nep-bec New Economics Papers
on Business Economics
Issue of 2010‒02‒05
twenty-two papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Factor Demand Linkages, Technology Shocks and the Business Cycle By Holly, S.; Petrella, I.
  2. Perks as Second Best Optimal Compensations By Alberto Bennardo; Pierre-André Chiappori; Joon Song
  3. Bank capital regulation, the lending channel and business cycles By Zhang, Longmei
  4. "Board's Monitoring and Retention of Sub-standard and Powerless CEOs" By Meg Sato
  5. The Timing of Endogenous Wage Setting under Bertrand Competition in a Unionized Mixed Duopoly By Choi, Kangsik
  6. On behavioral Arrow Pratt risk process with applications to risk pricing, stochastic cash flows, and risk control By Cadogan, Godfrey
  7. A Spectral Analysis of Business Cycle Patterns in UK Sectoral Output By Peijie Wang; Trefor Jones
  8. Unions and Upward Mobility for Asian Pacific American Workers By John Schmitt; Hye-Jin Rho; Nicole Woo
  9. Quality Distortions in Vertical Relations By Pio Baake; Vanessa von Schlippenbach
  10. "Insular Decision-making in the Board Room: Why Boards Retain and Hire Substandard CEOs" By Meg Sato
  11. Labour Reallocation, Relative Prices and Productivity By Shutao Cao; Danny Leung
  12. Family ownership, innovation and other context variables as determinants of sustainable entrepreneurship in SMEs: An empirical research study By Gerrit de Wit; Lorraine Uhlaner; Marta Berent; Ronald Jeurissen
  13. Read All About it!! What happens following a technology shock? By Michelle Alexopoulos
  14. Financial disclosure and the Board: A case for non-independent directors By Y. Biondi; P. Giannoccolo; A. Reberioux
  15. Low-wage careers: are there dead-end firms and dead-end jobs? By Mosthaf, Alexander; Schank, Thorsten; Stephani, Jens
  16. Traditional dynamics of output and factor income shares: lessons from East Germany By Simona E. Cociuba
  17. Does the Interest Risk Premium Predict Housing Prices? By Gogas, Periklis; Pragidis, Ioannis
  18. The Automobile Industry in and Beyond the Crisis By David Haugh; Annabelle Mourougane; Olivier Chatal
  19. The Decline of Investment in East Asia since the Asian Financial Crisis: An Overview and Empirical Examination By Park, Dong-hyun; Shin, Kwanho; Jongwanich, Juthathip
  20. On the sustainability of collusion in Bertrand supergames with discrete pricing and nonlinear demand By Zimmerman, Paul R.
  21. Crucial relationship among energy commodity prices By Cristina Bencivenga; Giulia Sargenti
  22. On the gravitation and convergence of industry profit rates in Denmark, Finland, Italy and the US By Andrea Vaona

  1. By: Holly, S.; Petrella, I.
    Abstract: This paper argues that factor demand linkages are crucial in the transmission of both sectoral and aggregate shocks. We show this using a panel of highly disaggregated manufacturing sectors together with sectoral structural VARs. When sectoral interactions are explicitly accounted for, a contemporaneous technology shock to all manufacturing sectors implies a positive response in both output and hours at the aggregate level. Otherwise, there is a negative correlation as in much of the existing literature. Furthermore, we find that technology shocks are important drivers of business cycles.
    Keywords: Multisectors, Technology shocks, Business cycles, Long-run restrictions, Cross Sectional Dependence
    JEL: E20 E32 C31 C51
    Date: 2010–01–22
  2. By: Alberto Bennardo (Università di Salerno, CSEF, and CEPR); Pierre-André Chiappori (Columbia University); Joon Song (University of Essex)
    Abstract: The finance literature views perks either as productivity enhancing expenditures or as a result of poor managerial control by shareholders. Using a corporate jet to attend a business meeting may be justified because of the returns generated for the firm; but flying on the same jet to reach a vacation resort reflects a misappropriation of the firm’s resources by the manager. Our paper challenges this view. We argue that complementarity between leisure and wages creates difficult incentive problems, because the bonuses or stock options that reward success increase the marginal disutility of effort. In such a context, we show that whenever there exist commodities (‘perks’) that are substitute to leisure (or even less complementary to leisure than money), the optimal incentive scheme involves overprovision of such commodities, in the sense that the agent should consume more of them that she would elect to, should she be given a choice between money and perks at the current market prices. This conclusion is valid even when perks must be provided independently of the manager’s performace. Finally, we discuss the role of governance by introducing manipulations a la Peng and Röell (2006), and show that, in contrast with standard intuition, perks are used even when governance is perfect, and poorer governance may result in less perks being offered to the agent.
    Keywords: Perks, Moral Hazard, Incentives, Second Best
    JEL: D23 D82 D83
    Date: 2010–01–18
  3. By: Zhang, Longmei
    Abstract: This paper develops a Dynamic Stochastic General Equilibrium (DSGE) model to study how the instability of the banking sector can amplify and propagate business cycles. The model builds on Bernanke, Gertler and Gilchrist (BGG) (1999), who consider credit demand friction due to agency cost, but it deviates from BGG in that financial intermediaries have to share aggregate risk with entrepreneurs, and therefore bear uncertainty in their loan portfolios. Unexpected aggregate shocks will drive loan default rate away from expected, and have an impact on both firm and bank's balance sheet via the financial contract. Low bank capital position can create strong credit supply contraction, and have a significant effect on business cycle dynamics. --
    Keywords: Bank capital regulation,banking instability,financial friction,business cycle
    JEL: E32 E44 E52
    Date: 2009
  4. By: Meg Sato (Crawford School of Economics and Government, The Australian National University)
    Abstract: Do corporate boards look after shareholder interests? This paper shows that CEO replacement may exhibit excessive inertia, in favor of the incumbent board of directors. I show that even when there is no relationship between the board of directors and CEO, or no threat of the CEO.s power over the board of directors, there is a case in which the board wants to keep sub-standard CEOs.
    Date: 2010–01
  5. By: Choi, Kangsik
    Abstract: The paper examines the timing of endogenous wage setting under Bertrand competition in a unionized mixed duopoly. The results are that when the public firm chooses the timing of wage setting: (1) sequential wage setting is the outcome and (2) simultaneous wage setting is the outcome. The first result coincides with the choices of the private firm, its union, and the union of the public firm if imperfect substitutability is sufficiently large. This result is in contrast to the findings of prior literature. However, but the second result does not coincide between firms and their unions if imperfect substitutability is sufficiently small. However, simultaneous wage setting is more likely to improve the welfare if imperfect substitutability is sufficiently small. Furthermore, we find that the impact of sequential wage setting on the equilibrium path is lower in terms of improving welfare than the other outcome of sequential wage setting.
    Keywords: Endogenous Wage Setting; Bertrand Competition; Mixed Duopoly; Social Welfare.
    JEL: D21 J51 L13 H44
    Date: 2010–01–22
  6. By: Cadogan, Godfrey
    Abstract: We introduce a closed form behavioural stochastic Arrow-Pratt risk process, decomposed into discrete asymmetric risk seeking and risk averse components that run on different local times in ϵ-disks centered at risk free states. Additionally, we embed Arrow-Pratt (“AP”) risk measure in a simple dynamic system of discounted cash flows with constant volatility, and time varying drift. Signal extraction of Arrow-Pratt risk measure shows that it is highly nonlinear in constant volatility for cash flows. Robust identifying restrictions on the system solution confirm that even for small time periods constant volatility is not a measure of AP risk. By contrast, time-varying volatility measures aspects of embedded AP risk. Whereupon maximal AP risk measure is obtained from a convolution of input volatility and idiosyncratic shocks to the system. We provide four applications for our theory. First, we find that Engle, Ng and Rothschild (1990) Factor-ARCH model for risk premia is misspecified because the factor price of risk is time varying and unstable. Our theory predicts that a hyper-ARCH correction factor is required to remove the Factor-ARCH specification. Second, when applied to analysts beliefs about interest rates and volatility, we find that AP risk measure is a feedback control over stochastic cash flows. Whereupon increased risk aversion to negative shocks to earnings increases volatility. Third, we use an oft cited example of Benes, Shepp and Witsenhausen (1980) to characterize a controlled AP diffusion for a conservative investor who wants to minimize the AP risk process for an asset. Fourth, we recover stochastic differential utility functional from the AP risk process and show how it is functionally equivalent to Duffie and Epstein’s (1992) parametrization.
    Keywords: behavioural Arrow-Pratt risk process; asymmetric risk decomposition; asset pricing; Markov process; local martingale; local time change
    JEL: G12 C00 G31
    Date: 2009–12–31
  7. By: Peijie Wang; Trefor Jones
    Abstract: This paper studies business cycle patterns in UK sectoral output. It analyzes the distinction between white noise processes and their non-white noise counterparts in the frequency domain and further examines the associated features and patterns for the process where white noise conditions are violated. The characteristics of these sectors, arising from their institutional features that may influence business cycles behavior and patterns, are discussed. The study then investigates the output of UK GDP sectors empirically, revealing their similarities and differences in their business cycle patterns.
    Date: 2010–01
  8. By: John Schmitt; Hye-Jin Rho; Nicole Woo
    Abstract: Asian Pacific American (APA) workers are, with Latinos, the fastest growing group in the U.S. workforce and in organized labor. Since the late 1980s, APA workers have seen their representation in the ranks of U.S. unions almost double, from about 2.5 percent of all union workers in 1989 to about 4.6 percent in 2008. This report uses national data from the Current Population Survey (CPS) to show that unionization raises the wages of the typical APA worker by 9 percent compared to their non-union peers. The study goes on to show that unionization also increases the likelihood that an APA worker will have health insurance and a pension.
    Keywords: unions, Asian, wages, benefits, pension
    JEL: J J1 J3 J31 J32 J41 J5 J58 J6 J68 J88
    Date: 2009–11
  9. By: Pio Baake; Vanessa von Schlippenbach
    Abstract: This paper examines how delivery tariffs and private quality standards are determined in vertical relations that are subject to asymmetric information. We consider an infinitely repeated game where an upstream firm sells a product to a downstream firm. In each period, the firms negotiate a delivery contract comprising the quality of the good as well as a non-linear tariff. Assuming asymmetric information about the actual quality of the product and focusing on incentive compatible contracts, we show that delivery contracts are more efficient the lower the firms' outside options, i.e. the higher their mutual dependency. Buyer power driven by a reduced outside option of the upstream firm enhances the efficiency of vertical relations, while buyer power due to an improved outside option of the downstream firm implies less efficient outcomes.
    Keywords: Quality Uncertainty, Private Standards, Vertical Relations, Buyer Power
    JEL: D82 L14 L15
    Date: 2010
  10. By: Meg Sato (Crawford School of Economics and Government, The Australian National University)
    Abstract: It is widely believed that corporate boards are overly reluctant to .re their CEOs. The conventional explanation for retaining a CEO regardless of his/her talent is that a CEO chooses the board members and has the power to .re them. However, very few studies have investigated how a new CEO is chosen. This paper explores an unexamined cause of board reluctance in removing a CEO: the incentive to minimize the leakage from the decision-makers. future surplus. I argue that this same logic provides the theoretical explanation for how a new CEO is chosen for both voluntary and forced CEO replacements. I show that this incentive of the incumbent board and CEO often departs from the shareholders.interest. In short, if the net surplus of the incumbent board and CEO is expected to be larger under an incumbent sub-standard CEO, or under an internal candidate rather than an external candidate, then they retain the incumbent sub-standard CEO or promote an internal CEO candidate, even though the expected corporate pro.t generated by appointing an external candidate is likely to have been greater.
    Date: 2010–01
  11. By: Shutao Cao; Danny Leung
    Abstract: This paper documents the rate at which labour flows between industries and between firms within industries using the most recent data available. It examines the determinants of these flows and their relationship with the productivity growth. It is found that the dispersion of industry employment growth rates has been elevated since 2005, and that this increase is not likely to be related to the business cycle. It is also found that changes in real exchange rates and commodity prices can account for a significant part of the employment dispersion across industries, especially since 2005. However, shifts of employment labour between industries have generally not contributed positively to aggregate labour productivity growth. With respect to movements of labour between firms within industries, it is found that the job reallocation rates have fallen steadily over the past decade and a half. Finally, unlike labour flows between industries, excess job reallocation rates within industries are found to be strongly related to multifactor productivity and labour productivity growth at the industry level.
    Keywords: Productivity; Inflation and prices; Labour markets
    JEL: D23 J6 E32
    Date: 2010
  12. By: Gerrit de Wit; Lorraine Uhlaner; Marta Berent; Ronald Jeurissen
    Abstract: This study focuses on the prediction of sustainable entrepreneurship, that is, behavior which demonstrates a firm’s concern about the natural environment, especially among small and medium sized enterprises (SMEs). Using a random sample of 642 Dutch SMEs we examine how organizational context (firm sector, size, ownership structure) and innovativeness influence SMEs engagement in sustainable entrepreneurship. Results show that manufacturing and construction firms, larger firms, family-owned firms, and firms with a more innovative orientation are more likely to report positive activity related to the natural environment. Results do not support the conclusion that the relationship between sustainable entrepreneurship and firm size is curvilinear. The paper discusses implications of the obtained results.  
    Date: 2010–01–22
  13. By: Michelle Alexopoulos
    Abstract: Existing indicators of technical change are plagued by shortcomings. I present here new measures based on books published in the field of technology that resolve many of these problems and use them to identify the impact of technology shocks on economic activity. They are positively linked to changes in R&D and scientific knowledge and capture the new technologies’ commercialization dates. Changes in information technology are found to be important sources of economic fluctuations in the post-WWII period and total factor productivity, investment and, to a lesser extent, labor are all shown to increase following a positive technology shock.
    Keywords: business cycles, technical change, information technologies
    JEL: E32 O3
    Date: 2010–01–26
  14. By: Y. Biondi; P. Giannoccolo; A. Reberioux
    Abstract: In listed companies, the Board of directors has ultimate responsibility for information disclosure. The conventional wisdom is that director independence is an essential factor in improving the quality of that disclosure. In a sense, this approach subordinates expertise to independence. We argue that effective certification may require firm-specific expertise, in particular for intangible-intensive business models. However, this latter form of expertise is negatively related to independence as it is commonly measured and evaluated. Accordingly, there exists an optimal share of independent directors for each company, related to the level of intangible resources.
    JEL: G30 M21 D80 M41
    Date: 2010–01
  15. By: Mosthaf, Alexander; Schank, Thorsten; Stephani, Jens
    Abstract: Using representative linked employer-employee data of the German Federal Employment Agency, this paper shows that just one out of seven full-time employees who earned low wages (i.e. less than two-thirds of the median wage) in 1998/99 was able to earn wages above the low-wage threshold in 2003. Bivariate probit estimations with endogenous selection indicate that upward wage mobility is higher for younger and better qualified low-wage earners, whereas women are substantially less successful. We show that the characteristics of the employing firm also matter for low-wage earners' probability of escaping low-paid work. In particular small plants and plants with a high share of low-wage earners often seem to be dead ends for low-wage earners. The likelihood of leaving the low-wage sector is also low when staying in unskilled and skilled service occupations and in unskilled commercial and administrational occupations. Consequently, leaving these dead-end plants and occupations appears to be an important instrument for achieving wages above the low-wage threshold. ; Mit repräsentativen verbundenen Arbeitgeber-Arbeitnehmer-Daten der Bundesagentur für Arbeit verdeutlicht diese Studie, dass nur jeder siebte Vollzeitbeschäftigte, der 1998/99 einen Niedriglohn (von weniger als zwei Dritteln des Medianlohns) bezog, bis 2003 den Niedriglohnsektor verlassen konnte. Bivariate Probit-Schätzungen mit endogener Selektion deuten darauf hin, dass die Aufwärtsmobilität für jüngere und besser qualifizierte Geringverdiener höher ausfällt, wohingegen Frauen deutlich weniger erfolgreich sind. Wir zeigen, dass auch die Merkmale des Beschäftigungsbetriebes die Aufstiegswahrscheinlichkeit beeinflussen. Insbesondere kleinere Betriebe und solche mit einem hohen Anteil von Niedriglohnbeschäftigten scheinen häufig Sackgassen für Geringverdiener darzustellen. Die Wahrscheinlichkeit, den Niedriglohnsektor zu verlassen, ist ferner relativ gering, wenn man in bestimmten (meist weniger qualifizierten) Jobs verharrt. Die Abwanderung aus solchen Betrieben und Beschäftigungen, die Sackgassen darstellen, dürfte deshalb ein wichtiges Mittel sein, um höhere Löhne zu erzielen. --
    Keywords: low-wage employment,wage mobility,Germany
    JEL: J30 J60
    Date: 2009
  16. By: Simona E. Cociuba
    Abstract: I evaluate the quantitative implications of technology change and government policies for output and factor income shares during East Germany's transition since 1990. I model an economy that gains access to a high productivity technology embodied in new plants. As existing low productivity plants decrease production, the capital income share varies due to variation in the profit share of these plants. Two policies - transfers and government-mandated wage increases - have opposite effects on output growth, but both contribute to reducing the capital share during the transition. The model's output and capital share line up with counterparts in East German data.
    Keywords: Income distribution ; Economic development ; Technology - Economic aspects ; Productivity ; Capital investments ; Wages
    Date: 2010
  17. By: Gogas, Periklis (Democritus University of Thrace, Department of International Economic Relations and Development); Pragidis, Ioannis (Democritus University of Thrace, Department of International Economic Relations and Development)
    Abstract: In this paper we examine the predictability power of long term risk premium over Housing prices in U.S.A. of a period of 19 years (1991-2009). For reasons that are cited clearly in the text, the interest rate risk premium is preferred over yield curve. Under a probit framework, it is tested whether recent housing pricing bust could have been predicted. We employ adaptive expectations for the formation of the agents’ short-term interest rate expectations. The ability to forecast such price changes is of great importance to investors and analysts of the housing market and for the design of financial institutions’ mortgage policy in a more prudential path.
    Keywords: Housing prices; risk premium; probit; forecasting
    JEL: D58 D74 E31 G21 G32 H20 R20
    Date: 2010–01–26
  18. By: David Haugh; Annabelle Mourougane; Olivier Chatal
    Abstract: This paper considers the role of the automobile industry in the current cycle. It shows that the industry is economically important and its cycle is intertwined with business cycles. After casting some light on the sources of the collapse in car sales at the start of the crisis, the policy measures, in particular car scrapping programmes, put in place to support the automobile industry are discussed. The paper also derives short and medium term projections of car sales. While a rebound in car sales is likely in North America, Japan and the United Kingdom, car sales in Germany have been pushed significantly above trend and may weaken going forward. Over the medium term, in mature markets such as Europe and North America, trend sales are likely to remain stagnant. By contrast, rapid increases are foreseen in China and to a lesser extent in India. Medium-term projections suggest that capacity exceeds trend sales by around 20% in the five largest Western European markets considered as a whole. Without an adjustment in capacity, these countries would need to ensure an ongoing strong export performance. By contrast, automakers in the NAFTA area would need to halt their decline in domestic market share or to rely increasingly on exports in order to avoid excess capacity. In order to maintain their high levels of capacity utilisation, Korean and Japanese manufacturers will need to keep up their strong export performance.<P>L’industrie automobile dans et après la crise<BR>Ce document examine le rôle de l’industrie automobile dans le cycle économique en cours. Il montre que l’industrie a une importance économique certaine et est interconnectée avec le cycle économique. Après avoir quelque peu détaillé l’origine de l’effondrement des ventes automobiles en début de crise, les mesures publiques mises en œuvre pour soutenir l’industrie automobile, et notamment celles concernant les dispositifs de prime à la casse sont détaillées. Ce document présente également des perspectives à court et moyen terme pour les ventes de voitures. Alors que l’on peut s’attendre à un rebond en Amérique du Nord, au Japon et au Royaume-Uni, les ventes d’automobiles en Allemagne sont nettement supérieures à la tendance, et pourraient de ce fait marquer un fléchissement à l’avenir. À moyen terme sur les marchés parvenus à maturité tels que l’Europe et l’Amérique du Nord, les ventes tendancielles devraient rester étales. À l’inverse, des hausses rapides sont attendues en Chine et dans une moindre mesure en Inde. Selon les projections à moyen terme, les capacités productives du bloc dépassent les ventes tendancielles de quelque 20 % sur l’ensemble des cinq plus grands marchés d’Europe occidentale. À défaut d’ajustement des capacités, il faudrait que ces pays affichent de solides performances continues à l’exportation. À l’opposé, pour éviter les surcapacités, les constructeurs de la zone ALENA devraient mettre un terme au recul qu’ils connaissent sur leur marché intérieur ou s’appuyer de plus en plus sur les exportations. Dans la mesure où les constructeurs coréens et japonais exportent une large part de leur production, leur destin est étroitement lié aux marchés mondiaux. Conserver des taux d’utilisation élevés en Corée et au Japon nécessitera que ces pays continuent de bénéficier de fortes performances à l’exportation.
    Keywords: automobile crisis, car scrapping schemes, car sales, crise de l'automobile, prime à la casse, ventes de voitures
    JEL: E3 H2 L62
    Date: 2010–01–26
  19. By: Park, Dong-hyun (Asian Development Bank); Shin, Kwanho (Korea University); Jongwanich, Juthathip (Asian Development Bank)
    Abstract: A key legacy of the Asian financial crisis of 1997–1998 is a sustained drop-off in the investment rates of East Asian countries that were hardest hit by the crisis. We first review the stylized facts of investment in those countries, and then explore and evaluate the various possible explanations for the decline in investment. In our empirical analysis, which expands upon Park and Shin (2009) by updating the data to include 2005–2008, we investigate the extent to which the investment rates of Asian countries can be explained by the underlying fundamental determinants of investment such as gross domestic product (GDP) growth and demographic variables. We also empirically revisit the various hypotheses put forth to explain the investment drop-off, in particular competitive pressures from the People's Republic of China and heightened risk and uncertainty. Our analysis yields two main findings: (i) some evidence of overinvestment in the precrisis period but (ii) very little evidence of underinvestment in the postcrisis period. The results suggest that investment rates are currently more or less at appropriate levels despite their postcrisis decline. The salient policy implication is that quantitatively boosting investment may be less important for future growth than enhancing the investment climate.
    Keywords: Investment; capital accumulation; growth slowdown; East Asia; Asian crisis
    JEL: E22
    Date: 2009–12
  20. By: Zimmerman, Paul R.
    Abstract: In traditional industrial organization models of Bertrand supergames, the critical discount factor governing the sustainability of collusion is independent of key demand and supply parameters. Recent research has demonstrated that these counterintuitive results stem from the assumption that firms can change prices in infinitesimally small increments (i.e., continuously). This note considers the effects of demand curvature in the context of a model of collusion where, as in Gallice (2008), Bertrand competitors can deviate only by lowering prices by some small, discrete amount. Two alternative demand specifications that capture the influence of demand curvature are considered. In either case, it is shown that with discrete price changes the critical discount factor is determined by the key demand parameters, including demand curvature. However, the direct effects of increased concavity (or convexity) in market demand on the sustainability of collusion runs in opposite directions across the two models. This discrepancy is shown to arise from the way in which the respective demand curves rotate in response to a change in the demand curvature parameter. The results support the conclusion of earlier research that determining the potential for collusion in homogenous goods industries likely requires careful case-by-case investigation.
    Keywords: Bertrand supergames; cartels; collusion sustainability; discrete pricing; nonlinear demand
    JEL: L13 L41
    Date: 2010–01–25
  21. By: Cristina Bencivenga; Giulia Sargenti (Department of Economic Theory and Quantitative Methods for Political Choices,Sapienza University of Rome,)
    Abstract: This study investigates the short and long run relationship between crude oil, natural gas and electricity prices in US and in European commodity markets. The relationship between energy commodities may have several implications for the pricing of derivative products and for risk management purposes. Using daily price data over the period 2001-2009 we perform a correlation analysis to study the short run relationship, while the long run relationship is analyzed using a cointegration framework. The results show an erratic relationship in the short run while in the long run an equilibrium may be identi ed having di erent features for the European and the US markets.
    Keywords: Energy, commodities, prices.
    Date: 2010
  22. By: Andrea Vaona (Department of Economics (University of Verona))
    Abstract: The hypotheses of profit rates gravitating around or converging towards a common value is tested using Danish, Finnish, Italian and US data. Both hypotheses are rejected for all the countries considered. This is interpreted as the result of limitations to capital mobility and of persistent differentials in the innovative performance of industries.
    Keywords: capital mobility, gravitation of profit rates, convergence, SURE estimation, exactly median unbiased estimator
    JEL: L16 L19 L60 L70 L80 L90
    Date: 2010–01

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