nep-bec New Economics Papers
on Business Economics
Issue of 2010‒03‒28
25 papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Wage Bargaining and the Boundaries of the Multinational Firm By Maria Bas; Juan Carluccio
  2. The Effect of Firm Compensation Structures on Employee Mobility and Employee Entrepreneurship of Extreme Performers By Seth Carnahan; Rajshree Agarwal; Benjamin Campbell; April Franco
  3. When high-powered incentive contracts reduce performance: choking under pressure as a screening device By Bannier, Christina E.; Feess, Eberhard
  4. Financial Shocks and TFP Growth By Marcello M. Estevão; Tiago Severo
  5. Globalization of Corporate Covernance: The American Influence on Dismissal Performance Sensitivity of European CEOs By Jungeilges, Jochen A.; Oxelheim, Lars; Randoy, Trond
  6. The More Business Owners the Merrier? By André van Stel; Mirjam van Praag
  7. EQUILIBRIUM PRINCIPAL-AGENT CONTRACTS Competition and R&D Incentives By Federico Etro; Michela Cella
  8. Bankruptcy and Firm Dynamics: The Case of the Missing Firms By Jose Daniel Rodríguez-Delgado
  9. The Evolution of the Returns to Human Capital in Canada, 1980-2005 By Boudarbat, Brahim; Lemieux, Thomas; Riddell, Craig
  10. Business Cycles around the Globe: A Regime Switching Approach By Sumru Altug; Melike Bildirici
  11. Risk and the Corporate Structure of Banks By Giovanni Dell’Ariccia; Robert Marquez
  12. Endogenous Market Structures and Contract Theory By Federico Etro
  13. Hybrid Entrepreneurship By Folta, Timothy B.; Delmar, Frédéric; Wennberg, Karl
  14. Anticipation, Free-Rider Problem, and Adaptation to Trade Union: Re-examining the Curious Case of Dissatisfied Union Members By Powdthavee, Nattavudh
  15. Systemic Risks and the Macroeconomy By Gianni De Nicoló; Marcella Lucchetta
  16. The Ugly and the Bad: Banking and Housing Crises Strangle Output Permanently, Ordinary Recessions Do Not By Jens Hogrefe; Nils Jannsen; Carsten-Patrick Meier
  17. The Effectiveness of Corporate Boards: Evidence from Bank Loan Contracting By Francis, Bill; Hasan, Iftekhar; Koetter, Michael; Wu, Qiang
  18. Incentive and Entrenchment Effects in European Ownership By Bennedsen, Morten; Nielsen, Kasper Meisner
  19. Globalization and Price Dispersion: Evidence from U.S. Trade Flows By John Tang
  20. Welfare-Enhancing Hard Core Cartels By Bos Iwan; Pot Erik
  21. The Impact of Institutions on Firms’ Rejuvenation Policies: Early Retirement with Severance Pay versus Simple Lay-Off. A Cross-European Analysis By Justina A.V. Fischer
  22. Monopoly Pricing when Consumers are Antagonized by Unexpected Price Increases: A "Cover Version" of the Heidhues-Koszegi-Rabin Model By Spiegler, Ran
  23. Measuring market risk using extreme value theory By Mapa, Dennis S.; Suaiso, Oliver Q.
  24. Competition and Firm Productivity: Evidence from Firm-Level Data By Sandra Ospina; Marc Schiffbauer
  25. Growth and Capital Flows with Risky Entrepreneurship By Damiano Sandri

  1. By: Maria Bas; Juan Carluccio
    Abstract: Do variations in labor market institutions across countries affect the cross-border organization of the firm? Using firm-level data on multinationals located in France, we show that multinational firms are more likely to import intermediate inputs from external independent suppliers instead of importing from their own subsidiaries when importing from countries with empowered unions. Moreover, this effect is stronger for firms operating in capital-intensive industries. We propose a theoretical mechanism that rationalizes these findings. The fragmentation of the value chain weakens the union’s bargaining position, by limiting the amount of revenues that are subject to union extraction. The outsourcing strategy reduces the share of surplus that is appropriated by the union, which enhances the firm’s incentives to invest. Since investment creates relatively more value in capital-intensive industries, increases in union power are more likely to be conducive to outsourcing in those industries. Overall, our findings suggest that multinational firms use their organizational structure strategically when sourcing intermediate inputs from unionized markets.
    Keywords: Wage bargaining; trade unions; sourcing; multinational firms
    JEL: F10 J52 L22
    Date: 2010–03
  2. By: Seth Carnahan; Rajshree Agarwal; Benjamin Campbell; April Franco
    Abstract: Previous studies of employee entrepreneurship have not considered the rewards available to potential entrepreneurs inside of their current organizations. This study hopes to fill this gap by investigating how the firm’s compensation structure, an important strategic decision closely scrutinized by human resource management, affects the mobility and entrepreneurship decisions of its employees, particularly those employees at the extreme ends of the performance distribution. Using a comprehensive U.S. Census data set covering all employees in the legal services industry across ten states for fifteen years, we find that high performing employees are less likely to leave firms with highly dispersed compensation structures. However, if high performers do leave employers that offer highly disperse compensation structures, they are more likely to join new firms. Less talented employees, on the other hand, are more likely to leave firms with greater pay dispersion. Unlike high performers, we find that low performers are less likely to move to new ventures when departing firms with highly disperse compensation structures.
    Date: 2010–03
  3. By: Bannier, Christina E.; Feess, Eberhard
    Abstract: Empirical and experimental papers find that high-powered incentives may reduce performance rather than improve it; a phenomenon referred to as choking under pressure. We show that competition for high ability workers nevertheless leads firms to offer high bonus payments, thereby deliberately accepting pressure-induced performance reductions. Bonus payments allow for a separating equilibrium in which only high ability workers choose high-powered incentive contracts. Low ability workers receive fixed payments and produce their maximum output which, however, is still below the reduced output of high ability workers. Bonus payments lead to a social loss which is increasing in the degree of competition. Our paper helps to explain why steep incentive schemes are persistent in highly-competitive industries such as investment banking, and why the observed performance sensitivity of CEO compensation is largely heterogeneous. --
    Keywords: Performance-related pay,screening,choking under pressure,competition
    JEL: D86 J31 J33
    Date: 2010
  4. By: Marcello M. Estevão; Tiago Severo
    Abstract: The paper investigates how changes in industries' funding costs affect total factor productivity (TFP) growth. Based on panel regressions using 31 U.S. and Canadian industries between 1991 and 2007, and using industries' dependence on external funding as an identification mechanism, we show that increases in the cost of funds have a statistically significant and economically meaningful negative impact on TFP growth. This finding cannot be explained by either increasing returns to scale or factor hoarding, as results are not sensitive to controlling for industry size and our calculations account for changes in factor utilization. Based on a stylized theoretical model, the estimates suggest that financial shocks distort the allocation of factors across firms even within an industry, reducing its TFP. The decline in productivity growth accounts for a large fraction of the negative impact of funding costs on output.
    Keywords: Bonds , Business cycles , Canada , Corporate sector , External financing , External shocks , Financial crisis , Industrial sector , Production growth , Productivity , United States ,
    Date: 2010–01–28
  5. By: Jungeilges, Jochen A. (Adger University College and Agder Research); Oxelheim, Lars (Research Institute of Industrial Economics (IFN)); Randoy, Trond (Adger University College and Agder Research)
    Abstract: This study examines how globalization of corporate governance practices influence the risk of European CEOs being dismissed. We argue that the harsh monitoring of the American corporate governance system spills over to the rest of the world as a result of this globalization. We focus on direct and indirect American influence on the dismissal performance sensitivity among the 250 largest European publicly listed firms. The indirect influence is assumed to materialize via European firms cross-listing on U.S. exchanges, whereas the direct influence is assumed to appear as a result of European firms hiring of American independent board members. Both sources of influence are hypothesized to result in increased dismissal performance sensitivity. The empirical results show a significant increase in the dismissal sensitivity in poorly performing companies with American board membership whereas no significant increase is found from cross-listing in the U.S.
    Keywords: CEO dismissal; Performance sensitivity; Globalization; Corporate governance; Foreign board membership; Institutional contagion
    JEL: G15 G18 G32 M14 M52
    Date: 2010–02–12
  6. By: André van Stel; Mirjam van Praag
    Abstract: Policy in developed countries is often based on the assumption that higher business ownership rates induce economic value. Recent microeconomic empirical evidence casts doubts on the validity of this assumption or, at least, leads to a more nuanced view: Especially the top performing business owners are responsible for the value creation of business owners. Other labor market participants would contribute more to economic value creation as an employee than as a business owner consistent with microeconomic occupational choice theory. This would translate at the macrolevel in the existence of an 'optimal' business ownership rate thereby replacing the dictum of 'the more business owners, the merrier'. We attempt to establish whether there is such an optimal level, while investigating the role of tertiary education. Two findings stand out. First, by estimating extended versions of traditional Cobb Douglas production functions on a sample of 19 OECD countries over the period 1981-2006, we find indeed robust evidence of an optimal business ownership rate (at around 12.5%, on average). Second, the relation between business ownership and macroeconomic productivity is steeper for countries with higher participation rates in tertiary education. Thus, the optimal business ownership rate tends to decrease with tertiary education levels. This is consistent with microeconomic theory and evidence showing that entrepreneurs with superior levels of human capital run larger firms.
    Date: 2010–03–18
  7. By: Federico Etro; Michela Cella
    Abstract: We analyze competition between firms engaged in R&D activities in the choice of incentive contracts for managers with hidden productivities. The equilibrium screening contracts require extra effort/investment from the most productive managers compared to the first best contracts: under additional assumptions on the hazard rate of the distribution of types we obtain no- distortion in the middle rather than at the top. Moreover, the equilibrium contracts are characterized by effort differentials between (any) two types that are always increasing with the number of firms, suggesting a positive re- lation between competition and high-powered incentives. An inverted-U curve between competition and absolute investments can emerge for the most pro- ductive managers, especially when entry is endogenous. These results persist when contracts are not observable, when they include quantity precommit- ments, and when products are imperfect substitutes.
    Keywords: Principal-agent contracts, asymmetric information, endogenous market structures
    JEL: D82 D L13
    Date: 2010–03
  8. By: Jose Daniel Rodríguez-Delgado
    Abstract: Financial frictions have been documented as an important determinant of firm dynamics. In this paper I model bankruptcy procedures, liquidation in particular, as an institutional feature that affects both sides of financial transactions. I construct a model of firm dynamics that generate endogenous borrowing limits and I find that a) inefficient bankruptcy procedures can have quantitatively important aggregate effects, but more importantly; b) that such effects would not be directly visible in the firms that industrial censuses and surveys focus on. I conclude that to capture the effects of the legal framework we need to look beyond the existing firms.
    Keywords: Bankruptcy , Borrowing , Economic models , External debt , Private investment , Private sector ,
    Date: 2010–02–22
  9. By: Boudarbat, Brahim (University of Montreal); Lemieux, Thomas (University of British Columbia, Vancouver); Riddell, Craig (University of British Columbia, Vancouver)
    Abstract: We examine the evolution of the returns to human capital in Canada over the period 1980-2005. Our main finding is that returns to education increased substantially for Canadian men, contrary to conclusions reached previously. Most of this rise took place in the early 1980s and since 1995. Returns to education also rose, albeit more modestly, for Canadian women. Another important development is that after years of expansion, the wage gap between younger and older workers stabilized after 1995. Controlling for work experience and using Canadian Census data appear to account for the main differences between our results and earlier findings.
    Keywords: human capital, wage differentials, Canada
    JEL: J24 J31
    Date: 2010–03
  10. By: Sumru Altug (Koc University); Melike Bildirici
    Abstract: This paper characterizes business cycle phenomena in a sample of 22 developed and developing economies using a univariate Markov regime switching approach. It examines the efficacy of this approach for detecting business cycle turning points and for identifying distinct economic regimes for each country in question. The paper also provides a comparison of the business cycle turning points implied by this study and those derived in other studies and by other methods. Our findings document the importance of heterogeneity of individual countries’ experiences. We also argue that consideration of a large and diverse group of countries provides an alternative perspective on the co-movement of aggregate economic activity worldwide.
    Keywords: Markov switching approach, business cycles, turning point analysis, nonparametric modelling
    JEL: E32 E37 C32
    Date: 2010–03
  11. By: Giovanni Dell’Ariccia; Robert Marquez
    Abstract: We identify different sources of risk as important determinants of banks' corporate structures when expanding into new markets. Subsidiary-based corporate structures benefit from greater protection against economic risk because of affiliate-level limited liability, but are more exposed to the risk of capital expropriation than are branches. Thus, branch-based structures are preferred to subsidiary-based structures when expropriation risk is high relative to economic risk, and vice versa. Greater cross-country risk correlation and more accurate pricing of risk by investors reduce the differences between the two structures. Furthermore, the corporate structure affects bank risk taking and affiliate size.
    Keywords: Capital , Corporate governance , Credit risk , Economic models , Financial risk , Foreign direct investment , International banking , International banks , Political economy ,
    Date: 2010–02–19
  12. By: Federico Etro
    Abstract: I study the role of unilateral strategic contracts for firms active in markets with price competition and endogenous entry. Traditional results change substantially when the market structure is endogenous rather than exogenous. They concern 1) contracts of managerial delegation to non-profit maximizers, 2) incentive contracts in the presence of moral hazard on cost reducing activities, 3) screening contracts in case of asymmetric information on the productivity of the managers, 4) vertical contracts of franchising in case of hold-up problems and 5) tying contracts by monopolists competing also in secondary markets. Firms use always these contracts to strengthen price competition and manage to obtain positive pro?ts in spite of free entry.
    Keywords: Strategic delegation, Incentive contracts, Screening contracts, Franchising, Tying, Endogenous market structures
    JEL: L11 L13 L22 L43
    Date: 2010–03
  13. By: Folta, Timothy B. (Krannert School of Management); Delmar, Frédéric (Research Institute of Industrial Economics (IFN)); Wennberg, Karl (Imperial College Business School)
    Abstract: In contrast to previous efforts to model the individual’s movement from wage work into entrepreneurship, we consider that individuals might transition incrementally by retaining their wage job while entering into self-employment. We show that these hybrid entrepreneurs represent a significant share of all entrepreneurial activity. Theoretical arguments are proposed to suggest why hybrid entrants are distinct from self-employment entrants, and why hybrid entry may facilitate subsequent entry into full self-employment. We demonstrate that there are significant theoretical and empirical consequences for this group and our understanding of self-employment entry and labor market dynamics. Using matched employee-employer data over eight years, we test the model on a population of Swedish wage earners in the knowledge-intensive sector.
    Keywords: Hybrid entrepreneurship; Self-employment; Labour market dynamics; Transition determinants; Employee-employer data
    JEL: H39 J24 L26
    Date: 2010–03–11
  14. By: Powdthavee, Nattavudh (University of York)
    Abstract: This paper documents evidence that rejects the paradox of dissatisfied union members. Using eleven waves of the BHPS, it studies the past, contemporaneous, and future effects of union membership on job satisfaction. By separating union "free-riders" from other nonmembers in the fixed effects equations, I find significant anticipation effects to unionism for prospective members and covered nonmembers of both genders. Workers go on to report, on average, a significant net increase in overall job satisfaction at the year unionization occurs. Nonetheless, adaptation to unionism is complete within the first few years of joining a unionized firm. One hypothesis for this is that workers adapt their reported satisfaction over time to support their union bargaining efforts, which would be consistent with the explanation given by Freeman and Medoff (1984) of union’s role in fanning the flame of discontent to the management during contract negotiations.
    Keywords: union coverage, union membership, job satisfaction, anticipation, adaptation, free-rider, longitudinal
    JEL: J28 J5
    Date: 2010–03
  15. By: Gianni De Nicoló; Marcella Lucchetta
    Abstract: This paper presents a modeling framework that delivers joint forecasts of indicators of systemic real risk and systemic financial risk, as well as stress-tests of these indicators as impulse responses to structural shocks identified by standard macroeconomic and banking theory. This framework is implemented using large sets of quarterly time series of indicators of financial and real activity for the G-7 economies for the 1980Q1-2009Q3 period. We obtain two main results. First, there is evidence of out-of sample forecasting power for tail risk realizations of real activity for several countries, suggesting the usefulness of the model as a risk monitoring tool. Second, in all countries aggregate demand shocks are the main drivers of the real cycle, and bank credit demand shocks are the main drivers of the bank lending cycle. These results challenge the common wisdom that constraints in the aggregate supply of credit have been a key driver of the sharp downturn in real activity experienced by the G-7 economies in 2008Q4- 2009Q1.
    Keywords: Banking sector , Capital markets , Economic forecasting , Economic indicators , Economic models , External shocks , Financial risk , Group of seven , International financial system , Time series ,
    Date: 2010–02–04
  16. By: Jens Hogrefe; Nils Jannsen; Carsten-Patrick Meier
    Abstract: This paper provides statistical evidence suggesting that in industrial countries, recessions that are associated with either banking crises or housing crises dampen output far more than ordinary recessions. Using a parametric panel framework that allows for a bounceback of the level of output in the course of the cyclical recovery, we find that ordinary recessions are followed by strong recoveries that make up for almost all the preceding shortfall in output. This bounceback tends to be significantly smaller following recessions associated with banking crises or housing crises. Our paper corroborates the practice of focusing exclusively on severe crises used in an emerging macroeconomic literature and integrates it with the earlier literature on recessions and recoveries
    Keywords: business cycle, banking crisis, housing crisis, panel data, asymmetry, persistence
    JEL: E32 C33
    Date: 2010–01
  17. By: Francis, Bill; Hasan, Iftekhar; Koetter, Michael; Wu, Qiang
    Abstract: This paper investigates the role of corporate boards in bank loan contracting. We find that when corporate boards are more independent, both price and non-price loan terms (e.g., interest rates, collateral, covenants and performance pricing) are more favorable and syndicated loans comprise more lenders. In addition, board size, board diversity, audit committee structure and other director characteristics also influence bank loan price. However they do not consistently affect all non-price loan terms except for audit committee independence. Moreover, the impact of board independence on bank loans varies with borrower characteristics (e.g., leverage, tangibility and anti-takeover environments) and loan characteristics (e.g., loan types and loan structures). Overall, our study provides strong evidence that banks tend to recognize the benefits of board monitoring in mitigating agency risk and information risk, and reward borrowers with higher quality boards with more favorable loan contract terms.
    Keywords: Bank loan contracting, Boards of directors, Corporate governance, Monitoring, SOX
    JEL: G21 G34
    Date: 2009–11
  18. By: Bennedsen, Morten; Nielsen, Kasper Meisner
    Abstract: In a large sample of European firms we analyze the value discount associated with disproportional ownership structures first documented by Claessens et al (2002). Consistent with a theoretical model of incentives and entrenchment effects, we find higher value discount in family firms, in firms with low cash flow concentration, and in industries with higher amenity value. Furthermore, the discount is higher in countries with good investor protection and higher for dual class shares than for pyramids. We find no impact on operating performance, likelihood of bankruptcy, dividend policy, or growth. Finally, we discuss policy implications of these findings.
    Keywords: Ownership Structure, Dual Class Shares, Pyramids, EU Company Law
    JEL: G30 G32 G34 G38
    Date: 2009–11
  19. By: John Tang
    Abstract: Historically, the integration of international markets has corresponded with decreasing prices for traded goods due to higher competition among suppliers, scale economies, and consumption demand. In recent years, product differentiation and multinational firm pricing behavior across markets and between suppliers make it difficult to assess the degree to which this still occurs. Using a confidential panel dataset comprising the universe of U.S. import trade transactions between 1992 and 2007, this paper explores the change in prices for imported commodities across American trade partners. Overall price dispersion appears to decline, albeit unevenly, over time; nevertheless, there is considerable heterogeneity within commodity groups, geographic regions, and income levels, which may owe to increased product and quality differentiation within commodity categories. Unusually, after controlling for gravity trade factors, trade openness and extensive measures of globalization are positively associated with price dispersion, which suggests a more disaggregated approach both at the commodity and firm level to account for these differences.
    Keywords: price convergence, offshoring, product differentiation, multinational firm, law of one price
    Date: 2010–03
  20. By: Bos Iwan; Pot Erik (METEOR)
    Abstract: The conventional wisdom is that cartels are bad. In particular, cartels that merely lead to lower production levels and higher prices are thought to be exclusively detrimental to social welfare. This is reflected in the fact that most capitalist societies have declared such so-called hard core cartel arrangements illegal per se. In this paper, we question this rather rigid approach to hard core cartels. In a simple but fairly general setting, we provide necessary and sufficient conditions for the existence of a hard core cartel that is beneficial for firms and society at large. We consider both strong (with side payments) and weak (without side payments) hard core cartel contracts and find that (i) both strong and weak welfare-enhancing cartels exist when at least one firm makes a loss on part of its sales in competition, (ii) a welfare-enhancing strong cartel exists whenever there is a difference in unit costs at competitive production levels, and (iii ) a welfare-enhancing weak cartel exists when this difference is sufficiently large.
    Keywords: mathematical economics;
    Date: 2010
  21. By: Justina A.V. Fischer (University of Hamburg, Institute for Public Finance)
    Abstract: Early retirement of workers is used by firms as means to rejuvenate their workforces. In principle, workers can either simply be laid off or can be offered an early retirement option combined with a financial bonus. However, dismissing masses of older workers may be detrimental to social peace and stability and damage the firm’s reputation, while entry into early retirement with a severance pay at least maintains the semblance of a worker’s voluntary decision. Cross-national analyses of this topic using micro data are, however, widely missing. Using the SHARE (Survey of Health, Aging and Retirement in Europe) data set, this paper fills this gap by investigating to what extent institutional factors such as the generosity of the pension system and strong unions influence firms’ rejuvenation policies. Stronger unions appear to lead to a higher likelihood of receiving a severance pay, as does a more generous pension system. In contrast, a higher decrease in wealth accrual leads to a higher probability of simple lay-off. It is concluded that the current reforms which aim at lowering the replacement rate and employment protection will most probably lead to more dismissals of older workers without severance pay.
    Keywords: Early Retirement, Involuntary Early Retirement, Severance Pay, Social Security, Pensions, Employment Protection, Unions
    JEL: J14 J21 J22 J26
    Date: 2010–02–28
  22. By: Spiegler, Ran
    Abstract: This paper reformulates and simplifies a recent model by Heidhues and Koszegi (2005), which in turn is based on a behavioral model due to Koszegi and Rabin (2006). The model analyzes optimal pricing when consumers are loss averse in the sense that an unexpected price hike lowers their willingness to pay. The main message of the Heidhues-Koszegi model, namely that this form of consumer loss aversion leads to rigid price responses to cost fluctuations, carries over. I demonstrate the usefulness of this "cover version" of the Heidhues-Koszegi-Rabin model by obtaining new results: (1) loss aversion lowers expected prices; (2) the firm's incentive to adopt a rigid pricing strategy is stronger when fluctuations are in demand rather than in costs.
    Keywords: monopoly pricing; loss aversion; price variation antagonism; price rigidity; price stickiness
    JEL: D42 L12
    Date: 2010–03–15
  23. By: Mapa, Dennis S.; Suaiso, Oliver Q.
    Abstract: The adoption of Basel II standards by the Bangko Sentral ng Pilipinas initiates financial institutions to develop value-at-risk (VaR) models to measure market risk. In this paper, two VaR models are considered using the peaks-over-threshold (POT) approach of the extreme value theory: (1) static EVT model which is the straightforward application of POT to the bond benchmark rates; and (2) dynamic EVT model which applies POT to the residuals of the fitted AR-GARCH model. The results are compared with traditional VaR methods such as RiskMetrics and AR-GARCH-type models. The relative size, accuracy and efficiency of the models are assessed using mean relative bias, backtesting, likelihood ratio tests, loss function, mean relative scaled bias and computation of market risk charge. Findings show that the dynamic EVT model can capture market risk conservatively, accurately and efficiently. It is also practical to use because it has the potential to lower a bank’s capital requirements. Comparing the two EVT models, the dynamic model is better than static as the former can address some issues in risk measurement and effectively capture market risks.
    Keywords: extreme value theory; peaks-over-threshold; value-at-risk; market risk; risk management
    JEL: G12 C22 C01
    Date: 2009–12
  24. By: Sandra Ospina; Marc Schiffbauer
    Abstract: This paper presents empirical evidence on the impact of competition on firm productivity. Using firm-level observations from the World Bank Enterprise Survey database, we find a positive and robust causal relationship between our proxies for competition and our measures of productivity. We also find that countries that implemented product-market reforms had a more pronounced increase in competition, and correspondingly, in productivity: the contribution to productivity growth due to competition spurred by product-market reforms is around 12-15 percent.
    Date: 2010–03–17
  25. By: Damiano Sandri
    Abstract: This paper shows that the behavior of entrepreneurs facing incomplete financial markets and risky investment can explain why growth accelerations in developing countries tend to be associated with current account improvements. The uninsurable risk of losing invested capital forces entrepreneurs to rely on self-financing, so that when business opportunities open up entrepreneurs increase saving to finance the investment that produces growth. The key insight is that saving has to rise more than investment to allow also for the accumulation of precautionary assets. Plausibly calibrated simulations show that this net saving increase can sustain large and persistent net capital outflows.
    Keywords: Capital flows , Capital outflows , Economic growth , Economic models , Financial risk , Private investment , Private savings , Private sector ,
    Date: 2010–02–18

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