nep-bec New Economics Papers
on Business Economics
Issue of 2010‒05‒22
twenty papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Does International Outsourcing Really Lower Workers' Income? By Koskela, Erkki; König, Jan
  2. Modeling News-Driven International Business Cycles By Beaudry, Paul; Dupaigne, Martial; Portier, Franck
  3. Managerial Effort Incentives and Market Collusion By Aubert, Cécile
  4. Using Forward Contracts to Reduce Regulatory Capture By Felix Hoeffler; Sebastian Kranz
  5. Bubbly Liquidity By Farhi, Emmanuel; Tirole, Jean
  6. Who Are You Calling Irrational? Marginal Costs, Variable Costs, and the Pricing Practices of Firms By Russell Pittman
  7. Contracting and Ideas Disclosure in the Innovation Process By Martimort, David; Poudou, Jean-Christophe; Sand-Zantman, Wilfried
  8. The Relationship between Risk, Capital and Efficiency: Evidence from Japanese Cooperative Banks By Tara Deelchand; Carol Padgett
  9. Is Producing a Private Label Counterproductive for a Branded Manufacturer? By Bergès, Fabian; Bouamra-Mechemache, Zohra
  10. Illiquidity and All Its Friends By Tirole, Jean
  11. Productivity, Quality, and Export Intensities By Rosario Crinò; Paolo Epifani
  12. Resistance to Change By James Dow; Enrico Perotti
  13. The Lifecycle of the Financial Sector and Other Speculative Industries By Biais, Bruno; Rochet, Jean-Charles; Woolley, Paul
  14. Extreme Volatilities, Financial Crises and L-moment Estimations of Tail-indexes By Bertrand B. Maillet; Jean-Philippe R. Médecin
  15. Non-Exclusive Competition in the Market for Lemons By Attar, Andrea; Mariotti, Thomas; Salanié, François
  16. Contractual Execution, Strategic Incompleteness and Venture Capital By Dessi, Roberta
  17. Shareholder Activism and Socially Responsible Investors: Equilibrium Changes in Asset Prices and Corporate Behavior By Gollier, Christian; Pouget, Sébastien
  18. The Circulation of Ideas in Firms and Markets By Thomas Hellman; Enrico Perotti
  19. Hours Worked and Permanent Technology Shocks in Open Economies By Dupaigne, Martial; Fève, Patrick
  20. Does Cointegration Matter? An Analysis in a RBC Perspective By Bisio Laura; Faccini Andrea

  1. By: Koskela, Erkki (University of Helsinki); König, Jan (Free University of Berlin)
    Abstract: We analyze the impact of international outsourcing on income, if the domestic labor market is imperfect. We distinguish in our analysis between the case where the parties negotiate over the wage only and where they negotiate over both wage and profit share. We find that in the first case outsourcing will reduce (increase) workers' income, if the labor union’s bargaining power is sufficiently high (low) and outsourcing will increase workers' income in the second case. For the amount of optimal international outsourcing, we find that it is in a pure wage bargaining system positively (negatively) affected by a sufficiently high (low) labor union's bargaining power, while in a wage and profit share bargaining system, a higher union's bargaining power decreases the optimal amount of outsourcing.
    Keywords: strategic outsourcing, profit sharing, labor market imperfection
    JEL: E23 E24 J23 J33 J82
    Date: 2010–05
  2. By: Beaudry, Paul; Dupaigne, Martial; Portier, Franck
    Abstract: This paper reexamines the question of how to explain business cycle co-movements within and between countries. First, we present two simple theoretically flexible price models to illustrate how and why news shocks can generate robust positive co-movements in economic activity across countries. We also discuss under what conditions the multi-sector version of the model generates appropriate business cycle patterns within countries. Second, we develop a quantitative two-country multi-sector model that is capable of replicating many international business cycle facts. The model is a two-country extension of the closed economy model of Beaudry and Portier [2004], in which there are limited possibilities to reallocate factors between investment and consumption good sectors.
    Keywords: business cycles, expectations, international fluctuations
    JEL: E32 F41
    Date: 2009–11
  3. By: Aubert, Cécile
    Abstract: We investigate the interactions between managers’ incentives to collude or compete, and incentives to exert effort. A manager privately chooses the competitive strategy of the firm, and his own effort to improve productivity; He may substitute collusion to effort to increase profits. High profit targets — i.e., strong effort incentives — make participating in a cartel more attractive. To answer this double moral hazard, owners may have to give the manager information rents, and to choose inefficient effort levels. This affects cartel sustainability and profitability. Because of reduced internal efficiency, welfare losses may arise even when the industry remains competitive. Antitrust policy has a novel value, specifically thanks to individual sanctions: They foster internal efficiency in competing firms while worsening it in cartelized firms. This improves both efficiency under competition and cartel deterrence. Individual fines are thus more beneficial than corporate fines; criminal sanctions are even more effective. Last, individual leniency programs have ambiguous effects, even when not used in equilibrium.
    Keywords: collusion, managerial incentives, leniency programs
    JEL: D82 K21 L41
    Date: 2009–12
  4. By: Felix Hoeffler (Department WHU - Otto Beisheim School of Management); Sebastian Kranz (Bonn Graduate School of Economics, University of Bonn)
    Abstract: A fully unbundled, regulated network firm of unknown efficiency level can untertake unobservable effort to increase the likelihood of low downstream prices, e.g. by facilitating downstream competition. To incentivize such effort, the regulator can use an incentive scheme paying transfers to the firm contingent on realized downstream prices. Alternatively, the regulator can force the firm to sell the following forward contracts: the firm pays the downstream price to the owners of a contract, but recieves the expected value of the contracts when selling them to a competivitve financial market. We compare the two regulatory tools with respect to regulatory capture: if the regulator can be bribed to suppress information on the underlying state of the world (the basic propability of high downstream prices, or the type of the firm), optimal regulation uses forward contracts only.
    Keywords: incentive regulation, regulatory capture, virtual power plants
    JEL: L42 L51 K23 L94
    Date: 2010–02
  5. By: Farhi, Emmanuel; Tirole, Jean
    Abstract: This paper analyzes the possibility and the consequences of asset price overvaluation in a dynamic economy where financially constrained firms demand and supply liquidity. Bubbles are more likely to emerge, the scarcer the supply of outside liquidity and the more limited the pledgeability of corporate income; they crowd investment in (out) when liquidity is abundant (scarce). We analyze the economic implications of firm heterogeneity, endogenous corporate governance, and stochastic bubbles. Finally we draw some implications for the way public policy could react to bubbles.
    JEL: E2 E44
    Date: 2009–10
  6. By: Russell Pittman (Director of Economic Research, Economic Analysis Group, Antitrust Division, U.S. Department of Justice, and visiting professor, New Economic School, Moscow)
    Abstract: Economists sometimes decry the persistence with which firms set prices above marginal cost and thus, according to the economists, fail to maximize profits. But it is the economists who have it wrong – first, because variable accounting costs are not always a good proxy for marginal economic costs, but more importantly because in an industry with U-shaped cost curves, a firm at a long-run sustainable equilibrium faces increasing marginal costs – i.e., a rising shadow price on some constrained input – i.e., in general, acost of capital. A corollary is that in such an industry the equilibrium mark-up over variable cost varies directly with capital intensity.
    Keywords: market power, price, mark-up, marginal cost, variable cost
    JEL: B21 D24 D43 K21 L11 L40
    Date: 2009–07
  7. By: Martimort, David; Poudou, Jean-Christophe; Sand-Zantman, Wilfried
    Abstract: We analyze the contract between an innovator and a developer, when the former has private information on his idea and the latter must exert efforts but may also quit the relationship after having been informed. We show that the equilibrium contracts distort downwards the developer's incentives but in different ways according to the strength of intellectual property rights (IPR). For example, with intermediate IPR, only pooling contracts arise with a limited amount of information revealed.
    Date: 2009–06
  8. By: Tara Deelchand (ICMA Centre, University of Reading); Carol Padgett (ICMA Centre, University of Reading)
    Abstract: The risk-capital positions of Japanese banks have been under tension throughout the 1990s. However, existing theory on the determinants of bank risk-taking still remains limited and the evidence is conflicting. Most studies concentrate on US and European banks, while empirical evidence has remained scarce for Asian banks. Added to that, to our knowledge, there are almost no papers on this subject for cooperative banks in Japan. Thus, the main contribution of this study is to shed some light on the determinants of bank risk-taking and analyse its relationship with capital and efficiency in Japanese cooperative banking (namely shinkin and credit cooperatives banks). This paper focuses on Japanese cooperative banks as they constitute an important segment of the Japanese banking sector. We employ a simultaneous equation model in which the relationships between, risk, capital and cost inefficiency are modelled. Two stage least squares with fixed effects estimation procedure are applied to a panel data set of 263 Japanese cooperative banks over the period 2003 through 2006. The results confirm the belief that risk, capital and inefficiency are simultaneously determined. The empirical model shows a negative relationship between risk and the level of capital for Japanese cooperative banks. Inefficient Japanese cooperative banks appear to operate with larger capital and take on more risk. These arguments may reflect the moral hazard problem that exists in the banking system through exploitation of the benefits of deposit insurance. We also assess the size effects and find that larger cooperative banks holding less capital take on more risk and are less efficient.
    Keywords: Risk; Capital; Efficiency; Japanese cooperative banks
    JEL: C23 D24 E44 E5 E52 G21 N25
    Date: 2009–11
  9. By: Bergès, Fabian; Bouamra-Mechemache, Zohra
    Abstract: Branded food manufacturers vindicate the use of excess production capacities (idle otherwise) to justify their production of retailers' brands. We study the distributor and food manufacturer's private label strategy for production within a framework featuring endogenous store brand quality, bargaining power, possible differences in production technology and potential capacity constraint for the branded manufacturer. According to the structure of capacity constraint (applying to both products or private label only), the retailer may prefer to choose an independent firm whereas he selected the branded manufacturer when unconstrained. The conclusions of our article thus partially confirm branded manufacturers' thinking: they may produce store brands when they are not capacity constrained
    JEL: L11 L13 Q13
    Date: 2009–12
  10. By: Tirole, Jean (University of Toulouse Capitole)
    Abstract: The recent crisis was characterized by massive illiquidity. This paper reviews what we know and don't know about illiquidity and all its friends: market freezes, fire sales, contagion, and ultimately insolvencies and bailouts. It first explains why liquidity cannot easily be apprehended through a single statistics, and asks whether liquidity should be regulated given that a capital adequacy requirement is already in place. The paper then analyzes market breakdowns due to either adverse selection or shortages of financial muscle, and explains why such breakdowns are endogenous to balance sheet choices and to information acquisition. It then looks at what economics can contribute to the debate on systemic risk and its containment. Finally, the paper takes a macroeconomic perspective, discusses shortages of aggregate liquidity and analyses how market value accounting and capital adequacy should react to asset prices. It concludes with a topical form of liquidity provision, monetary bailouts and recapitalizations, and analyses optimal combinations thereof; it stresses the need for macroprudential policies.
    JEL: E44 E52 G28
    Date: 2009–09–12
  11. By: Rosario Crinò; Paolo Epifani
    Abstract: We study how firm and foreign market characteristics affect the geographic distribution of exporter' sales. To this purpose, we use export intensities (the ratio of exports to sales) across destinations as our key measures of firms'relative involvement in heterogeneous foreign markets. In a representative sample of Italian manufacturing firms, we find a robust negative correlation between revenue-TFP and export intensity to low-income destinations and, more generally, that the correlations between export intensities and TFP are increasing in per capita income of the foreign destinations. We argue that these (and other) empirical regularities can arise from the interplay between (endogenous) cross-firm heterogeneity in product quality and cross-country heterogeneity in quality consumption. To test this conjecture, we propose a new strategy to proxy for product quality that allows to exploit some unique features of our dataset. Our results strongly suggest that firms producing higher-quality products tend to concentrate their sales in the domestic and other high-income markets.
    Keywords: Heterogeneous Firms; Export Intensities; Quality; Technical Efficiency; Total Factor Productivity (TFP)
    JEL: F1
    Date: 2010–04–08
  12. By: James Dow (LBS); Enrico Perotti (University of Amsterdam)
    Abstract: Established firms often fail to maintain leadership following disruptive market shifts. We argue that such firms are more prone to internal resistance. A radical adjustment of assets affects the distribution of employee rents, creating winners and losers. Losers resist large changes when strong customer goodwill cushions the consequences. Partial adaptation may lead winners to depart to form new firms with no goodwill, but no internal resistance.
    Keywords: Resistance to Change, Leadership, Adaptation
    JEL: D21
    Date: 2010–05
  13. By: Biais, Bruno; Rochet, Jean-Charles; Woolley, Paul
    Abstract: Speculative industries exploit novel technologies subject to two risks. First, there is uncertainty about the fundamental value of the innovation: is it strong or fragile? Second, it is difficult to monitor managers, which creates moral hazard. Because of moral hazard, managers earn agency rents in equilibrium. As time goes by and profits are observed, beliefs about the industry are rationally updated. If the industry is strong, confidence builds up. Initially this spurs growth. But increasingly confident managers end up requesting very large rents, which curb the growth of the speculative sector. If rents become too high, investors may give up on incentives, and risk and failure rates rise. Furthermore, if the innovation is fragile, eventually there is a crisis, and the industry shrinks. Our model thus captures important stylized facts of the financial innovation wave which took place at the beginning of this century.
    Date: 2009–04
  14. By: Bertrand B. Maillet (ABN AMRO Advisors, Variances and University of Paris-1 (CES/CNRS and EIF)); Jean-Philippe R. Médecin (Paris School of Economics, University of Paris-1 and Variances)
    Abstract: Following Bali and Weinbaum (2005) and Maillet et al. (2010), we present several estimates of volatilities computed with high- and low frequency data and complement their results using additional measures of risk and several alternative methods for Tail-index estimation. The aim here is to confirm previous results regarding the slope of the tail of various risk measure distributions, in order to define the high watermarks of market risks. We also produce synthetic general results concerning the method of estimation of the Tail-indexes related to expressions of the L-moments. Based on estimates of Tail-indexes, retrieved from the high frequency 30’ sampled CAC40 French stock Index series from the period 1997-2009, using Non-parametric Generalized Hill, Maximum Likelihood and various kinds of L-moment Methods for the estimation of both a Generalized Extreme Value density and a Generalized Pareto Distribution, we confirm that a heavy-tail density specification of the Log-volatility is not necessary.
    Keywords: Financial Crisis, Realized Volatility, Range-based Volatility, Extreme Value Distributions, Tail-index, L-moments, High Frequency Data.
    JEL: G10 G14
  15. By: Attar, Andrea; Mariotti, Thomas; Salanié, François
    Abstract: We consider an exchange economy in which a seller can trade an endowment of a divisible good whose quality she privately knows. Buyers compete in menus of non-exclusive contracts, so that the seller may choose to trade with several buyers. In this context, we show that an equilibrium always exists and that aggregate equilibrium allocations are generically unique. Although the good offered by the seller is divisible, aggregate equilibrium allocations exhibit no fractional trades. In equilibrium, goods of relatively low quality are traded at the same price, while goods of higher quality may end up not being traded at all if the adverse selection problem is severe. This provides a novel strategic foundation for Akerlof's (1970) results, which contrasts with standard competitive screening models postulating enforceability of exclusive contracts. Latent contracts that are issued but not traded in equilibrium turn out to be an essential feature of our construction.
    Date: 2009–06
  16. By: Dessi, Roberta
    Abstract: Contractual execution generates hard information, available to the contracting parties, even when contracts are secretly executed. Building on this simple observation, the paper shows that incomplete contracts can be preferred to complete contracts. This is because (i) execution of incomplete contracts reveals less information to outside parties, giving rise to strategic gains; (ii) secretly executed complete contracts could not do better, given the possible strategic uses of the hard information generated by execution of the contract. The key effects at work are explored in the case of financial contracts for innovative start-up companies, providing a rationale for the observed differences in the extent to which venture capital contracts include a variety of contingencies, and for how this varies across industries and geographically.
    JEL: D82 G24 L22 D86
    Date: 2009–08
  17. By: Gollier, Christian; Pouget, Sébastien
    Abstract: We examine the functioning of financial markets when firms can invest in socially responsible activities that produce an externality at a cost. We examine a model in which some investors are altruistic in the sense that they internalize the assets' extra-financial performance when they value their portfolio. There are two mechanisms by which these pro-social investors can influence firm's decisions. They can vote with their feet, thereby raising the cost of capital of non-responsible firms. They can also try to get the majority of shares to impose their view to the management. We also examine a model in which there exists a large investor who can act strategically to influence the beliefs of atomistic investors about his vote. We show that an increase in the degree of pro-social motivation of the large investor may raise its purely financial profit.
    JEL: G34 H23
    Date: 2009–09
  18. By: Thomas Hellman (University of British Columbia); Enrico Perotti (University of Amsterdam)
    Abstract: Novel early stage ideas face uncertainty on the expertise needed to elaborate them, which creates a need to circulate them widely to find a match. Yet as information is not excludable, shared ideas may be stolen, reducing incentives to innovate. Still, in idea-rich environments inventors may share them without contractual protection. Idea density is enhanced by firms ensuring rewards to inventors, while their legal boundaries limit idea leakage. As firms limit idea circulation, the innovative environment involves a symbiotic interaction: firms incubate ideas and allow employees to leave if they cannot find an internal fit; markets allow for wide circulation of ideas until matched and completed; under certain circumstances ideas may be even developed in both firms and markets.
    Keywords: Ideas, Innovation, Entrepreneurship, Firm Organization, Start-Ups
    JEL: D83 L22 M13 O31
    Date: 2010–05
  19. By: Dupaigne, Martial; Fève, Patrick
    Abstract: We use Structural Vector Autoregressions to study the impact of technology improvements on hours worked in the major seven countries. While previous studies estimate the response of labor input to permanent shocks to country -level labor productivity, we consider the response of labor input to aggregate -level labor productivity. Since labor productivities do cointegrate in the G7, the estimated responses should look very similar. They do not: for each country but Germany, the responses estimated using G7 labor productivity sizeably exceed those estimated using country -level labor productivity. These results also hold in larger SVAR models.
    JEL: C32 E32 F41
    Date: 2009–11
  20. By: Bisio Laura; Faccini Andrea
    Abstract: The aim of this paper is to verify if a proper SVEC representation of a standard Real Business Cycle model exists even when the capital stock series is omitted. The argument is relevant as the common unavailability of su¢ ciently long medium-frequency capital series prevent researchers from including capital in the widespread structural VAR (SVAR) representations of DSGE models - which is supposed to be the cause of the SVAR biased estimates. Indeed, a large debate about the truncation and small sample bias a¤ecting the SVAR performance in approximating DSGE models has been recently rising. In our view, it might be the case of a smaller degree of estimates distorsions when the RBC dynamics is approximated through a SVEC model as the information provided by the cointegrating relations among some variables might compensate the exclusion of the capital stock series from the empirical representation of the model.
    Keywords: RBC, SVAR, SVEC model, cointegration
    JEL: E27 E32 C32 C52
    Date: 2010–05

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