nep-bec New Economics Papers
on Business Economics
Issue of 2009‒11‒21
twenty-one papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Firm Heterogeneity, Contract Enforcement, and the Industry Dynamics of Offshoring By Alireza Naghavi; Gianmarco I. P. Ottaviano
  2. Information Advantage in Cournot Oligopoly with Separable Information, or Nondifferentiable By Haimanko, Ori
  3. The Feldstein-Horioka fact By Domenico Giannone; Michele Lenza
  4. Business groups and the boundaries of the firm By Giulio Cainelli; Donato Iacobucci
  5. Creditor-Focused Corporate Governance: Evidence from Mergers and Acquisitions in Japan By Mehrotra, Vikas; Schaik, Dimitri van; Spronk, Jaap; Steenbeek, Onno
  6. From Business model to Business model portfolio in the european biopharmaceutical industry By Valérie Sabatier; Vincent Mangematin; Tristan Rouselle
  7. Strategy vs. business models vs. tactics By Casadesus-Masanell, Ramon; Ricart, Joan E.
  8. Banking Deregulations, Financing Constraints, and Firm Entry Size By William Kerr; Ramana Nanda
  9. The Impact of Risk Aversion and Stress on the Incentive Effect of Performance Pay By C. Bram Cadsby; Fei Song; Francis Tapon
  10. Business cycle fluctuations and learning-by-doing externalities in a one-sector model By Hippolyte D'Albis; Emmanuelle Augeraud-Véron; Alain Venditti
  11. Tenure, Wage Profiles and Monitoring By Sessions, John; Theodoropoulos, N.
  12. The power of delegation: Allowing workers to choose their wage By Ramón Cobo-Reyes; Natalia Jiménez; Juan Antonio Lacomba; Francisco Lagos
  13. Competition and Quality Upgrading By Mary Amiti; Amit K. Khandelwal
  14. Misinformative advertising By Ruiz-Aliseda, Francisco
  15. Portfolio inertia and the equity premium By Christopher Gust; David López-Salido
  16. The Effects of Uncertainty and Corporate Governance on Firms' Demand for Liquidity By Christopher F. Baum; Atreya Chakraborty; Boyan Liu; Boyan Liu
  17. Assessing Competition with the Panzar-Rosse Model: The Role of Scale, Costs, and Equilibrium By Jacob Bikker; Sherrill Shaffer; Laura Spierdijk
  18. Did Fair-Value Accounting Contribute to the Financial Crisis? By Christian Laux; Christian Leuz
  19. An Empirical Evaluation of the Long-Run Risks Model for Asset Prices By Ravi Bansal; Dana Kiku; Amir Yaron
  20. Creditor control of free cash flow By Rocco Huang
  21. Risk Price Dynamics By Jaroslav Borovička; Lars Peter Hansen; Mark Hendricks; José A. Scheinkman

  1. By: Alireza Naghavi (University of Bologna); Gianmarco I. P. Ottaviano (Bocconi University)
    Abstract: We develop an endogenous growth model with R&D spillovers to study the long run consequences of offshoring with firm heterogeneity and incomplete contracts. In so doing, we model offshoring as the geographical fragmentation of a firm’s production chain between a home upstream division and a foreign downstream one. While there is always a positive correlation between upstream bargaining weight and offshoring activities, there is an inverted U-shaped relationship between these and growth. Whether offshoring with incomplete contracts also increases consumption depends on firm heterogeneity. As for welfare, whereas with complete contracts an R&D subsidy is enough to solve the inefficiency due to R&D spillovers, with incomplete contracts a production subsidy is also needed.
    Keywords: o¤shoring, heterogeneous …rms, incomplete contracts, industry dynamics
    JEL: D23 F23 L23 O31 O43
    Date: 2009–11–17
  2. By: Haimanko, Ori
    Abstract: Einy et al (2002) showed that information advantage of a firm is rewarded in any equilibrium of an incomplete information Cournot oligopoly, provided the inverse demand function is differentiable and monotonically decreasing, and costs are affine. We extend this result in two directions. We show first that a firm receives not less than its rival even if that firm's information advantage is only regarding payoff-relevant data, and not necessarily payoff-irrelevant "sunspots". We then show that there is at least one equilibrium which rewards firm's information advantage even with non-differentiable, but concave, inverse demand function. Under certain conditions, these results hold even with always non-negative inverse demand functions.
    Keywords: Oligopoly, Incomplete Information, Information advantage, Bayesian Cournot, Equilibrium, Sunspots, Non-differentiability, Inverse demand
    JEL: C72 D43 L13
    Date: 2009–09
  3. By: Domenico Giannone; Michele Lenza
    Abstract: This paper shows that general equilibrium effects can partly rationalize the high correlation between saving and investment rates observed in OECD countries. We find that once controlling for general equilibrium effects the saving-retention coefficient remains high in the 70’s but decreases considerably since the 80’s, consistently with the increased capital mobility in OECD countries.
    JEL: C23 F32 F41
    Date: 2009–11
  4. By: Giulio Cainelli (Dipartimento per lo Studio delle Società Mediterranee, Università degli Studi di Bari); Donato Iacobucci (Dipartimento di Ingegneria Informatica, Gestionale e dell’Automazione, Università Politecnica delle Marche)
    Abstract: This paper aims to show that the business group – i.e. the set of firms under common ownership and control – is the most appropriate unit to study the behavior and organization of firms and define their boundaries. Particular emphasis is given to notions such as unitary direction – i.e. the influence over strategic decisions – and administrative co-ordination which allow owners to exercise supervision and authority over the controlled companies.
    Keywords: business group; boundary of the firm; unitary direction
    JEL: L2 M2
    Date: 2009–11
  5. By: Mehrotra, Vikas; Schaik, Dimitri van; Spronk, Jaap; Steenbeek, Onno
    Abstract: Mergers in Japan have the dubious distinction of not creating wealth for shareholders of target firms, in sharp contrast to much of the rest of the world. Using a sample of 91 mergers from 1982 through 2003 we document several distinctive features of the merger market in Japan: mergers tend to be countercyclical and often orchestrated by a common main bank. Overall our results point to a market for corporate control that is distinctly less shareholder-focused than that in the U.S., and one where creditors play an important, perhaps dominant, role in corporate governance.
    Keywords: Japanese mergers, Japanese corporate governance
    JEL: G30 G34
    Date: 2009–08
  6. By: Valérie Sabatier (GAEL - Economie Appliquée de Grenoble - INRA : UR1215 - Université Pierre Mendès-France - Grenoble II, 3PX Therapeutics - 3PX Therapeutics); Vincent Mangematin (MTS - Management Technologique et Strategique - Grenoble Ecole de Management); Tristan Rouselle (3PX Therapeutics - 3PX Therapeutics)
    Abstract: At the crossroad of firm's core competencies and of the anticipations of consumers' needs, the business model approach complements corporate and business strategy approaches. Firms combine several business models simultaneously to deliver value to different markets, building a portfolio of business model. For managers, business model and business model portfolio are particularly useful to address customer's needs and organisational capabilities of the firm. They also emphasise how the initial core competency of the firm can be extended or redeployed to increase the rent. Business model portfolio describes the firm's strategy to balance time-to-market, revenue stream, risk and interdependencies. It conceptualises firm diversification within the same industry to generate and capture rents. They finally describe two generic dimensions: core competence extension to enlarge the market and to address additional customers and core competence redeployment to serve similar market with the same core competence.
    Keywords: Biopharmaceutical; portfolio; corporate strategy; business strategy; core competence; coherence; value chain
    Date: 2009–11–12
  7. By: Casadesus-Masanell, Ramon (Harvard Business School); Ricart, Joan E. (IESE Business School)
    Abstract: The notion of business model has been used by strategy scholars to refer to "the logic of the firm, the way it operates and how it creates value for its stakeholders." On the surface, this notion appears to be similar to that of strategy. We present a conceptual framework to separate business model from strategy. Business model, we argue, is a reflection of the firm's realized strategy. We find that in simple competitive situations there is a one-to-one mapping between strategy and business model, which makes it difficult to separate the two notions. We show that the concepts of strategy and business model differ markedly when there are important contingencies upon which a well-designed strategy must be based. Our framework also delivers a clear separation between tactics and strategy. This distinction is possible because strategy and business model are different constructs.
    Keywords: Business model; Strategy; Competitive dynamics; Interaction;
    Date: 2009–08–03
  8. By: William Kerr; Ramana Nanda
    Abstract: We examine the effect of US branch banking deregulations on the entry size of new firms using micro-data from the US Census Bureau. We find that the average entry size for startups did not change following the deregulations. However, among firms that survived at least four years, a greater proportion of firms entered either at their maximum size or closer to the maximum size in the first year. The magnitude of these effects were small compared to the much larger changes in entry rates of small firms following the reforms. Our results highlight that this large-scale entry at the extensive margin can obscure the more subtle intensive margin effects of changes in financing constraints.
    JEL: E44 G21 L26 L43 M13
    Date: 2009–11
  9. By: C. Bram Cadsby (Department of Economics, University of Guelph); Fei Song (Ted Rogers School of Business Management, Ryerson University); Francis Tapon (Department of Economics, University of Guelph)
    Abstract: We demonstrate that effectiveness of performance-contingent incentives is inversely related to individual risk-aversion levels through two mechanisms: 1) rational optimizing decisions about the amount of effort to supply when effort is positively correlated with risk exposure and 2) the possibly choke-inducing stress accompanying financial uncertainty. In two laboratory studies using real-effort tasks, we find a significant inverse relationship between productivity improvement under performance pay and risk-aversion levels. Moreover, we show that both mechanisms help explain this result. For about 25% of participants, performance actually deteriorates under performance pay, and the probability of such deterioration increases with risk aversion and stress.
    Keywords: risk aversion, performance pay, incentive, stress, choking under pressure, productivity, pay for performance, piece rate, experiment, compensation.
    JEL: C91 M52 J33
    Date: 2009
  10. By: Hippolyte D'Albis (LERNA - Economie des Ressources Naturelles - INRA : UR1081 - CEA : DPG - Université des Sciences Sociales - Toulouse I); Emmanuelle Augeraud-Véron (MIA - Mathématiques, Image et Applications - Université de La Rochelle : EA3165); Alain Venditti (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579)
    Abstract: We consider a one-sector Ramsey-type growth model with inelastic labor and learning-by-doing externalities based on cumulative gross investment (cumulative production of capital goods), which is assumed, in accordance with Arrow [5], to be a good index of experience. We prove that a slight memory effect characterizing the learning-by-doing process is enough to generate business cycle fluctuations through a Hopf bifurcation. This is obtained for reasonable parameter values, notably for both the elasticity of output with respect to the externality and the elasticity of intertemporal substitution. Hence, contrary to all the results available in the literature on aggregate models, we show that endogenous fluctuations are compatible with a low (in actual fact, zero) wage elasticity of the labor supply.
    Keywords: One-sector infinite-horizon model, learning-by-doing externalities, inelastic labor, business cycle fluctuations, Hopf bifurcation
    Date: 2009–11–15
  11. By: Sessions, John; Theodoropoulos, N.
    Abstract: We undertake the first empirical investigation of the relationship between the slope of the wagetenure profile and the level of monitoring. On the assumption that firms strive for the optimal trade-off between these various instruments, we hypothesise that increased monitoring leads to a decline in the slope of the wagetenure profile. Our empirical analysis, using two cross sections of matched employer-employee British data, provides robust support for this prediction.
    Keywords: Monitoring; tenure; efficiency wages;
    Date: 2009–11
  12. By: Ramón Cobo-Reyes (Department of Economic Theory and Economic History, University of Granada.); Natalia Jiménez (Department of Economic Theory and Economic History, University of Granada.); Juan Antonio Lacomba (Department of Economic Theory and Economic History, University of Granada.); Francisco Lagos (Department of Economic Theory and Economic History, University of Granada.)
    Abstract: This paper analyzes the effect of delegating on the employees’ performance in an experimental gift exchange game where employers may allow workers to choose their own wages. Our results show that higher effort levels are displayed when workers are free to choose their wage, even when wages chosen by employees are similar to those assigned by employers. Notwithstanding this better performance, the employers’ profits depend on whether the wage decision is bounded or not. Perceiving the delegating decision as a signal of trust or as a larger responsibility for the allocation of payoffs, might trigger a higher employees’ performance.
    Keywords: labor market, gift exchange-game, delegation, responsibility-allevietion, reciprocity, experiments.
    Date: 2009–10–07
  13. By: Mary Amiti; Amit K. Khandelwal
    Abstract: How does competition affect innovation? We address this question by using a novel approach to measure quality -- an important component of innovation -- using highly disaggregated product data for a large set of countries. Constructing an internationally comparable measure of quality enables us to separate the effect of reducing import tariffs, our measure of competition, on quality upgrading from other country level differences in competitive environments, and product demand shocks. We base our analysis on recent theoretical frameworks that predict that the effect of competition on innovation depends on firms' proximity to the world technological frontier. As predicted by theory, we find that lower tariffs are associated with quality upgrading for products close to the world frontier; whereas lower tariffs discourage quality upgrading for varieties distant from the frontier.
    JEL: F1
    Date: 2009–11
  14. By: Ruiz-Aliseda, Francisco (IESE Business School)
    Abstract: This paper analyzes how advertising can be used to mislead rivals in an oligopoly environment with demand uncertainty. In particular, we examine a two-period game in which two firms each sell a differentiated product whose attractiveness vis-à-vis the competitor's product is unknown. In each period, a firm sets prices for its product and exerts an advertising effort that is imperfectly observed by the rival later on. Advertising is persuasive in that it enhances willingness to pay, but it can also be used to manipulate rivals' beliefs about initially unobservable differences in consumers' quality perceptions. In equilibrium, each firm uses advertising to persuade consumers and to interfere with the rival's learning about this unknown dimension of demand. This can be done because the effect of imperfectly observed advertising cannot be separated out of the effect of the unknown quality differential, which creates a signal extraction problem for the competitor. There always exists acontinuum of (symmetric) equilibria, but refining the equilibrium set selects out a unique one in which firms price in the first-period as in the static equilibrium, whereas the misinformative usage of advertising makes firms under advertise if and only if the marginal cost of advertising is high enough.
    Keywords: Firms; Productivity; Catalonia; Innovation;
    Date: 2009–07–15
  15. By: Christopher Gust; David López-Salido
    Abstract: We develop a DSGE model in which aggregate shocks induce endogenous movements in risk. The key feature of our model is that households rebalance their financial portfolio allocations infrequently, as they face a fixed cost of transferring cash across accounts. We show that the model can account for the mean returns on equity and the risk-free rate, and generates countercyclical movements in the equity premium that help explain the response of stock prices to monetary shocks. The model is consistent with empirical evidence documenting that unanticipated changes in monetary policy have important effects on equity prices through changes in risk.
    Date: 2009
  16. By: Christopher F. Baum (Boston College; DIW Berlin); Atreya Chakraborty (University of Massachusetts-Boston); Boyan Liu (Beihang University); Boyan Liu (Beihang University)
    Abstract: We find that U.S. corporations' demand for liquidity is sensitive to two important factors: uncertainty facing the firm and the quality of corporate governance. Following prior research, we find that both factors have important influences on firms' cash holdings. Our results also indicate that the interactions between uncertainty and governance measures are significant. From a policy perspective, these new findings indicate both governance and the nature of uncertainty may play an important role in managing liquidity risks. Policy recommendations may not only be limited to changes in financial policy but may also include changes in corporate governance.
    Keywords: liquidity, demand for cash, uncertainty, governance, Gindex
    JEL: G32 G34 E32
    Date: 2009–11–11
  17. By: Jacob Bikker; Sherrill Shaffer; Laura Spierdijk
    Abstract: The Panzar-Rosse test has been widely applied to assess competitive conduct, often in specifications controlling for firm scale or using a price equation. We show that neither a price equation nor a scaled revenue function yields a valid measure for competitive conduct. Moreover, even an unscaled revenue function generally requires additional information about costs and market equilibrium. Our theoretical findings are confirmed by an empirical analysis of competition in banking, using a sample covering more than 110,000 bank-year observations on almost 18,000 banks in 67 countries during 1986-2004.
    Keywords: Panzar-Rosse test; competition; firm size
    JEL: D40 L11
    Date: 2009–11
  18. By: Christian Laux; Christian Leuz
    Abstract: The recent financial crisis has led to a major debate about fair-value accounting. Many critics have argued that fair-value accounting, often also called mark-to-market accounting, has significantly contributed to the financial crisis or, at least, exacerbated its severity. In this paper, we assess these arguments and examine the role of fair-value accounting in the financial crisis using descriptive data and empirical evidence. Based on our analysis, it is unlikely that fair-value accounting added to the severity of the current financial crisis in a major way. While there may have been downward spirals or asset-fire sales in certain markets, we find little evidence that these effects are the result of fair-value accounting. We also find little support for claims that fair-value accounting leads to excessive write-downs of banks’ assets. If anything, empirical evidence to date points in the opposite direction, that is, towards overvaluation of bank assets.
    JEL: F3 G15 G21 G24 G38 K22 M41
    Date: 2009–11
  19. By: Ravi Bansal; Dana Kiku; Amir Yaron
    Abstract: We provide an empirical evaluation of the forward-looking long-run risks (LRR) model and highlight model differences with the backward-looking habit based asset pricing model. We feature three key results: (i) Consistent with the LRR model, there is considerable evidence in the data of time-varying expected consumption growth and volatility, (ii) The LRR model matches the key asset markets data features, (iii) In the data and in the LRR model accordingly, past consumption growth does not predict future asset prices, whereas lagged consumption in the habit model forecasts future price-dividend ratios with an R2 of over 40%. Overall, our evidence implies that the LRR model provides a coherent framework to analyze and interpret asset prices.
    JEL: E0 G0 G1 G12 G14
    Date: 2009–11
  20. By: Rocco Huang
    Abstract: With free cash flows, borrowers can accumulate cash or voluntarily pay down debts. However, sometimes creditors impose a mandatory repayment covenant called "excess cash flow sweep" in loan contracts to force borrowers to repay debts ahead of schedule. About 17 percent of borrowers in the authors' sample (1995-2006) have this covenant attached to at least one of their loans. The author finds that the sweep covenant is more likely to be imposed on borrowers with higher leverage (i.e., where risk shifting by equity holders is more likely). The results are robust to including borrower fixed effects or using industry median leverage as a proxy. The covenant is more common also in borrowers where equity holders appear to have firmer control, e.g., when more shares are controlled by institutional block holders, when firms are incorporated in states with laws more favorable to hostile takeovers, or when equity holders place higher valuation on excess cash holdings. These determinants suggest that the sweep covenant may be motivated by creditor-shareholder conflicts. Finally, the author shows that the covenant has real effects: borrowers affected by the sweep covenant indeed repay more debts using excess cash flows, and they spend less in capital investment and pay out fewer dividends to shareholders.
    Keywords: Loans ; Debt
    Date: 2009
  21. By: Jaroslav Borovička; Lars Peter Hansen; Mark Hendricks; José A. Scheinkman
    Abstract: We present a novel approach to depicting asset pricing dynamics by characterizing shock exposures and prices for alternative investment horizons. We quantify the shock exposures in terms of elasticities that measure the impact of a current shock on future cash-flow growth. The elasticities are designed to accommodate nonlinearities in the stochastic evolution modeled as a Markov process. Stochastic growth in the underlying macroeconomy and stochastic discounting in the representation of asset values are central ingredients in our investigation. We provide elasticity calculations in a series of examples featuring consumption externalities, recursive utility, and jump risk.
    JEL: C52 E44 G12
    Date: 2009–11

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