nep-bec New Economics Papers
on Business Economics
Issue of 2010‒04‒17
forty-five papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Can News Be a Major Source of Aggregate Fluctuations? A Bayesian DSGE Approach By Ippei Fujiwara; Yasuo Hirose; Mototsugu Shintani
  2. Debt overhang and credit risk in a business cycle model By Filippo Occhino; Andrea Pescatori
  3. The employment of temporary agency workers in the UK – with or against the trade unions? By René Böheim; Martina Zweimüller
  4. Financial Integration and International Risk Sharing By Yan Bai; Jing Zhang
  5. News Shocks and the Slope of the Term Structure of Interest Rates By André Kurmann; Christopher Otrok
  6. Understanding the wage patterns of Canadian less skilled workers: the role of implicit contracts By David A. Green; James Townsend
  7. Wage and Productivity Differentials in Japan: The Role of Labor Market Mechanisms By Donatella Gatti; Ryo Kambayashi; Sebastien Lechevalier
  8. Adjustment Costs, Firm Responses, and Labor Supply Elasticities: Evidence from Danish Tax Records By Raj Chetty; John N. Friedman; Tore Olsen; Luigi Pistaferri
  9. Branching Deregulation and Merger Optimality By Ana Lozano-Vivas; Miguel A. Meléndez-Jímenez; Antonio J. Morales
  10. News-Driven International Business Cycles: Effects of the US News Shock on the Canadian Economy By Michiru Sakane
  11. The Fixed Wage Puzzle: Why Profit Sharing Is So Hard to Implement By Jürgen Jerger; Jochen Michaelis
  12. Equilibrium Corporate Finance By Alberto Bisin; Piero Gottardi; Guido Ruta
  13. The information revolution and small business lending: the missing evidence By Robert DeYoung; W. Scott Frame; Dennis Glennon; Peter Nigro
  14. Information, Authority, and Corporate Hierarchies By Choe, Chongwoo; In-Uck, Park
  15. Search in Macroeconomic Models of the Labor Market By Richard Rogerson; Robert Shimer
  16. Intra-Industry Adjustment to Import Competition: Theory and Application to the German Clothing Industry By Horst Raff; Joachim Wagner
  17. Risk Shocks and Housing Markets By Dorofeenko, Victor; Lee, Gabriel S.; Salyer, Kevin D.
  18. Estimated U.S. Manufacturing Production Capital and Technology Based on an Estimated Dynamic Structural Economic Model By Baoline Chen; Peter A. Zadrozny
  19. Risk Premiums and Macroeconomic Dynamics in a Heterogeneous Agent Model By De Graeve, Ferre; Dossche, Maarten; Emiris, Marina; Sneessens, Henri; Wouters, Raf
  20. Deep Financial Integration and Volatility By Sebnem Kalemli-Ozcan; Bent Sørensen; Vadym Volosovych
  21. Employee Spinoffs and the Choice of Technology By Peter Thompson; Jing Chen
  22. Why Do BLS Hours Series Tell Different Stories About Trends in Hours Worked? By Harley Frazis; Jay Stewart
  23. Financial frictions and the K/L ratio in UK manufacturing industries By Marina-Eliza Spaliara
  25. Labor Market Search, Housing Prices and Borrowing Constraints. By Javier Andrés Domingo; José Emilio Boscá; Javier Ferri
  26. The Strategic Use of Architectural Knowledge by Entrepreneurial Firms By Carliss Y. Baldwin
  27. Oil Volatility and the Option Value of Waiting: An analysis of the G-7 By Don Bredin; John Elder; Stilianos Fountas
  28. A Matter of Interpretation: Bargaining over Ambiguous Contracts By Simon Grant; Jeff Kline; John Quiggin
  29. Intra-firm Trade and Product Contractibility (Long Version) By Andrew B. Bernard; J. Bradford Jensen; Stephen J. Redding; Peter K. Schott
  30. Dismissal Regulation in Japan By Ryo Kambayashi
  31. The Impact of Vertical Integration and Outsourcing on Firm Efficiency: Evidence from the Italian Machine Tool Industry. By Fabio Pieri; Enrico Zaninotto
  32. Financial market disturbances as sources of business cycle fluctuations in Finland By Freystätter, Hanna
  33. Macroeconomic Shocks and the Business Cycle: Evidence from a Structural Factor Model By Mario Forni; Luca Gambetti
  34. Work Hours, Social Value of Leisure and Globalisation By Hansen, Jørgen Drud; Molana, Hassan; Montagna, Catia; Ulff-Møller Nielsen, Jørgen
  35. Further Model-Based Estimates of U.S. Total Manufacturing Production Capital and Technology, 1949-2005 By Baoline Chen; Peter A. Zadrozny
  36. Investigating the exponential age distribution of firms By Alex Coad
  37. Working Hours of Part-timers and the Measurement of Firm-level Productivity By MORIKAWA Masayuki
  38. The Effects of Product Dropping on Firm's Productivity and Employment Composition By Sergio De Nardis; Marco Ventura
  39. Total Factor Productivity of Korean Manufacturing Industries: Comparison of Competing Models with Firm-Level Data By Dong-hyun Oh; Almas Heshmati; Hans Loof
  40. The Term Structure of Interest Rates in a DSGE Model with Recursive Preferences By Jules van Binsbergen; Jesús Fernández-Villaverde; Ralph S.J. Koijen; Juan F. Rubio-Ramírez
  41. The Alleviation of Coordination Problems through Financial Risk Management By BOYER, Marcel; BOYER, Martin M.; GARCIA, René
  42. Sources of the Volatility Puzzle in the Crude Oil Market By C. BAUMEISTER; G. PEERSMAN;
  44. Productivity and the density of human capital By Jaison R. Abel; Ishita Dey; Todd M. Gabe
  45. Leverage Constraints and the International Transmission of Shocks By Michael B Devereux; James Yetman

  1. By: Ippei Fujiwara (Financial Markets Department, Bank of Japan); Yasuo Hirose (Monetary Affairs Department, Bank of Japan); Mototsugu Shintani (Department of Economics, Vanderbilt University)
    Abstract: We examine whether the news shocks, as explored in Beaudry and Portier(2004), can be a major source of aggregate fluctuations. For this purpose, we extend a standard dynamic stochastic general equilibrium model of Christiano, Eichenbaum, and Evans (2005), and Smets and Wouters (2003, 2007) by allowing news shocks on the total factor productivity, and estimate the model using Bayesian methods. Estimation results on the U.S. and Japanese economies suggest that (1) news shocks play a relatively more important role in the U.S. than in Japan; (2) a news shock with a longer forecast horizon has larger effects on nominal variables; and (3) the overall effect of the total factor productivity on hours worked becomes ambiguous in the presence of news shocks.
    Keywords: Bayesian estimation, business cycles, news
    JEL: E30 E40 E50
    Date: 2009–12
  2. By: Filippo Occhino; Andrea Pescatori
    Abstract: We study the macroeconomic implications of the debt overhang distortion. The probability that a firm will default acts like a tax that discourages its current investment. This is because the marginal return of the firm's investment will be seized by its creditors in the event of default, so the higher the firm's probability of default, the lower its expected marginal return of investment. The dynamics of this distortion, which moves counter-cyclically, amplify and propagate the effects of productivity, volatility, wealth redistribution and government spending shocks. Both the size and the persistence of these effects are quantitatively important, and the fiscal multiplier is large and hump-shaped. The model replicates important features of the joint dynamics of macro variables and credit risk variables, like default rates, recovery rates and credit spreads.
    Keywords: Corporations - Finance ; Debt ; Business cycles ; Risk
    Date: 2010
  3. By: René Böheim; Martina Zweimüller
    Abstract: A firm's decision to employ agency workers may be perceived as a replace- ment of directly employed workers or as way to curb union power, which trade unions would oppose. Alternatively, trade unions may encourage the (tem- porary) employment of agency workers in a firm, if they manage to bargain higher wages for their members. We estimate the relationship between hir- ing agency workers and trade union activity at the workplace, in particular, the type of collective bargaining agreements. We use British data from the Workplace Employment Relations Surveys (WERS) of 1998 and 2004. The empirical association between the employment of agency workers and union strength is weak, but positive. Furthermore, workplaces with collective bar- gaining have lower wages in the presence of agency workers, suggesting that agency workers are hired against the unions.
    Keywords: temporary work agency, collective bargaining, flexibility, Workplace Employment Relations Survey
    JEL: D21 J31 J40
    Date: 2009–10
  4. By: Yan Bai (Arizona State University); Jing Zhang (University of Michigan)
    Abstract: Conventional wisdom suggests that financial liberalization can help countries insure against idiosyncratic risk. There is little evidence, however, that countries have increased risk sharing despite recent widespread financial liberalization. This work shows that the key to understanding this puzzling observation is that conventional wisdom assumes frictionless international financial markets, while actual international financial markets are far from frictionless. In particular, financial contracts are incomplete and enforceability of debt repayment is limited. Default risk of debt contracts constrains borrowing, and more importantly, it makes borrowing more difficult in bad times, precisely when countries need insurance the most. Thus, default risk of debt contracts hinders international risk sharing. When countries remove their official capital controls, default risk is still present as an implicit barrier to capital flows; the observed increase in capital flows under financial liberalization is in fact too limited to improve risk sharing. If default risk of debt contracts were eliminated, capital flows would be six times greater, and international risk sharing would increase substantially.
    Keywords: international risk sharing, financial integration, financial liberalization, financial frictions, sovereign default, international capital flows
    JEL: F02 F34 F36 F41
    Date: 2009–05
  5. By: André Kurmann; Christopher Otrok
    Abstract: We provide a new structural interpretation of the relationship between the slope of the term structure of interest rates and macroeconomic fundamentals. We first adopt an agnostic identification approach that allows us to identify the shocks that explain most of the movements in the slope. We find that two shocks are sufficient to explain virtually all movements in the slope. Impulse response functions for the first shock, which explains the majority of the movements in the slope, lead us to interpret this main shock as a news shock about future productivity. We confirm this interpretation by formally identifying such a news shock as in Barsky and Sims (2009) and Sims (2009). We then assess to what extent a New Keynesian DSGE model is capable of generating the observed slope responses to a news shock. We find that augmenting DSGE models with a term structure provides valuable information to discipline the description of monetary policy and the model’s response to news shocks in general.
    Keywords: Term structure of interest rates, news, productivity shocks, business cycles, monetary policy
    JEL: E30 E43 E52
    Date: 2010
  6. By: David A. Green; James Townsend
    Abstract: <p><p>We examine the wage patterns of Canadian less skilled male workers over the last quarter century by organizing workers into job entry cohorts. We find entry wages for successive cohorts declined until 1997, and then began to recover. Wage profiles steepened for cohorts entering after 1997, but not for cohorts entering in the 1980s - a period when start wages were relatively high. We argue that these patterns are consistent with a model of implicit contracts with recontracting in which a worker's current wage is determined by the best labour market conditions experienced during the current job spell.</p></p>
    JEL: J31 O33
    Date: 2009–11
  7. By: Donatella Gatti; Ryo Kambayashi; Sebastien Lechevalier
    Abstract: Two stylized facts characterized Japan during the so-called Lost Decade (1992-2005): rising wage inequalities and increasing productivity differentials at the firm level. Surprisingly, these features have never been connected in the literature. This paper attempts to fill this gap by proposing an explanation focusing on labor market mechanisms. We first construct an efficiency wage model with two types of firms distinguished by their job security schemes and associated incentive mechanisms. We show that a comparable negative productivity shock at the aggregate level leads to different firm reactions; namely, the model predicts increasing effort from workers in firms employing an efficiency wage mechanism. This leads to increasing productivity and wage differentials and a rise of the share of these firms in the total population of firms. We test this model using Japanese micro data. For the first time, we match the Basic Survey on Wage Structure and the Employment Trend Survey for 2005. The matched worker-firm dataset we obtain allows us to confirm the existence of an efficiency wage mechanism on average. We also divide our sample of firms into two groups using the unknown regime switching regression a la Dickens and Lang (1985), and find that the primary sector, unlike the secondary, is characterized by efficiency wages. We confirm this result with various robustness checks. Finally, we simulate the evolution of the share of the primary sector in the economy and find that it substantially increased between 1981 and 2005 in line with the predictions of our model.
    Keywords: heterogeneity of firms, efficiency wages, job security, effort, productivity differentials, wage inequalities
    JEL: L23 J24 J31 J42
    Date: 2010–03
  8. By: Raj Chetty (Harvard University); John N. Friedman (Harvard University); Tore Olsen (Harvard University); Luigi Pistaferri (Harvard University)
    Abstract: We show that the effects of taxes on labor supply are shaped by interactions between adjustment costs for workers and hours constraints set by firms. We develop a model in which firms post job offers characterized by an hours requirement and workers pay search costs to find jobs. In this model, micro elasticities are smaller than macro elasticities because they do not account for adjustment costs and firm responses. We present evidence supporting three predictions of the model by analyzing bunching at kinks using the universe of tax records in Denmark. First, larger kinks generate larger taxable income elasticities because they are more likely to overcome search costs. Second, kinks that apply to a larger group of workers generate larger elasticities because they induce changes in hours constraints. Third, firms tailor job o¤ers to match workers.aggregate tax preferences in equilibrium. Calibrating our model to match these empirical findings, we obtain a lower bound on the intensive-margin macro elasticity of 0:34, an order of magnitude larger than the estimates obtained using standard microeconometric methods for wage earners in our data.
    Date: 2010–03
  9. By: Ana Lozano-Vivas (Department of Economic Theory, Universidad de Málaga); Miguel A. Meléndez-Jímenez (Department of Economic Theory, Universidad de Málaga); Antonio J. Morales (Department of Economic Theory, Universidad de Málaga)
    Abstract: The U.S. banking industry has been characterized by intense merger activity in the absence of economies of scale and scope. We claim that the loosening of geographic constraints on U.S. banks is responsible for this consolidation process, irrespective of value-maximizing motives. We demonstrate this by putting forward a theoretical model of banking competition and studying banks’ strategic responses to geographic deregulation. We show that even in the absence of economies of scale and scope, bank mergers represent an optimal response. Also, we show that the consolidation process is characterized by merger waves and that some equilibrium mergers are not profitable per se -they yield losses- but become profitable as the waves of mergers unfold.
    Keywords: Banking Competition, Deregulation, Mergers
    JEL: C72 G21 G28 L13 L41 L51
    Date: 2010–03
  10. By: Michiru Sakane
    Abstract: This paper studies the international transmission effects of the news about the Total Factor Productivity (TFP) of the US to the Canadian economy. First, using the Vector Error Correction Model (VECM), the impulse responses of Canadian macroeconomic variables to the US news shock are estimated. Next, I develop and estimate a two-country RBC model with the preference introduced by Jaimovich and Rebelo (2008) and investment adjustment cost to generate booms in Canadian variables in response to news about future US TFP. I find that international macroeconomic comovements between the US and Canada can be generated by the news about future TFP in the US. Unlike previous studies, I show that the response of Canadian TFP to the US news shock is important in order to generate the boom observed in empirical analysis. Estimated value of the preference parameter indicates that getting rid of the wealth effect on hours worked is important. I also show that low elasticity of substitution between domestically and foreign produced intermediate goods can also help explaining the domestic boom created by the news shock, which highlights the importance of analyzing an open economy.
    Date: 2010–03
  11. By: Jürgen Jerger (University of Regensburg and Osteuropa-Institut Regensburg); Jochen Michaelis (University of Kassel)
    Abstract: It is well known that profit sharing arrangements Pareto-dominate fixed wage contracts. Share agreements are (far) less than ubiquitous, however. This paper offers a solution of this "fixed wage puzzle“ by adopting a perspective of bounded rationality. We show that share arrangements that fulfill ”plausible“ constraints are not generally acceptable to both firms and unions.
    Keywords: Profit Sharing, Share Economy, Remuneration Systems
    JEL: E24 J33
    Date: 2010
  12. By: Alberto Bisin; Piero Gottardi; Guido Ruta
    Abstract: We study a general equilibrium model with production where financial markets are incomplete. At a competitive equilibrium firms take their production and financial decisions so as to maximize their value. We show that shareholders unanimously support value maximization. Furthermore, competitive equilibria are constrained Pareto efficient. Finally the Modigliani-Miller theorem typically does not hold and the firms’ corporate financing structure is determined at equilibrium. Such results extend to the case where informational asymmetries are present and contribute to determine the firms’ capital structure.
    Keywords: capital structure, competitive equilibria, incomplete markets, asymmetric information
    Date: 2010
  13. By: Robert DeYoung; W. Scott Frame; Dennis Glennon; Peter Nigro
    Abstract: This paper provides empirical confirmation for Petersen and Rajan's (2002) widely accepted conjecture that information technology was the primary driver of the observed increase in small business borrower-lender distances in the United States in recent years. Using a different data source for small business loans, we show that annual increases in borrower-lender distances were slow and steady prior to 1993 (the end point in Petersen and Rajan's data) but accelerated rapidly after that. Importantly, we are able to assign at least half of this acceleration to the adoption of credit scoring technologies by the lending banks. Our tests also reveal strong statistical associations between lending distances and borrower characteristics, lender characteristics, market conditions, regulatory constraints, moral hazard incentives, and principal-agent incentives.
    Date: 2010
  14. By: Choe, Chongwoo; In-Uck, Park
    Abstract: In a typical corporate hierarchy, the manager is delegated the authority to make strategic decisions, and to contract with other employees. By studying a model with one principal and two agents where one agent can gather information that is valuable for the principal's project choice and the other agent provides effort to the chosen project, we study when the principal can benefit from such delegation relative to centralization. We show that beneficial delegation is possible when complete contracts cannot be written, and delegation of authority should necessarily be to the information gatherer. The benets of delegation stem from either efficiency gains or reduction in rent to the information gatherer.
    Keywords: Corporate hierarchies; information gathering; delegation; centralization.
    JEL: D21 D82 L22 C72
    Date: 2010–01–10
  15. By: Richard Rogerson; Robert Shimer
    Abstract: This chapter assesses how models with search frictions have shaped our understanding of aggregate labor market outcomes in two contexts: business cycle fluctuations and long-run (trend) changes. We first consolidate data on aggregate labor market outcomes for a large set of OECD countries. We then ask how models with search improve our understanding of these data. Our results are mixed. Search models are useful for interpreting the behavior of some additional data series, but search frictions per se do not seem to improve our understanding of movements in total hours at either business cycle frequencies or in the long-run. Still, models with search seem promising as a framework for understanding how different wage setting processes affect aggregate labor market outcomes.
    JEL: E24 E32 J21 J64
    Date: 2010–04
  16. By: Horst Raff (Kiel Institute for the World Economy and Department of Economics, Christian-Albrechts-Universität zu Kiel); Joachim Wagner (Institute of Economics, Leuphana University of Lüneburg, Germany)
    Abstract: This paper uses an oligopoly model with heterogeneous firms to examine how an industry adjusts to rising import competition. The model predicts that in the short run the least efficient firms in the industry become inactive, surviving firms face a fall in output, mark-ups and profits, and the average productivity of survivors increases. These pro-competitive effects of import penetration on the domestic industry disappear in the long run. The predictions for the short run are confirmed in an empirical study of the German clothing industry.
    Keywords: international trade, firm heterogeneity, productivity, clothing industry
    JEL: F12 F15
    Date: 2009–09
  17. By: Dorofeenko, Victor (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria); Lee, Gabriel S. (IREBS, University of Regensburg, Regensburg, Germany, and Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria); Salyer, Kevin D. (Department of Economics, University of California, Davis, USA)
    Abstract: This paper analyzes the role of uncertainty in a multi-sector housing model with financial frictions. We include time varying uncertainty (i.e. risk shocks) in the technology shocks that affect housing production. The analysis demonstrates that risk shocks to the housing production sector are a quantitatively important impulse mechanism for the business cycle. Also, we demonstrate that bankruptcy costs act as an endogenous markup factor in housing prices; as a consequence, the volatility of housing prices is greater than that of output, as observed in the data. The model can also account for the observed countercyclical behavior of risk premia on loans to the housing sector.
    Keywords: Agency costs, credit channel, time-varying uncertainty, residential investment, housing production, calibration
    JEL: E4 E5 E2 R2 R3
    Date: 2010–02
  18. By: Baoline Chen (U.S. Bureau of Economic Analysis); Peter A. Zadrozny (U.S. Bureau of Labor Statistics)
    Abstract: Production capital and total factor productivity or technology are fundamental to understanding output and productivity growth, but are unobserved except at disaggregated levels and must be estimated before being used in empirical analysis. In this paper, we develop estimates of production capital and technology for U.S. total manufacturing based on an estimated dynamic structural economic model. First, using annual U.S. total manufacturing data for 1947-1997, we estimate by maximum likelihood a dynamic structural economic model of a representative production firm. In the estimation, capital and technology are completely unobserved or latent variables. Then, we apply the Kalman filter to the estimated model and the data to compute estimates of model-based capital and technology for the sample. Finally, we describe and evaluate similarities and differences between the model-based and standard estimates of capital and technology reported by the Bureau of Labor Statistics.
    Keywords: Kalman filter estimation of latent variables
    JEL: C50 C81 D24 L60
    Date: 2009–09
  19. By: De Graeve, Ferre (Research Department, Central Bank of Sweden); Dossche, Maarten (National Bank of Belgium); Emiris, Marina (Bank of Canada); Sneessens, Henri (University of Luxembourg); Wouters, Raf (National Bank of Belgium)
    Abstract: We analyze financial risk premiums and real economic dynamics in a DSGE model with three types of agents - shareholders, bondholders and workers - that differ in participation in the capital market and in attitude towards risk and intertemporal substitution. Aggregate productivity and distribution risks are transferred across these agents via the bond market and via an efficient labor contract. The result is a combination of volatile returns to capital and a highly cyclical consumption process for the shareholders, which are two important ingredients for generating high and countercyclical risk premiums. These risk premiums are consistent with a strong propagation mechanism through an elastic supply of labor, rigid real wages and a countercyclical labor share. Based on the empirical estimates for the two sources of real macroeconomicrisk, the model generates significant and plausible time variation in both bond and equity risk premiums. Interestingly, the single largest jump in both the risk premium and the price of risk is observed during the current recession.
    Keywords: Macro-Finance; Heterogeneous agent; Limited participation; Equity premium; Bond premium
    JEL: E32 E44 G12
    Date: 2010–01–01
  20. By: Sebnem Kalemli-Ozcan; Bent Sørensen; Vadym Volosovych
    Abstract: We investigate the relationship between financial integration and output volatility at micro and macro levels. Using a very large firm-level dataset from EU countries over time, we construct a measure of "deep" financial integration at the regional level based on foreign ownership at the firm level. We find a positive effect of foreign ownership on volatility of firms' outcomes. This effect survives aggregation and carries over to regional output. Exploiting variation in the transposition dates of EU-wide legislation, we find that high trust regions in countries who harmonized capital markets sooner have higher levels of financial integration and volatility.
    JEL: E32 F15 F36 O16
    Date: 2010–04
  21. By: Peter Thompson (Department of Economics, Florida International University); Jing Chen (Department of Economics, Florida International University)
    Abstract: Most existing models of employee spinoffs assume they are driven by a desire to implement new ideas. However, history is replete with examples of spinoffs that were launched to continue with old ideas that their parents were in the process of abandoning. We develop a model of technology choice in which spinoffs may form to implement new or old technologies. A team of managers engaged in production using technology x, is considering switching to technology y. The value of y is not known and disagreements may emerge among team members. Managers who develop sufficiently strong disagreements with their colleagues choose to form new companies to implement their preferred strategy. Two distinct classes of spinoffs arise. A type 1 spinoff forms when an employee comes to believe it is worth adopting y but the firm does not. A type 2 spinoff arises when an employee sufficiently disagrees with the firm’s decision to adopt y that he is willing to invest in order to continue with x. We explore the implications of the model for the comparative dynamics of spinoff formation, and the performance of firms.
    Keywords: Spinoffs, learning, disagreement, choice of technology.
    JEL: L2 D70 D83
    Date: 2010–03
  22. By: Harley Frazis (U.S. Bureau of Labor Statistics); Jay Stewart (U.S. Bureau of Labor Statistics)
    Abstract: Hours worked is an important economic indicator. In addition to being a measure of labor utilization, average weekly hours are inputs into measures of productivity and hourly wages, which are two key economic indicators. However, the Bureau of Labor Statistics’ two hours series tell very different stories. Between 1973 and 2007 average weekly hours estimated from the BLS’s household survey (the Current Population Survey or CPS) indicate that average weekly hours of nonagricultural wage and salary workers decreased slightly from 39.5 to 39.3. In contrast, average hours estimated from the establishment survey (the Current Employment Statistics survey or CES) indicate that hours fell from 36.9 to 33.8 hours per week. Thus the discrepancy between the two surveys increased from about two-and-a-half hours per week to about five-and-a-half hours. Our goal in the current study is to reconcile the differences between the CPS and CES estimates of hours worked and to better understand what these surveys are measuring. We examine a number of possible explanations for the divergence of the two series: differences in workers covered, multiple jobholding, differences in the hours concept (hours worked vs. hours paid), possible overreporting of hours in CPS, and changes in the length of CES pay periods. We can explain most of the difference in levels, but cannot explain the divergent trends.
    Keywords: of work, Comparison of household and establishment surveys
    JEL: C81 J22
    Date: 2010–01
  23. By: Marina-Eliza Spaliara (Dept of Economics, Loughborough University)
    Abstract: Using comprehensive financial data on UK unquoted firms, we investigate whether technological differences of UK manufacturing industries influence the response of firms' capital-labour ratio (K/L) to changes in financial indicators under capital market imperfections. The results reveal that cash flow has a positive impact on the K/L ratio for constrained firms in high tech industries and a negative impact for firms with similar characteristics in low tech industries. Specifically, the sensitivity of the K/L ratio to cash flow not only depends on firms' net worth and financial frictions, but most importantly on firms' industry affiliation.
    Date: 2010–03
  24. By: Dermot Leahy; Catia Montagna
    Abstract: We critically consider the conventional belief that the attractiveness of international outsourcing lies in cheaper labour costs overseas and that it offers a means to ‘escape’ the power of unions. We develop an oligopoly model in which firms facing unionised domestic labour market choose between producing an intermediate in-house or outsourcing it to a non-unionised foreign supplier that makes a relationship specific investment in developing the intermediate. We show that outsourcing typically results in higher wages and does not always reduce marginal costs. Trade liberalisation favours outsourcing particularly for the relatively less efficient firms.
    Keywords: Outsourcing, Unionisation, Strategic Investment, Trade Liberalisation, Oligopoly
    JEL: F12 J51 L13 L14
    Date: 2010–03
  25. By: Javier Andrés Domingo (University of Valencia, Spain); José Emilio Boscá (University of Valencia, Spain); Javier Ferri (University of Valencia, Spain)
    Abstract: Mortgage market deregulation in the early 1980s coincided in time with a sharp break in the cyclical behavior of many variables related to housing and to the labor market. This paper analyses the joint dynamics of labor market variables, output and housing prices in a search model with efficient bargaining and financial frictions. In a setting of household heterogeneity, only mortgaged-backed loans are available for impatient households, whose borrowing cannot exceed a proportion of the expected value of their real estate holdings. This feature of the credit market, together with search and matching frictions in the labor market, establish a strong link between credit constraints and consumption that significantly affects labor market outcomes: hours, wages and vacancies. The model is also able to explain the comovements of housing prices with output, productive investment and consumption. Our analysis confirms that the response of labor market variables to technology shocks has been substantially affected by the changes in the nature and tightness of imperfections in credit markets that occurred in the early 1980s. Allowing for a housing price shock, in addition to the technology shock, the model is also able to explain the observed reduction in the correlation of housing prices with both output and private investment.
    Keywords: general equilibrium, borrowing constraints, search frictions, housing prices
    JEL: E24 E32 E44
    Date: 2010–03
  26. By: Carliss Y. Baldwin (Harvard Business School, Finance Unit)
    Abstract: This paper describes how entrepreneurial firms can use superior architectural knowledge of a technical system to gain strategic advantage. The strategy involves, first, identifying "bottlenecks" in the existing system, and then creating a new architecture that isolates the bottlenecks in modules. An entrepreneurial firm with limited financial resources can then focus on supplying superior bottleneck components, and while outsourcing non-bottleneck components. I show that a firm pursuing this strategy will have a higher return on invested capital (ROIC) than competitors with a less modular design. Over time, the focal firm can drive the ROIC of competitors below their cost of capital, causing them to shrink and possibly exit the market. The strategy was used by Sun Microsystems in the 1980s and Dell Computer in the 1990s.
    Keywords: architecture, innovation, knowledge, modularity, dynamics, competition, industry evolution
    JEL: D23 L22 L23 M11 O31 O34 P13
    Date: 2010–02
  27. By: Don Bredin (University College Dublin); John Elder (Colorado State University); Stilianos Fountas (University of Macedonia)
    Abstract: There has recently been considerable interest in the potential adverse effects associated with excessive uncertainty in energy futures markets. Theoretical models of investment under uncertainty predict that increased uncertainty will tend to induce firms to delay investment. These models are widely utilized in capital budgeting decisions, particularly in the energy sector. There is relatively little empirical evidence, however, on whether such channels have industry-wide effects. Using a sample of G7 countries we examine whether uncertainty about a prominent commodity — oil — affects the time series variation in manufacturing activity. Our primary result is consistent with the predictions of real options theory — uncertainty about oil prices has had a negative and significant effect on manufacturing activity in Canada, France, UK and US.
    Keywords: Oil, Volatility, Vector autoregression, Multivariate GARCH-in-Mean VAR
    JEL: G1 G3 F3
    Date: 2010–01–01
  28. By: Simon Grant (Department of Economics, Rice University); Jeff Kline (Department of Economics, University of Queensland); John Quiggin (Department of Economics, University of Queensland)
    Abstract: We present a formal treatment of contracting in the face of ambiguity. The central idea is that boundedly rational individuals will not always interpret the same situation in the same way. More specifically, even with well defined contracts, the precise actions to be taken by each party to the contract might be disputable. Taking this potential for dispute into account, we analyze the effects of ambiguity on contracting. We find that risk averse agents will engage in ambiguous contracts for risk sharing reasons. We provide an application where ambiguity motivates the use of a liquidated damages contract.
    Keywords: ambiguity, bounded rationality, expected uncertain utility, incomplete contracts, liquidated damages.
    JEL: D80 D82
    Date: 2009–11
  29. By: Andrew B. Bernard; J. Bradford Jensen; Stephen J. Redding; Peter K. Schott
    Abstract: This paper examines the determinants of intra-firm trade in U.S. imports using detailed country-product data. We create a new measure of product contractibility based on the degree of intermediation in international trade for the product. We find important roles for the interaction of country and product characteristics in determining intra-firm trade shares. Intra-firm trade is high for products with low levels of contractability sourced from countries with weak governance, for skill-intensive products from skill-scarce countries, and for capital-intensive products from capital-abundant countries.
    JEL: F10 F23 L14 L23
    Date: 2010–04
  30. By: Ryo Kambayashi
    Abstract: The purpose of this chapter is to take a closer look at the role of legal institutions and their impact on human capital accumulation using the Japanese case of dismissal regulation as an example. In the Japanese labor markets, so called the Doctrine of Abusive Dismissal has been thought to be responsible for controlling dismissal behaviors. With careful examination of court cases and statistics, this chapter shows, the Doctrine has grown out of industrial conflicts in the past and it has been useful in resolving disputes revolving around mass layoffs and, by fostering communication between management and labor regarding firms' business conditions, helped to smooth the rapid adjustment of employment in Japan. In other words, in order to achieve a relationship of mutual trust between employer and employees, the Doctrine created social norms encouraging the two sides to reach agreement within the workplace, firm, or organization. This guidance provided by the Doctrine contrasts with the direct constraints imposed on the contents of labor contracts by, for example, the Labor Standards Act.
    Date: 2010–03
  31. By: Fabio Pieri; Enrico Zaninotto (DISA, Faculty of Economics, Trento University)
    Abstract: In this paper we made use of an econometric approach to efficiency analysis in order to capture the role of vertical integration and outsourcing on firm's efficiency. Vertical integration is considered an indicator of structure, while outsourcing represents the process of its change. We consider inefficiency measures as indicators of organizational heterogeneity, related to the firm's choices regarding the phases of the production process that are under its control. We find support for the hypothesis of a relationship between vertical integration and efficiency. The results on outsourcing activity, and in particular the interaction between outsourcing and vertical structure, indicate that heterogeneous patterns, far from tending to cancel out each other as a consequence of common external changes, are reinforcing. Moreover, the sensitivity of inefficiency variance to the cycle, indicate that different firms may have different dynamic properties.
    Keywords: vertical integration; outsourcing; technical efficiency; double heteroskedastic model
    JEL: D24 L23 L25 L64
    Date: 2010–03
  32. By: Freystätter, Hanna (Bank of Finland Research)
    Abstract: This paper studies financial market disturbances as sources of investment fluctuations in Finland during 1995–2008. We construct a DSGE model of the Finnish economy that incorporates two domestic financial market shocks and financial frictions in the form of a BGG financial accelerator. We investigate empirically the importance of financial market frictions and disturbances by estimating the model using a Bayesian Maximum Likelihood approach. The empirical evidence points to an operative financial accelerator mechanism in Finland. Our key result is that disturbances originating in the financial sector have played a significant role in the historical variation of investment activities in Finland. Even allowing for several shocks stemming from both domestic sources and the international economy, domestic financial market shocks emerge as key drivers of recent business cycle fluctuations in Finland.
    Keywords: financial market disturbances; DSGE models; Bayesian estimation
    JEL: E32 E44 F41
    Date: 2010–02–21
  33. By: Mario Forni; Luca Gambetti
    Abstract: We use a dynamic factor model to provide a semi-structural representation for 101 quarterly US macroeconomic series. We find that (i) the US economy is well described by a number of structural shocks between two and six. Focusing on the four-shock specification, we identify, using sign restrictions, two non-policy shocks, demand and supply, and two policy shocks, monetary and fiscal. We obtain the following results. (ii) Both supply and demand shocks are important sources of fluctuations; supply prevails for GDP, while demand prevails for employment and inflation. (ii) Policy matters: Both monetary and fiscal policy shocks have sizeable effects on output and prices, with little evidence of crowding out; both monetary and fiscal authorities implement important systematic countercyclical policies reacting to demand shocks. (iii) Negative demand shocks have a large long-run positive effect on productivity, consistently with the Schumpeterian "cleansing" view of recessions.
    Keywords: structural factor model; sign restrictions; monetary policy; fiscal policy; demand; supply
    JEL: C32 E32 E52 F31
    Date: 2010–02
  34. By: Hansen, Jørgen Drud (Department of Economics, Aarhus School of Business); Molana, Hassan (University of Dundee); Montagna, Catia (University of Dundee); Ulff-Møller Nielsen, Jørgen (Department of Economics, Aarhus School of Business)
    Abstract: We examine how openness interacts with the coordination of consumption-leisure decisions in determining the equilibrium working hours and wage rate when there are leisure externalities (e.g., due to social interactions). The latter are modelled by allowing a workers marginal utility of leisure to be increasing in the leisure time taken by other workers. Coordination takes the form of internalising the leisure externality and other relevant constraints (e.g., labour demand). The extent of openness is measured by the degree of capital mobility. We find that: coordination lowers equilibrium work hours and raises the wage rate; there is a U-shaped (inverse-U-shaped) relationship between work hours (wages) and the degree of coordination; coordination is welfare improving; and, the gap between the coordinated and uncoordinated work hours (and the corresponding wage rates) is affected by the extent and nature of openness.
    Keywords: coordination; corporatism; openness; capital mobility; social multiplier; welfare; work hours
    JEL: F20 J20 J50
    Date: 2010–01–01
  35. By: Baoline Chen (U.S. Bureau of Economic Analysis); Peter A. Zadrozny (U.S. Bureau of Labor Statistics)
    Abstract: Production capital and technology (i.e., total factor productivity) in U.S. manufacturing are fundamental for understanding output and productivity growth of the U.S. economy but are unobserved at this level of aggregation and must be estimated before being used in empirical analysis. Previously, we developed a method for estimating production capital and technology based on an estimated dynamic structural economic model and applied the method using annual SIC data for 1947-1997 to estimate production capital and technology in U.S. total manufacturing. In this paper, we update this work by reestimating the model and production capital and technology using annual SIC data for 1949-2001 and partly overlapping NAICS data for 1987-2005.
    Keywords: Kalman filter estimation of latent variables
    JEL: C50 C81 D24 L60
    Date: 2009–09
  36. By: Alex Coad
    Abstract: While several plots of the aggregate age distribution suggest that firm age is exponentially distributed, we find some departures from the exponential benchmark. At the lower tail, we find that very young establishments are more numerous than expected, but they face high exit hazards. At the upper tail, the oldest firms are older than the exponential would have predicted. Furthermore, the age distribution of international airline companies displays multimodality. Although we focused on departures from the exponential, we found that the exponential was a useful reference point and endorse it as an appropriate benchmark for future work on industrial structure.
    Keywords: Age distribution, Exponential distribution, Firm size distribution, Survival Length 16 pages
    JEL: L20 L25 L11
    Date: 2009–12
  37. By: MORIKAWA Masayuki
    Abstract: This paper empirically quantifies what effect the data availability on part-timers' firm-level working hours may have on the accuracy of productivity measurement by using a data set on a large number of Japanese firms. Despite the practical importance of part-time workers in productivity measurement, this issue has not been considered seriously in past empirical studies. According to the analysis of this paper: (1) firm-level working hours of part-timers are quite heterogeneous even within the same industry; (2) when using industry average working hours, the bias of measured productivity is around 4% at the sample mean and from 1% to 2% at the sample median. The biases are especially large for service industries such as restaurant, hotel, and retail trade, where the part-time ratio is high; (3) however, the correlation between measured productivities using industry average working hours and those using firm-level hours is very high. This suggests there is only a small mismeasurement when using industry aggregate data in analyzing effects of firm characteristics or policy measures on productivity; (4) it is desirable to calculate full-time and part-time hours separately in productivity analyses covering service industries. In considering the importance of planning a valid economic growth strategy, enriching firm-level statistics is a cost-effective investment.
    Date: 2010–04
  38. By: Sergio De Nardis (ISAE - Institute for Studies and Economic Analyses); Marco Ventura (ISAE - Institute for Studies and Economic Analyses)
    Abstract: Recent literature on heterogeneous multi-product firms predicts that elimination of marginal (less productive) products, due to fiercer competition, leads to an increase of firm efficiency. We test this prediction in the case of a sample of Italian firms during a period (2000-05) of rising competitive pressures. Adopting a propensity score matching estimator, we find evidence of a causal relationship between product dropping and higher firm productivity. We also find evidence that product dropping activity causes a fall of the share of blue collars versus white collars. We draw some policy implications regarding labour market adjustment and support to internal product switching when competition shocks take place.
    Keywords: product dropping, matching estimator, white collar
    JEL: D20 L23 L60
    Date: 2010–03
  39. By: Dong-hyun Oh; Almas Heshmati; Hans Loof (Technology Management, Economics and Policy Program(TEMEP), Seoul National University)
    Abstract: This paper presents the parametric estimation of the rates of technical change and total factor productivity (TFP) growth of 7,462 Korean manufacturing firms for the period 1987 to 2007. Two alternative formulations of technical change measured by the time trend and the general index approaches are estimated with panel data models assuming flexible functional forms. Several extensions of each approach are also onsidered and their benefits and limitations are discussed. In addition to making estimates of the TFP growth and its decomposition, the paper compares the parametric TFP growth measure with the non-parametric Solow residual serving as a benchmark. Several hypotheses related to technology level, firm sizes, industrial sectors, skill biased technological change and macroeconomic and industrial policies are tested to explain the growth patterns and heterogeneity in technical change, input biases and TFP growth rates. Using second regression analysis, the paper explores the determinants of TFP growth and their policy implications.
    Keywords: Total factor productivity, technical change, manufacturing industry, determinants of growth
    JEL: C23 C51 D24 L25 L60
    Date: 2009–10
  40. By: Jules van Binsbergen; Jesús Fernández-Villaverde; Ralph S.J. Koijen; Juan F. Rubio-Ramírez
    Abstract: We solve a dynamic stochastic general equilibrium (DSGE) model in which the representative household has Epstein and Zin recursive preferences. The parameters governing preferences and technology are estimated by means of maximum likelihood using macroeconomic data and asset prices, with a particular focus on the term structure of interest rates. We estimate a large risk aversion, an elasticity of intertemporal substitution higher than one, and substantial adjustment costs. Furthermore, we identify the tensions within the model by estimating it on subsets of these data. We conclude by pointing out potential extensions that might improve the model's fit.
    JEL: E2 E3 G12
    Date: 2010–04
  41. By: BOYER, Marcel; BOYER, Martin M.; GARCIA, René
    Abstract: We characterize a firm as a nexus of activities and projects with their associated cashflow distributions across states of the world and time. With specialized managers intent on maximizing firm value, we show that such a representation leads to a transformation possibility frontier between the riskiness and expected value of cashflows. A firm reacts to changes in the market prices of risks by adjusting its value maximizing portfolio of real activities. We show that financial risk management can help to alleviate the reorganization and coordination problems related to the implementation of the desired adjustments. Empirically, we show that a firm's use of financial derivatives is linked to its reactivity to variations in risk prices. We also argue that financial risk management allows a firm to maintain its value in the presence of cashflow-at-risk or value-at-risk constraints.
    Keywords: Risk Management, Firm Value, Hedging, Value at Risk
    JEL: G22 G31 G34
    Date: 2010
    Abstract: A remarkable but unnoticed feature of the crude oil market is that the dramatic rise in oil price volatility over time has been accompanied by a substantial fall in oil production volatility. We investigate the reasons for this opposite evolution of both oil market variables. Our main finding is that the observed volatility puzzle can be rationalized by the fact that the price elasticities of both oil supply and oil demand have decreased considerably over time. This implies that small disturbances on either side of the oil market currently generate large price reactions but only modest quantity adjustments. We further document that the variance of innovations which shift oil demand and supply has even become smaller in the more recent past thereby mitigating oil price fluctuations.
    Keywords: Oil prices, volatility, time variation, price elasticities
    JEL: E31 E32 Q43
    Date: 2010–01
  43. By: Daniele Nosenzo (University of Nottingham)
    Abstract: This study uses a three-person gift-exchange game experiment to examine the impact of pay comparisons on effort behavior. We compare effort choices made in a treatment where coworkers’ wages are secret with effort choices made in two ‘public wages’ treatments. The two ‘public wages’ treatments differ in whether co-workers’ wages are chosen by an employer, or are fixed exogenously by the experimenter. We find that pay comparison information has an overall detrimental impact on effort choices: employees respond less favorably to the wage offers made by the employer when they receive information about the wage paid to the co-worker as compared to the case where co-workers’ wages are secret. These effects are particularly pronounced in the treatment where the level of the co-worker’s wage is fixed exogenously.
    Keywords: social comparisons; wage comparisons; gift exchange; experiments
    JEL: C91 C92 J31
    Date: 2010–03
  44. By: Jaison R. Abel; Ishita Dey; Todd M. Gabe
    Abstract: We estimate a model of urban productivity in which the agglomeration effect of density is enhanced by a metropolitan area's stock of human capital. Estimation accounts for potential biases due to the endogeneity of density and industrial composition effects. Using new information on output per worker for U.S. metropolitan areas along with a measure of density that accounts for the spatial distribution of population, we find that a doubling of density increases productivity by 2 to 4 percent. Consistent with theories of learning and knowledge spillovers in cities, we demonstrate that the elasticity of average labor productivity with respect to density increases with human capital. Metropolitan areas with a human capital stock one standard deviation below the mean realize no productivity gain, while doubling density in metropolitan areas with a human capital stock one standard deviation above the mean yields productivity benefits that are about twice the average.
    Keywords: Urban economics ; Labor productivity ; Labor market ; Population ; Demography
    Date: 2010
  45. By: Michael B Devereux (University of British Columbia); James Yetman (Bank for International Settlements)
    Abstract: Recent macroeconomic experience has drawn attention to the importance of interdependence among countries through financial markets and institutions, independently of traditional trade linkages. This paper develops a model of the international transmission of shocks due to interdependent portfolio holdings among leverage-constrained financial institutions. In the absence of leverage constraints, international portfolio diversification has no implications for macroeconomic co-movements. When leverage constraints bind, however, the presence of diversified portfolios in combination with these constraints introduces a powerful financial transmission channel which results in a high correlation among macroeconomic aggregates during business cycle downturns, quite independent of the size of international trade linkages.
    Keywords: leverage; international transmission; portfolios
    JEL: F3 F32 F34
    Date: 2009–12

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