nep-bec New Economics Papers
on Business Economics
Issue of 2010‒05‒08
23 papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Firm Ownership and Rent Sharing By Monteiro, Natália Pimenta; Portela, Miguel; Straume, Odd Rune
  2. Strategic Orientation of Outsourcing Firms:Demystifying Key Differentiators By Sharda Kirti
  3. Rising Wage Inequality, the Decline of Collective Bargaining, and the Gender Wage Gap By Antonczyk, Dirk; Fitzenberger, Bernd; Sommerfeld, Katrin
  4. A Dynamic Model of Housing Demand: Estimation and Policy Implications By Patrick Bajari; Phoebe Chan; Dirk Krueger; Daniel Miller
  5. Vertical Separation with Private Contracts By Marco Pagnozzi; Salvatore Piccolo
  6. credit supply, flight to quality and evergreening: an analysis of bank-firm relationships after Lehman By Ugo Albertazzi; Domenico J. Marchetti
  7. Firm Heterogeneity, Credit Constraints, and Endogenous Growth By Jürgen Antony; Torben Klarl; Alfred Maussner
  8. Liquidity Constraints and Firm’s Export Activity By Emanuele Forlani
  9. The Value of Delegation in a Dynamic Agency By Barbara Schöndube-Pirchegger; Jens Robert Schöndube
  10. Using a DSGE model to look at the recent boom-bust cycle in the US By Marco Ratto; Werner Roeger; Jan in 't Veld-European Commission
  11. Is Bigger Always Better ? The Effect of Size on Defaultse By Giulio Bottazzi; Federico Tamagni
  12. Fortune or Virtue: Time-Variant Volatilities Versus Parameter Drifting in U.S. Data By Jesús Fernández-Villaverde; Pablo Guerrón-Quintana; Juan F. Rubio-Ramírez
  13. Exclusive Territories and Manufacturers’ Collusion By Salvatore Piccolo; Markus Reisinger
  14. The Synchronization of GDP Growth in the G7 during U.S. Recessions. Is this Time Different? By Nikolaos Antonakakis; Johann Scharler
  15. Are Overconfident CEOs Better Innovators? By Hirshleifer, David; Low, Angie; Teoh, Siew Hong
  16. "Multiproduct Duopoly with Vertical Differentiation" By Yi-Ling Cheng; Shin-Kun Peng; Takatoshi Tabuchi
  17. Measurement Errors in Investment Equations By Heitor Almeida; Murillo Campello; Antonio F. Galvao Jr.
  18. The Financial Instability Hypothesis:a Stochastic Microfoundation Framework By Carl Chiarella; Corrado Di Guilmi
  19. Firm Valuations, the Cost of Capital and the Tax Treatment of Capital Gains By Chris Jones
  20. Experts, Conflicts of Interest, and the Controversial Role of Reputation By Filippo Pavesi; Massimo Scotti
  21. Ownership concentration and audit fees: do auditors matter most when investors are protected least? By Ben Ali Chiraz; Cédric Lesage
  22. Why Less Informed Managers May Be Better Leaders By Sergei Guriev; Anton Suvorov
  23. Do bank-firm relationships influence firm internationalization? By Riccardo De Bonis; Giovanni Ferri; Zeno Rotondi

  1. By: Monteiro, Natália Pimenta (University of Minho); Portela, Miguel (University of Minho); Straume, Odd Rune (University of Minho)
    Abstract: We analyse – theoretically and empirically – how private versus public ownership of firms affects the degree of rent sharing between firms and their workers. Using a particularly rich linked employer-employee dataset from Portugal, covering a large number of corporate ownership changes across a wide spectrum of economic sectors over more than 20 years, we find a positive relationship between private ownership and rent sharing. Based on our theoretical analysis, this result cannot be explained by private firms being more profit oriented than public ones. However, the result is consistent with privatisation leading to less job security, implying stronger efficiency wage effects.
    Keywords: rent sharing, private vs public ownership, panel data
    JEL: J45 D21 C23
    Date: 2010–04
  2. By: Sharda Kirti
    Abstract: Despite the importance of outsourcing firms and the highly competitive nature of the outsourcing industry, there has been minimal examination of outsourcing firm strategy. This paper investigates the strategic focus of 60 outsourcing firms using empirical data collected through survey and semi-structured interviews from 226 top management team respondents. Factor and cluster analysis reveal three outsourcing firm archetypes based on their strategic orientation, namely, superachievers, quality advocates and defenders. The dominance of these archetypes also varies across business activities offered by sample firms. By delineating dimensions underlying outsourcing form strategy and by identifying archetypes of strategic orientation, the paper provides an understanding of key differentiators of outsourcing firm performance.
    Date: 2009–12–21
  3. By: Antonczyk, Dirk (University of Freiburg); Fitzenberger, Bernd (University of Freiburg); Sommerfeld, Katrin (University of Freiburg)
    Abstract: This paper investigates the increase in wage inequality, the decline in collective bargaining, and the development of the gender wage gap in West Germany between 2001 and 2006. Based on detailed linked employer-employee data, we show that wage inequality is rising strongly – driven not only by real wage increases at the top of the wage distribution, but also by real wage losses below the median. Coverage by collective wage bargaining plummets by 16.5 (19.1) percentage points for male (female) employees. Despite these changes, the gender wage gap remains almost constant, with some small gains for women at the bottom and at the top of the wage distribution. A sequential decomposition analysis using quantile regression shows that all workplace related effects (firm effects and bargaining effects) and coefficients for personal characteristics contribute strongly to the rise in wage inequality. Among these, the firm coefficients effect dominates, which is almost exclusively driven by wage differences within and between different industries. Labor demand or firm wage policy related effects contribute to an increase in the gender wage gap. Personal characteristics tend to reduce wage inequality for both, males and females, as well as the gender wage gap.
    Keywords: quantile regression, collective bargaining, gender wage gap, wage distribution, sequential decomposition
    JEL: J31 J51 J52 C21
    Date: 2010–04
  4. By: Patrick Bajari; Phoebe Chan; Dirk Krueger; Daniel Miller
    Abstract: Using data from the Panel Study of Income Dynamics (PSID) we specify, estimate and simulate a dynamic structural model of housing demand. Our model generalizes previous applied econometric work by incorporating realistic features of the housing market including non-convex adjustment costs from buying and selling a home, credit constraints from minimum downpayment requirements and uncertainty about the evolution of incomes and home prices. We argue that these features are critical for capturing salient features of housing demand observed in the PSID. After estimating the model we use it to simulate how consumer behavior responds to house price and income declines as well as tightening credit. These experiments are motivated by the U.S. recession starting in December of 2007 that saw large falls in home prices, large negative income shocks for many households and tightening credit standards. In the short run, relatively few households adjust their housing stock. Households respond instead by reducing non-housing consumption and reducing wealth because they wish to avoid losing their home and the associated adjustment costs. Households that adjust in the short run are those hit with a series of bad shocks, such as a negative income shock and a home price decline. A larger proportion of households do adjust their consumption in the long run, increasing their housing stock since housing is less expensive. However, such changes may occur several years after the shocks listed above.
    JEL: D12 E21 R21
    Date: 2010–04
  5. By: Marco Pagnozzi (University of Napoli "Federico II" and CSEF); Salvatore Piccolo (University of Naples "Federico II" and CSEF)
    Abstract: We consider a manufacturer's incentive to sell through an independent retailer, rather than directly to final consumers, when contracts with retailers cannot be observed by competitors. If retailers conjecture that identical competing manufacturers always offer identical contracts (symmetry beliefs), vertical separation by all manufacturers is an equilibrium, and it results in higher consumers' prices and manufacturers' profits. Even with private contracts, vertically separated manufacturers reduce competition by inducing less aggressive behaviour by retailers in the final market. We characterize a condition for manufacturers' profits to be higher with private than with public contracts. Our results hold both with price and with quantity competition, and do not hinge on retailers' beliefs being perfectly symmetric.
    Keywords: Delegation, vertical separation, private contracts, symmetry beliefs
    JEL: D20 D43
    Date: 2010–04–26
  6. By: Ugo Albertazzi (Bank of Italy); Domenico J. Marchetti (Bank of Italy)
    Abstract: This paper analyzes the effects of the financial crisis on credit supply by using highly detailed data on bank-firm relationships in Italy after Lehman’s collapse. We control for firms’ unobservable characteristics, such as credit demand and borrowers’ risk, by exploiting multiple lending. We find evidence of a contraction of credit supply, associated to low bank capitalization and scarce liquidity. The ability of borrowers to compensate through substitution across banks appears to have been limited. We also document that larger less-capitalized banks reallocated loans away from riskier firms, contributing to credit pro-cyclicality. Such ‘flight to quality’ has not occurred for smaller less-capitalized banks. We argue that this may have reflected, among other things, evergreening practices. We provide corroborating evidence based on data on borrowers' productivity and interest rates at bank-firm level.
    Keywords: credit supply, bank capital, flight to quality, evergreening
    JEL: E44 E51 G21 G34 L16
    Date: 2010–04
  7. By: Jürgen Antony (CPB Netherlands Bureau for Economic Policy Analysis, The Hague, The Netherlands); Torben Klarl (University of Augsburg, Department of Economics); Alfred Maussner (University of Augsburg, Department of Economics)
    Abstract: This paper is concerned with the role of firm heterogeneity under credit constraints for economic growth. We focus on firm size, innovativeness and credit constraints in a semi-endogenous growth model reflecting recent empirical findings on firm heterogeneity. It allows for an explicit solution for transitional growth and balanced growth path productivity as well as the growth maximizing firm heterogeneity. This enables us to draw inference about the impact of key policy parameters of the model on these quantities and to draw conclusions about firm and capital market related policies.
    Keywords: firm heterogeneity, credit constraints, firm size, SME, economic growth
    JEL: E5 O31
    Date: 2010–04
  8. By: Emanuele Forlani (Université catholique de Louvain – CORE)
    Abstract: This paper will assess the importance of internal firm resources in overcoming sunk entry costs associated with export. When firms are not able to raise additional external funds for investments, they are credit-constrained, and in such a case, new exporters have to rely on their internal liquidity to pay sunk costs. Using a data set of small and medium size Italian enterprises (SMEs), we find that entry probability in the export market is affected by the level of cash stock for constrained firms. We propose a methodology used to identify a priori constrained firms, employing index analysis as used in business economics. The estimation of the Euler equation for investments confirms the fitness of our classification. In addition we find that exporters show higher liquidity if they raise the number of destinations. Finally, we do not find evidence that entry in the export market improves firm\'s financial health, while ex-ante new entrants are found to be relatively more leveraged.
    Keywords: Productivity, Credit constraints, Heterogenous firms, Trade
    JEL: C14 D24 F10 F12 F13 F19 M40
    Date: 2010–04–30
  9. By: Barbara Schöndube-Pirchegger (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Jens Robert Schöndube (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: In this paper we analyze the value of delegation in a two-period agency. A central management hires an agent to perform a personal effort in each period. Due to time constraints or lack of ability this effort can not be performed by central management. Besides personal effort firm value is influenced by the decision to launch a project which has to be made at the beginning of period two. The project decision can either be delegated to the agent (decentralization) or it can be made by central management (centralization). Under decentralization the agent observes the project’s contribution before its decision. While this captures the benefit of delegation its cost is that the project decision is unobservable and must be motivated together with personal effort via the same incentive contract. In the centralized regime, in contrast, no incentives for the project decision are necessary, however, the project’s actual contribution will not be observed such that the project decision has to be made based on expectations. We analyze optimal performance measurement for both regimes in a linear contracting setting and analyze the variables that affect the value of delegation. We do this for two different contracting regimes: long-term commitment and long-term renegotiation-proof contracts. Trade-offs under both contracting environments differ substantially. In particular, under renegotiation-proof contracts, decentralization might become optimal even if its direct benefit in terms of acquiring specific knowledge about the project vanishes. The reason is that with delegation of the project decision central management implicitly commits to a higher second period incentive rate as personal effort and the project decision must be controlled via the same incentive contract. This is beneficial if renegotiation-proofness requires central management to set too low second-period incentives compared to long-term commitment. A necessary condition for that is, that intertemporal correlation is negative. Contrary to the classical view this result implies that the incentive problem under centralization may become more severe than under decentralization.
    Date: 2009–12
  10. By: Marco Ratto; Werner Roeger; Jan in 't Veld-European Commission
    Abstract: This paper presents a DSGE model with residential investment and credit-constrained households estimated with US data over the period 1980Q1-2008Q4. In order to better understand speculative movements of house prices, we model land as an exhaustible resource, implying that house prices have asset market characteristics.We conduct an event study for the US over the period 1999Q1-2008Q4 which has been characterised by a housing boom and bust and examine which shocks have contributed to the evolution of GDP and its components over this period. We devote special attention to the contribution of non-fundamental shocks to asset prices over this episode.
    Keywords: Using a DSGE model to look at the recent boom-bu DSGE model Housing Credit constraint collateral Bubbles Shocks Ratto Roeger in 't Veld European Economy. Economic Papers
    JEL: C51 E21 E22 E52
    Date: 2010–01
  11. By: Giulio Bottazzi; Federico Tamagni
    Abstract: Exploiting a large database of Italian manufacturing firms we investigate the relationships between default rate and firm size. Default events, defined as conditions of actual or likely insolvency, are a signal of deep business troubles. They are unanticipated, costly and dangerous for the firm as well as for the economy, and should be in principle avoided. Our evidence, based on data provided by a large Italian banking group, reveals that the default probability of firms increases with their size. This finding contrasts with typical results on exit events based on business registries data, and suggests to revise the common wisdom that sees the core of the industry as a safe place and its members as most valuable economic assets.
    Keywords: firm default and exit, firm size,bootstrap probit regressions.
    JEL: C14 C25 G30 L11
    Date: 2010–05–01
  12. By: Jesús Fernández-Villaverde (Department of Economics, University of Pennsylvania); Pablo Guerrón-Quintana (Federal Reserve Bank of Philadelphia); Juan F. Rubio-Ramírez (Department of Economics, Duke University)
    Abstract: This paper compares the role of stochastic volatility versus changes in monetary policy rules in accounting for the time-varying volatility of U.S. aggregate data. Of special interest to us is understanding the sources of the great moderation of business cycle fluctuations that the U.S. economy experienced between 1984 and 2007. To explore this issue, we build a medium-scale dynamic stochastic general equilibrium (DSGE) model with both stochastic volatility and parameter drifting in the Taylor rule and we estimate it non-linearly using U.S. data and Bayesian methods. Methodologically, we show how to confront such a rich model with the data by exploiting the structure of the high-order approximation to the decision rules that characterize the equilibrium of the economy. Our main empirical findings are: 1) even after controlling for stochastic volatility (and there is a fair amount of it), there is overwhelming evidence of changes in monetary policy during the analyzed period; 2) however, these changes in monetary policy mattered little for the great moderation; 3) most of the great performance of the U.S. economy during the 1990s was a result of good shocks; and 4) the response of monetary policy to inflation under Burns, Miller, and Greenspan was similar, while it was much higher under Volcker.
    Keywords: DSGE models, Stochastic volatility, Parameter drifting, Bayesian methods
    JEL: E10 E30 C11
    Date: 2010–04–15
  13. By: Salvatore Piccolo (University of Naples "Federico II" and CSEF); Markus Reisinger (University of Munich)
    Abstract: This paper highlights the rationale for exclusive territories in a model of repeated interaction between competing supply chains. We show that exclusive territories have two countervailing effects on the incentives for manufacturers to sustain tacit collusion. First, granting local monopolies to retailers distributing a given brand softens inter- and intrabrand competition in a one-shot game. Hence, in repeated interaction the punishment profit after deviation from the collusive agreement is larger, thereby rendering deviation more profitable. Second, exclusive territories stifle deviation profits because retailers of competing brands can adjust their pricing decisions to the wholesale contract offered by a deviant manufacturer, whilst intrabrand competition would prevent this .instantaneous reaction’ mechanism. We show that the latter effect tends to dominate the former, whereby making exclusive territories a more suitable organizational mode to sustain cooperation between manufacturers. We also argue that these effects emerge only if manufacturers engage in information sharing about wholesale contracts, and show that they indeed always choose to do so in equilibrium. Otherwise, the strategic effects are absent and exclusive territories are of no use. Thus, the paper provides insights on the way exclusive territories and information sharing between supply chains should be bundled to improve manufacturers’ profits.
    Keywords: Exclusive territories, supply chains, tacit collusion, information sharing, vertical restraints.
    Date: 2010–04–14
  14. By: Nikolaos Antonakakis; Johann Scharler
    Abstract: Using the dynamic conditional correlation (DCC) model due to Engle (2002), we estimate time varying correlations of quarterly real GDP growth among the G7 countries. In general, we find that rathe heterogeneous patterns of international synchronization exist during U.S. recessions. During the 2007 - 2009 recession, however, international co-movement increased substantially.
    Keywords: Dynamic conditional correlation, Business cycle synchronization, Recession
    JEL: E3 E32 F4 F41
    Date: 2010–04
  15. By: Hirshleifer, David; Low, Angie; Teoh, Siew Hong
    Abstract: Using options- and press-based proxies for CEO overconfidence (Malmendier and Tate 2005a, 2005b, 2008), we find that over the 1993-2003 period, firms with overconfident CEOs have greater return volatility, invest more in innovation, obtain more patents and patent citations, and achieve greater innovative success for given research and development (R&D) expenditure. Overconfident managers only achieve greater innovation than non-overconfident managers in innovative industries. Overconfidence is not associated with lower sales, ROA, or Q.
    Keywords: CEO Overconfidence; Innovation; R&D; Patent
    JEL: M52 G30 M40
    Date: 2010–04–29
  16. By: Yi-Ling Cheng (Department of Economics, National Taiwan University); Shin-Kun Peng (Academia Sinica and National Taiwan University); Takatoshi Tabuchi (Faculty of Economics, University of Tokyo)
    Abstract: The paper investigates a two-stage competition in a vertical differentiated industry, where each firm produces an arbitrary number of similar qualities and sells them to heterogeneous consumers. We show that, when unit costs of quality are increasing and quadratic, each firm has an incentive to provide an interval of qualities. The finding is in sharp contrast to the single-quality outcome when the market coverage is exogenously determined. We also show that allowing for an interval of qualities intensifies competition, lowers the profits of each firm and raises the consumer surplus and the social welfare in comparison to the single-quality duopoly.
    Date: 2010–04
  17. By: Heitor Almeida; Murillo Campello; Antonio F. Galvao Jr.
    Abstract: We use Monte Carlo simulations and real data to assess the performance of alternative methods that deal with measurement error in investment equations. Our experiments show that individual-fixed effects, error heteroscedasticity, and data skewness severely affect the performance and reliability of methods found in the literature. In particular, estimators that use higher-order moments are shown to return biased coefficients for (both) mismeasured and perfectly-measured regressors. These estimators are also very inefficient. Instrumental variables-type estimators are more robust and efficient, although they require fairly restrictive assumptions. We estimate empirical investment models using alternative methods. Real-world investment data contain firm-fixed effects and heteroscedasticity, causing high-order moments estimators to deliver coefficients that are unstable across different specifications and not economically meaningful. Instrumental variables methods yield estimates that are robust and seem to conform to theoretical priors. Our analysis provides guidance for dealing with the problem of measurement error under circumstances empirical researchers are likely to find in practice.
    JEL: G3
    Date: 2010–04
  18. By: Carl Chiarella (School of Finance and Economics, University of Technology, Sydney); Corrado Di Guilmi (School of Finance and Economics, University of Technology, Sydney)
    Abstract: This paper examines the dynamics of ï¬nancial distress and in particular th emechanism of transmission of shocks from the ï¬nancial sector to the real economy. The analysis is performed by representing the linkages between microeconomic ï¬nancial variables and the aggregate performance of the economy by means of a microfounded model with ï¬rms that have heterogeneous capital structures. The model is solved both numerically and analytically, by means of a stochastic approximation that is able to replicate quite well the numerical solution. These methodologies, by overcoming the restrictions imposed by the traditional microfounded approach, enable us to provide some insights into the stabilization policies which may be effective in a ï¬nancially fragile system.
    Keywords: financial fragility; complex dynamics; stochastic aggregation
    JEL: E12 E22 E44
    Date: 2010–03–01
  19. By: Chris Jones
    Abstract: By recognising the cash flow characteristics of personal taxes on dividends Auerbach, Bradford and King find they reduce the current value of a firm’s equity without affecting the marginal cost of capital funded from retained earnings. This paper draws on work by Boadway and Bruce to show why personal taxes levied on realized capital gains have the same effects, where the common practice of approximating them with accrual based taxes set at lower rates is misleading. We use these findings to recommend reforms to dividend imputation schemes that would convert progessive personal taxes on (taxed) equity income into accrual based taxes.
    JEL: H20 G30
    Date: 2010–04
  20. By: Filippo Pavesi; Massimo Scotti
    Abstract: This paper studies the impact of reputation on the reporting strategy of experts that face conflicts of interest. The framework we propose applies to different settings involv- ing decision makers that rely on experts for making informed decisions, such as financial analysts and goverment agencies. We show that reputation has a non-monotonic effect on the degree of information revelation. In general, truthful revelation is more likely to occur when there is more uncertainty on an expert's ability. Furthermore, above a certain threshold, an increase in reputation always makes truthful revelation more difficult to achieve. Our results shed light on the relationship between the institutional features of the reporting environment and informational efficiency.
    Date: 2010–04
  21. By: Ben Ali Chiraz (ESC Amiens - ESC Amiens); Cédric Lesage (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - GROUPE HEC - CNRS : UMR2959)
    Abstract: Minority expropriation could result when controlling shareholders can expropriate minority shareholders and profit from private benefits of control. This agency conflict (named Type II) has been rarely studied, as the most commonly assumed agency conflict resides between managers and shareholders (Type I). We want to study the role of the auditors in reducing the type II agency conflict. Using an audit fees model derived from Simunic (1980), we study the impact of type I and type II agency conflicts on audit fees in code law vs common law countries. We then focus two civil law countries (Germany and France) providing a lower investor protection level, and two common law countries (the USA and UK) providing a higher investor protection level (La Porta et al. 1998, 2000). Our results show 1) a negative relation between audit fees and managerial shareholding, which is stronger for common law than for civil law countries; 2) a curvilinear (concave) relation between audit fees and controlling shareholding for civil law countries; 3) no Type II conflict in the common law countries. These results illustrate the mixed effects of the legal environment and of each agency conflict on audit fees.
    Date: 2010
  22. By: Sergei Guriev (New Economic School (Moscow)); Anton Suvorov (New Economic School (Moscow))
    Abstract: Unlike the textbook model of a top manager being an omniscient planner, coordinator and monitor, the real life managers suffer from discontinuity, lack of systematic information collection and limited time for analysis and re?ection. Why do not business leaders set up their organizations in the way that would allow themselves to make informed choices based on thorough analysis? We argue that in some situations top managers may benefit from being less informed. In our model, additional information raises ex post flexibility of the decision-makers which may undermine the ex ante incentives of their subordinates to make specific investments. The subordinates expect less informed leaders to be more committed to the original strategy which increases the returns to the strategy-specific investments. We show that this effect is more likely to take place in more predictable environments; we also discuss how this effect depends on the hierarchical structure of the organization.
    Keywords: leadership, commitment, organizational structure
    Date: 2010–04
  23. By: Riccardo De Bonis (Banca d'Italia, Economics and International Relations Area); Giovanni Ferri (Universit… degli Studi di Bari); Zeno Rotondi (UniCredit Group, Head of Research and Competitors Benchmarking,, Retail Division)
    Abstract: We show that a longer relationship length with the main bank fosters Italian firms' foreign direct investment (FDI) and, weakly, production off-shoring abroad. Possibly, longer bank relationships help secure external financing for these companies, which have become more opaque because of their internationalization. In contrast, other than for smaller-sized companies, we detect no impact on firms' propensity to export, suggesting that exporting alters enterprises' financial set-up less than shifting production internationally. We also find a link between the internationalization of the main creditor bank and firm FDIs. Our evidence suggests that reexisting strong bank-firm relationships support manufacturing firms' production internationalization.
    Keywords: bank-firm relationships, export, external finance, foreign direct investments, internationalization, off-shoring
    JEL: D21 F10 F21 F23 G21
    Date: 2010–04

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