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on Business Economics |
| By: | Edmans, Alex; Gabaix, Xavier; Sadzik, Tomasz; Sannikov, Yuliy |
| Abstract: | Contracts in a dynamic model must address a number of issues absent from static frameworks. Shocks to firm value may weaken the incentive effects of securities (e.g. cause options to fall out of the money), and the impact of some CEO actions may not be felt until far in the future. We derive the optimal contract in a setting where the CEO can affect firm value through both productive effort and costly manipulation, and may undo the contract by privately saving. The optimal contract takes a surprisingly simple form, and can be implemented by a "Dynamic Incentive Account." The CEO’s expected pay is escrowed into an account, a fraction of which is invested in the firm’s stock and the remainder in cash. The account features state-dependent rebalancing and time-dependent vesting. It is constantly rebalanced so that the equity fraction remains above a certain threshold; this threshold sensitivity is typically increasing over time even in the absence of career concerns. The account vests gradually both during the CEO’s employment and after he quits, to deter short-termist actions before retirement. |
| Keywords: | Contract theory; executive compensation; incentives; manipulation; principal-agent problem; private saving; vesting |
| JEL: | D2 D3 G34 J3 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7497&r=bec |
| By: | Jermann, Urban; Quadrini, Vincenzo |
| Abstract: | In this paper we document the cyclical properties of U.S. firms' financial flows. Equity payouts are procyclical and debt payouts are countercyclical. We develop a model with explicit roles for debt and equity financing and explore how the observed dynamics of real and financial variables are affected by `financial shocks', that is, shocks that affect the firms' capacity to borrow. Standard productivity shocks can only partially explain the movements in real and financial variables. The addition of financial shocks brings the model much closer to the data. The recent events in the financial sector show up clearly in our model as a tightening of firms' financing conditions causing the GDP decline in 2008-09. Our analysis also suggests that the downturns in 1990-91 and 2001 were strongly influenced by changes in credit conditions. |
| Keywords: | business cycle; debt and equity; Financial frictions |
| JEL: | E32 G10 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7451&r=bec |
| By: | Bullard, James B.; Singh, Aarti |
| Abstract: | We study a stylized theory of the volatility reduction in the U.S. after 1984 - the Great Moderation - which attributes part of the stabilization to less volatile shocks and another part to more difficult inference on the part of Bayesian households attempting to learn the latent state of the economy. We use a standard equilibrium business cycle model with technology following an unobserved regime-switching process. After 1984, according to Kim and Nelson (1999a), the variance of U.S. macroeconomic aggregates declined because boom and recession regimes moved closer together, keeping conditional variance unchanged. In our model this makes the signal extraction problem more difficult for Bayesian households, and in response they moderate their behavior, reinforcing the effect of the less volatile stochastic technology and contributing an extra measure of moderation to the economy. We construct example economies in which this learning effect accounts for about 30 percent of a volatility reduction of the magnitude observed in the postwar U.S. data. |
| Keywords: | Bayesian learning; business cycles; information; regime-switching |
| JEL: | D8 E3 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7401&r=bec |
| By: | Qiang Kang (Department of Finance, University of Miami); Oscar A. Mitnik (Department of Economics, University of Miami) |
| Abstract: | We study the changes in CEO power and compensation that arise when firms go through financial distress. We use a matching estimator to identify suitable controls and estimate the causal effects of financial distress for a sample of U.S. public companies from 1992 to 2005. We document that, relative to those in control firms, the CEOs of distressed firms experience significant reductions in total compensation; the bulk of this reduction derives from the decline in value of new grants of stock options. These results hold not only for incumbent CEOs but also, surprisingly, for newly hired CEOs. Financial distress has important consequences on corporate governance, decreasing managerial influence over the board. We find that, among distressed firms, there is a significant decrease in the proportion of CEOs holding board chairmanship, and in the fractions of executives serving as directors or in the compensation committee of the board. We also show that periods of financial distress are associated with a decrease in opportunistic timing behavior of stock option awards. The results are suggestive of a link between managerial power and executive compensation. |
| Keywords: | CEO compensation, financial distress, lucky grants, managerial influence, bias-corrected matching estimators |
| JEL: | G30 J33 M52 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:mia:wpaper:2010-2&r=bec |
| By: | Krusell, Per; Mukoyama, Toshihiko; Sahin, Aysegul |
| 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. |
| Keywords: | heterogenous agents; incomplete markets; matching |
| JEL: | D52 J63 J64 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7429&r=bec |
| By: | Den Haan, Wouter; Sedlacek, Petr |
| Abstract: | Fluctuations in firms' revenues reduce firms' viability and are costly from a social welfare point of view even when agents are risk neutral if (i) the decision to continue operating a firm is not efficient at the margin so that fluctuations shorten firms' life expectancy (because they increase the chance revenue levels are such that discontinuation is unavoidable) and (ii) the shortening of the life expectancy reduces entry. Welfare consequences are large, even for moderate fluctuations: Implied estimates for the per period costs of business cycles can easily be equal to several percentage points of GDP. These estimates are based on a direct measurement of cyclical changes in the value added generated by workers that recently were not employed. This extensive margin measure of the cyclical change in output is of independent interest. |
| Keywords: | business cycles; frictions |
| JEL: | E24 E32 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7468&r=bec |
| By: | Karel Mertens (Cornell University); Morten O. Ravn (University College London; University of Southampton; CEPR) |
| Abstract: | The authors provide empirical evidence on the dynamic effects of tax liability changes in the United States. We distinguish between surprise and anticipated tax changes using a timing convention. We document that pre-announced but not yet implemented tax cuts give rise to contractions in output, investment and hours worked, while real wages increase. In contrast, there are no significant anticipation effects on aggregate consumption. Implemented tax cuts, regardless of their timing, have expansionary and persistent effects on output, consumption, investment, hours worked and real wages. The findings are shown to be very robust. We argue that tax shocks are empirically important impulses to the US business cycle and that anticipation effects have been significant over several business cycle episodes |
| Keywords: | fiscal policy shocks, tax liabilities, anticipation effects, business cycles |
| JEL: | E20 E32 E62 H30 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:200911-13&r=bec |
| By: | Keisuke Otsu (Faculty of Liberal Arts, Sophia University (E-mail: k-otsu@sophia.ac.jp)) |
| Abstract: | A key feature of the Japanese business cycles over the 1980- 2007 period is that the fluctuation of total hours worked leads the fluctuation of output. A canonical real business cycle model cannot account for this fact. This paper uses the business cycle accounting method introduced by Chari, Kehoe and McGrattan (2007) and shows that labor market distortions are important in accounting for the this feature of the Japanese labor supply fluctuation. I further discuss fundamental economic shocks that manifest themselves as labor wedges and assess their impacts on labor fluctuation. |
| Keywords: | Business Cycle Accounting, Japanese Labor Market |
| JEL: | E13 E32 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:09-e-28&r=bec |
| By: | Werner, Arndt; Moog, Petra |
| Abstract: | Based on the finding that entrepreneurs who found new firms tend to work as employees of small rather than large firms prior to start-up, we test how different working conditions, which enhance entrepreneurial learning, affect their decision to become entrepreneurs when moderated by firm size. Based on data of the German Socio-Economic Panel (SOEP), we find a significant relationship between entrepreneurial learning (extracted in an orthogonal factor analysis based on twelve working conditions as proxy for entrepreneurial human capital and work experience) and firm size when predicting the probability of leaving paid employment for self-employment. We think, that this is a special kind of knowledge spillover. We also control for other aspects such as gender, age, wage, etc. – factors that may potentially influence the decision to become self-employed. Thus, our analysis sheds new light onto the black box of SMEs as a hotbed of new start-ups. |
| Keywords: | Entrepreneurship; Occupational Choice; Working Conditions; Human Capital |
| JEL: | J28 M54 J24 M13 C33 |
| Date: | 2009–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:18826&r=bec |
| By: | Keisuke Otsu (Faculty of Liberal Arts, Sophia University (E-mail: k-otsu@sophia.ac.jp)) |
| Abstract: | In this paper, I extend the business cycle accounting method a la Chari, Kehoe and McGrattan (2007) to a two-country international business cycle model and quantify the effect of the disturbances in relevant markets on the business cycle correlation between Japan and the US over the 1980-2008 period. This paper finds that disturbances in the labor market and production efficiency are important in accounting for the recent increase in the cross-country output correlation. If international financial market integration is important for considering the recent increase in cross-country output correlation, it must operate through an increase in the cross-country correlation of disturbances in the labor market and production efficiency, and not in the domestic investment market. |
| Keywords: | Business Cycle Accounting, International Business Cycles |
| JEL: | E32 F41 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:09-e-29&r=bec |
| By: | Fuentes-Albero, Cristina; Kryshko, Maxym; Ríos-Rull, José-Víctor; Santaeulàlia-Llopis, Raül; Schorfheide, Frank |
| Abstract: | In this paper, we employ both calibration and modern (Bayesian) estimation methods to assess the role of neutral and investment-specific technology shocks in generating fluctuations in hours. Using a neoclassical stochastic growth model, we show how answers are shaped by the identification strategies and not by the statistical approaches. The crucial parameter is the labor supply elasticity. Both a calibration procedure that uses modern assessments of the Frisch elasticity and the estimation procedures result in technology shocks accounting for 2% to 9% of the variation in hours worked in the data. We infer that we should be talking more about identification and less about the choice of particular quantitative approaches. |
| Keywords: | Business Cycle Fluctuations; Calibration; DSGE Model Estimation; Technology Shocks |
| JEL: | C1 C8 E3 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7474&r=bec |
| By: | Salvatori, Andrea (ISER, University of Essex) |
| Abstract: | In the EU, one in seven employees work on temporary contracts associated with lower pay and less training. Using workplace-level data from 21 countries, I show that, in contrast with previous evidence for the US, unionized workplaces are more likely to use temporary employment across Europe. To address the endogeneity of unions, I then use a British dataset and exploit variation over time and across occupations to control for workplace unobserved heterogeneity. This confirms that unions contribute to creating contract duality in the labour market and thus do not limit the ability of firms to adjust employment through flexible contracts. |
| Keywords: | temporary employment, unions, panel data |
| JEL: | J41 J51 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4554&r=bec |
| By: | Robert W. Fairlie (Department of Economics, University of California, Santa Cruz and RAND); Kanika Kapur (School of Economics and Geary Institute, University College Dublin and RAND); Susan Gates (RAND) |
| Abstract: | The focus on employer-provided health insurance in the United States may restrict business creation. We address the limited research on the topic of “entrepreneurship lock” by using recent panel data from matched Current Population Surveys. We use difference-in-difference models to estimate the interaction between having a spouse with employer-based health insurance and potential demand for health care. We find evidence of a larger negative effect of health insurance demand on the entrepreneurship probability for those without spousal coverage than for those with spousal coverage. We also take a new approach in the literature to examine the question of whether employer-based health insurance discourages entrepreneurship by exploiting the discontinuity created at age 65 through the qualification for Medicare. Using a novel procedure of identifying age in months from matched monthly CPS data, we compare the probability of business ownership among male workers in the months just before turning age 65 and in the months just after turning age 65. We find that business ownership rates increase from just under age 65 to just over age 65, whereas we find no change in business ownership rates from just before to just after for other ages 55-75. Our estimates provide some evidence that "entrepreneurship lock" exists, which raises concerns that the bundling of health insurance and employment may create an inefficient allocation of which or when workers start businesses. |
| Keywords: | Self-employment, entrepreneurship, health insurance |
| Date: | 2009–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:ucd:wpaper:200939&r=bec |
| By: | Veronesi, Pietro; Zingales, Luigi |
| Abstract: | We calculate the costs and benefits of the largest ever U.S. Government intervention in the financial sector announced the 2008 Columbus-day weekend. We estimate that this intervention increased the value of banks’ financial claims by $131 billion at a taxpayers’cost of $25 -$47 billions with a net benefit between $84bn and $107bn. By looking at the limited cross section we infer that this net benefit arises from a reduction in the probability of bankruptcy, which we estimate would destroy 22% of the enterprise value. The big winners of the plan were the three former investment banks and Citigroup, while the loser was JP Morgan. |
| Keywords: | bankruptcy; credit crisis; government intervention |
| JEL: | G21 G28 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7528&r=bec |
| By: | Calzolari, Giacomo; Spagnolo, Giancarlo |
| Abstract: | We study the tension between competitive screening and contract enforcement where a principal trades repeatedly with one among several agents, moral hazard and adverse selection coexist, and non-contractible dimensions are governed by relational contracting. We simultaneously characterize optimal relational contracts and competitive screening policies which are interdependent. When non-contractible dimensions are important, the principal optimally restricts competitive screening to a subset of 'loyal' agents, giving up performance bonuses and, when such dimensions are crucial, negotiates an indefinitely renewable contract with one agent. To enhance enforcement, explicit contract duration is also reduced. However, these policies facilitate collusion among agents, which induces an additional trade-off between reputational forces and collusion. When non-contractible dimensions are very important this last trade-off may disappear, as collusion allows more efficient enforcement of better performance. |
| Keywords: | auctions; collusion; contract duration; efficiency wages; implicit and incomplete contracts; Limited enforcement; Loyalty; Multi-tasking; Negotiation; Non-contractible quality; Performance bonus; Procurement; Relational contracts; Reputation; Screening |
| JEL: | C73 D86 L14 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7434&r=bec |
| By: | Rabah Amir (Department of Economics, University of Arizona); Natalia Lazzati (Department of Economics, University of Arizona) |
| Abstract: | This paper provides a thorough analysis of oligopolistic markets with positive demand-side network externalities and perfect compatibility. The minimal structure imposed on the model primitives is such that industry output increases in a firm's rivals' total output as well as in the expected network size. This leads to a generalized equilibrium existence treatment that includes guarantees for a nontrivial equilibrium, and some insight into possible multiplicity of equilibria. We formalize the concept of industry viability and show that it is always enhanced by having more firms in the market. We also characterize the effects of market structure on industry performance, with an emphasis on departures from standard markets. As per-firm profits need not be monotonic in the number of competitors, we revisit the concept of free entry equilibrium for network industries. The approach relies on lattice-theoretic methods, which allow for a unified treatment of various general results in the literature on network goods. Several illustrative examples with closed-form solutions are also provided. |
| Keywords: | Network effects, demand-side externalities, Cournot oligopoly, supermodularity. |
| JEL: | C72 D43 L13 L14 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:0927&r=bec |
| By: | Bloise, Gaetano; Reichlin, Pietro; Tirelli, Mario |
| Abstract: | We prove indeterminacy of competitive equilibrium in sequential economies, where limited commitment requires the endogenous determination of solvency constraints preventing debt repudiation (Alvarez and Jermann (2000)). In particular, we show that, for any arbitrary value of social welfare in between autarchy and (constrained) optimality, there exists an equilibrium attaining that value. Our method consists in restoring Welfare Theorems for a weak notion of (constrained) optimality. The latter, inspired by Malinvaud (1953), corresponds to the absence of Pareto improving feasible redistributions over finite (though indefinite) horizons. |
| Keywords: | Debt Constraints; Default; Indeterminacy |
| JEL: | D50 D52 D61 E44 G13 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7477&r=bec |
| By: | Backus, David; Chernov, Mikhail; Martin, Ian |
| Abstract: | We use prices of equity index options to quantify the impact of extreme events on asset returns. We define extreme events as departures from normality of the log of the pricing kernel and summarize their impact with high-order cumulants: skewness, kurtosis, and so on. We show that high-order cumulants are quantitatively important in both representative-agent models with disasters and in a statistical pricing model estimated from equity index options. Option prices thus provide independent confirmation of the impact of extreme events on asset returns, but they imply a more modest distribution of them. |
| Keywords: | cumulants; entropy; equity premium; implied volatility; pricing kernel; risk-neutral probabilities |
| JEL: | E44 G12 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7416&r=bec |
| By: | Pinelopi Goldberg (Princeton University); Rebecca Hellerstein (Federal Reserve Bank of New York) |
| Abstract: | How rigid are producer prices? Conventional wisdom is that producer prices are more rigid than and so play less of an allocative role than do consumer prices. In the 1987-2008 micro data collected by the U.S. Bureau of Labor Statistics for the PPI, we find that producer prices for finished goods and services in fact exhibit roughly the same rigidity as do consumer prices that include sales, and substantially less rigidity than do consumer prices that exclude sales. Large firms change prices two to three times more frequently than do small firms, and by smaller amounts, particularly for price decreases. Longer price durations are associated with larger price changes, though there is considerable heterogeneity in this relationship. Long-term contracts are associated with somewhat greater price rigidity for goods and services, though the differences are not dramatic. The size of price decreases plays a key role in inflation dynamics, while the size of price increases does not. The frequencies of price increases and decreases tend to move together, and so cancel one another out. |
| Keywords: | Producer prices, consmer prices, contracts |
| JEL: | D24 D40 E30 E37 H31 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:pri:cepsud:1184&r=bec |
| By: | Jaap W.B. Bos; Ivy Chan; James W. Kolari; Jiang Yuan |
| Abstract: | Empirical literature and related legal practice using concentration as a proxy for competition measurement are prone to a fallacy of division, as concentration measures are appropriate for perfect competition and perfect collusion but not intermediate levels of competition. Extending the classic Cournot-type competition model of Cowling and Waterson (1976) and Cowling (1976) used to derive the Hirschman-Herfindahl Index (HHI) of market concentration, we propose an adaptation of this model that allows collusive rents for all, none, or some of the firms in a market. Application of our model to data for U.S. commercial banks in the period 1984-2004 confirms that concentration measures are unreliable competition metrics. While collusion is prevalent in the banking industry at the state level, the critical market shares at which market power is achieved, rents earned from collusion, and collusive concentration levels vary widely across states. These and other results lead us to conclude that a fallacy of division exists in concentration-based competition tests. |
| Keywords: | SCP hypothesis, competition, Cournot, conjectural variation, efficiency hypothesis |
| JEL: | G21 L11 L22 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:0933&r=bec |
| By: | Miller, Marcus; Stiglitz, Joseph E |
| Abstract: | An iconic model with high leverage and overvalued collateral assets is used to illustrate the amplification mechanism driving asset prices to ‘overshoot’ equilibrium when an asset bubble bursts - threatening widespread insolvency and what Richard Koo calls a ‘balance sheet recession’. Besides interest rates cuts, asset purchases and capital restructuring are key to crisis resolution. The usual bankruptcy procedures for doing this fail to internalise the price effects of asset ‘fire-sales’ to pay down debts, however. We discuss how official intervention in the form of ‘super’ Chapter 11 actions can help prevent asset price correction causing widespread economic disruption. |
| Keywords: | asset bubbles; Credit constraints; insolvency; interest rates; leverage; restructuring |
| JEL: | E32 G21 G32 G33 G34 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7469&r=bec |
| By: | Nazim Belhocine |
| Abstract: | This paper measures the size of the stock of intangible capital in Canada using newly released data on the market value of all securities in the economy. The approach taken relies on a quantitative application of the q-theory of investment to generate the quantity of capital owned by firms. I find that the intangible capital stock accounted for approximately 30% of overall capital since 1994. Of this intangible capital stock, the R&D reported by national accounts makes up only 23%. In addition, the finding on the magnitude of the intangible capital stock is comparable to that reported using a cost approach, confirming the size and the relevance of intangibles to macroeconomic models. |
| Keywords: | Accounting , Canada , Capital , Capital goods , Corporate sector , Economic models , Investment , National income accounts , Stock markets , Stock prices , |
| Date: | 2009–09–18 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/250&r=bec |
| By: | Nazim Belhocine |
| Abstract: | This paper constructs a data set to document firms' expenditures on an identifiable list of intangible items and examines the implications of treating intangible spending as an acquisition of final (investment) goods on GDP growth for Canada. It finds that investment in intangible capital by 2002 is almost as large as the investment in physical capital. This result is in line with similar findings for the U.S. and the U.K. Furthermore, the growth in GDP and labor productivity may be underestimated by as much as 0.1 percentage point per year during this same period. |
| Keywords: | Canada , Capital goods , Capital transactions , Cross country analysis , Data collection , Economic growth , Gross domestic product , Investment , Labor productivity , National income accounts , |
| Date: | 2009–09–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/240&r=bec |
| By: | David Backus; Espen Henriksen; Frederic Lambert; Christopher Telmer |
| Abstract: | With US trade and current account deficits approaching 6% of GDP, some have argued that the country is "on the comfortable path to ruin" and that the required "adjustment'' may be painful. We suggest instead that things are fine: although national saving is low, the ratios of household and consolidated net worth to GDP remain high. In our view, the most striking features of the world at present are the low rates of investment and growth in some of the richest countries, whose surpluses account for about half of the US deficit. The result is that financial capital is flowing out of countries with low investment and growth and into the US and other fast-growing countries. Oil exporters account for much of the rest. |
| JEL: | E21 F21 F32 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15525&r=bec |