can even be fully removed with fixed separation taxes in the case where the relevant private information is exponentially distributed.
    Keywords: bargaining, asymmetric information, employment protection legislation, inefficient job separations
    JEL: J41 J60
    Date: 2009–10
  19. By: James Feyrer
    Abstract: This paper examines whether management changes caused by the entry of the baby boom into the workforce explain the US productivity slowdown in the 1970s and resurgence in the 1990s. Lucas (1978) suggests that the quality of managers plays a significant role in determining output. If there is heterogeneity across workers and management skill improves with experience, an influx of young workers will lower the overall quality of management and lower total factor productivity. Census data shows that the entry of the baby boom resulted in more managers being hired from the smaller, pre baby boom cohorts. These marginal managers were necessarily of lower quality. As the boomers aged and gained experience, this effect was reversed, increasing managerial quality and raising total factor productivity. Using the Lucas model as a framework, a calibrated model of managers, workers, and firms suggests that the management effects of the baby boom may explain roughly 20 percent of the observed productivity slowdown and resurgence.
    JEL: E0 E25 J1 J11 O33 O4 O47 O51
    Date: 2009–11
  20. By: Daniel Danau; Annalisa Vinella
    Abstract: We consider a principal who deals with two privately informed agents protected by limited liability. Their technologies are such that the fixed costs decline with the marginal costs (the types), which are correlated. Because of these technological features, agents display countervailing incentives to misrepresent type. We show that, with high liability, the first-best outcome can be effected for any type if (1) the fixed cost is non-concave in type, under the contract that yields the smallest feasible loss to agents; (2) the fixed cost is not very concave in type, under the contract that yields the maximum sustainable loss to agents. We further show that, with low liability, the first-best outcome is still implemented for a non-degenerate range of types if the fixed cost is less concave in type than some given threshold, which tightens as the liability reduces. The optimal contract entails pooling otherwise..
    Keywords: Countervailing incentives; Limited liability; Correlation; Pooling
    JEL: D82
    Date: 2009–09
  21. By: Eric J. Bartelsman; John C. Haltiwanger; Stefano Scarpetta
    Abstract: This paper combines different strands of the productivity literature to investigate the effect of idiosyncratic (firm-level) policy distortions on aggregate outcomes. On the one hand, a growing body of empirical research has been relating cross-country differences in key economic outcomes, such as productivity or output per capita, to differences in policies and institutions that shape the business environment. On the other hand, a branch of empirical research has attempted to shed light on the determinants of productivity at the firm level and the evolution of the distribution of productivity across firms within each industry. In this paper, we exploit a rich source of data with harmonized statistics on firm level variation within industries for a number of countries. Our key empirical finding is that there is substantial variation in the within-industry covariance between size and productivity across countries, but this covariance varies significantly across countries and is affected by the presence of idiosyncratic distortions. We develop a model in which heterogeneous firms face adjustment frictions (overhead labor and quasi-fixed capital) and idiosyncratic distortions. We show that the model can be readily calibrated to match the observed cross-country patterns of the within-industry covariance between productivity and size and thus help to explain the observed differences in aggregate performance.
    JEL: L11 L16 L2 L25 O4 O57
    Date: 2009–11
  22. By: Eric T. Swanson
    Abstract: In dynamic stochastic general equilibrium (DSGE) models, the househol's labor margin as well as consumption margin affects Arrow-Pratt risk aversion. This paper derives simple, closed-form expressions for risk aversion that take into account the household's labor margin. Ignoring the labor margin can lead to wildly inaccurate measures of the household's true attitudes toward risk. We show that risk premia on assets computed using the stochastic discount factor are proportional to Arrow-Pratt risk aversion, so that measuring risk aversion correctly is crucial for understanding asset prices. Closed-form expressions for risk aversion in DSGE models with generalized recursive preferences and internal and external habits are also derived.> In dynamic stochastic general equilibrium (DSGE) models, the househol's labor margin as well as consumption margin affects Arrow-Pratt risk aversion. This paper derives simple, closed-form expressions for risk aversion that take into account the household's labor margin. Ignoring the labor margin can lead to wildly inaccurate measures of the household's true attitudes toward risk. We show that risk premia on assets computed using the stochastic discount factor are proportional to Arrow-Pratt risk aversion, so that measuring risk aversion correctly is crucial for understanding asset prices. Closed-form expressions for risk aversion in DSGE models with generalized recursive preferences and internal and external habits are also derived.
    Keywords: Financial risk management ; Asset pricing
    Date: 2009
  23. By: Vroom, Govert (IESE Business School); Mccann, Brian T. (Krannet School of Management)
    Abstract: We question the broad applicability of the assumption of profit maximization as the goal of the firm and investigate how variance in objective functions across different ownership structures affects competitive behavior. While prior work in agency theory has argued that firms may fail to engage in profit maximizing behaviors due to misalignment between the goals of owners and managers, we contend that we are unlikely to observe pure profit maximizing behavior even in the case of the perfect alignment of goals that exists in owner-managed firms. We compare the competitive behaviors of owner-managed and professionally managed firms and find that, contrary to the expectations of agency theory, professionally managed firms are more likely to engage in behaviors consistent with profit-maximization goals. Consistent with the view that owner-managers are less concerned with maximizing profits, we observe that the entry, exit, and pricing decisions of owner-managed firms are all relatively less responsive to the underlying economic attractiveness of the markets in which they operate.
    Keywords: profit; behavior; goals; firms; market;
    Date: 2009–07–07
  24. By: Farhi, Emmanuel (Harvard University); Tirole, Jean (Toulouse School of Economics)
    JEL: E2 E44
    Date: 2009–10
  25. By: Dur, Robert (Erasmus University Rotterdam); Sol, Joeri (Erasmus University Rotterdam)
    Abstract: Social interaction with colleagues is an important job attribute for many workers. To attract and retain workers, managers therefore need to think about how to create and preserve high-quality co-worker relationships. This paper develops a principal-multi-agent model where agents do not only engage in productive activities, but also in social interaction with their colleagues, which in turn creates co-worker altruism. We study how financial incentives for productive activities can improve or damage the work climate. We show that both team incentives and relative incentives can help to create a good work climate.
    Keywords: social interaction, altruism, incentive contracts, co-worker satisfaction
    JEL: D86 J41 M50
    Date: 2009–10

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