nep-bec New Economics Papers
on Business Economics
Issue of 2010‒05‒29
23 papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. From Pigou to Extended Liability: On the Optimal Taxation of Externalities under Imperfect Financial Markets. By Tirole, Jean
  2. Liquidity and Capital Requirements and the Probability of Bank Failure By Philipp Johann König
  3. Statistical Confidence Intervals for the Bank of Canada's Business Outlook Survey By Daniel de Munik
  4. Conditional Investment-Cash Flow Sensitivities and Financing Constraints By Bond, Stephen R.; Söderbom, Måns
  5. Technology Shocks around the World. By Dupaigne, Martial; Fève, Patrick
  6. Unemployment and Product Market Competition in a Cournot Model with Efficiency Wage By Zhiqi Chen; Bo Zhao
  7. Spillovers of Domestic Shocks: Will They Counteract the "Great Moderation"? By Ashoka Mody; Alina Carare
  8. Financial factors in economic fluctuations By Lawrence Christiano; Roberto Motto; Massimo Rostagno
  9. Evidence on a Real Business Cycle model with Neutral and Investment-Specific Technology Shocks using Bayesian Model Averaging. By Rodney W. Strachan; Herman K. van Dijk
  10. Credit constraints, cyclical fiscal policy and industry growth. By Aghion, P.; Hemous, D.; Kharroubi, E.
  11. Technology Choice and Incentives under Relative Performance Schemes By Matthias Kräkel; Anja Schöttner
  12. Foreign Ownership and Corporate Restructuring: Direct Investment by Emerging-Market Firms in the United States By Anusha Chari; Wenjie Chen; Kathryn M.E. Dominguez
  13. Performance, Valuation and Capital Structure: a Survey of Family Firms By Ana Paula Matias; Jorge Galvão
  14. Monopoly pricing when consumers are antagonized by unexpected price increases: a "cover version" of the Heidhues-Koszegi-Rabin model. By Spiegler, R.
  15. Changes in the wage structure in EU countries By Rebekka Christopoulou; Juan F. Jimeno; Ana Lamo
  16. Competition and Innovation: Together a Tricky Rollercoaster for Productivity. By Wiel, H.P. van der
  17. The Strategic Value of Quantity Forcing Contracts. By Martimort, David; Piccolo, Salvatore
  18. Definable and contractible contracts. By Peters, M.; Szentes, B.
  19. Gross domestic product and its components in recessions By Steven Gjerstad; Vernon L. Smith
  20. Performance Measurement and Incentive Plans By Antti Kauhanen; Sami Napari
  21. One-dimensional bargaining with Markov recognition probabilities. By Herings, P. Jean-Jacques; Predtetchinski, Arkadi
  22. From action theory to the theory of the firm By Argandoña, Antonio
  23. How performance related pay affects productivity and employment. By Gielen, A. C.; Kerkhofs, M.; Ours, J.C. van

  1. By: Tirole, Jean
    Date: 2010–04
  2. By: Philipp Johann König
    Abstract: Using the model of Rochet and Vives (2004), this note shows that a prudential regulator can in general not mitigate a bank’s failure risk solely by means of liquidity requirements. However, their effectiveness can be restored if, in addition, minimum capital requirements are met. This provides a rationale for capital requirements beyond the commonly envoked reasoning that they are to be used to control the riskiness of banks’ asset portfolios.
    Keywords: prudential regulation, liquidity requirements, minimum capital requirements, global games
    JEL: G21 G28
    Date: 2010–05
  3. By: Daniel de Munik
    Abstract: While a number of central banks publish their own business conditions indicators that rely on non-random sampling, knowledge about their statistical accuracy has been limited. Recently, de Munnik, Dupuis, and Illing (2009) made some progress in this area for the Bank of Canada's Business Outlook Survey (BOS) by estimating the impact of the Bank's non-random sampling on the accuracy of the survey results. They found no evidence that the Bank's firm-selection process results in significantly biased estimates and/or wider confidence intervals than in the random-selection case. The author deepens and extends this work by (i) outlining the statistical properties of population-proportion and balance-of-opinion questions, and demonstrating how their design affects the calculation of the confidence intervals; (ii) examining the variation in statistical confidence associated with changes in the underlying response distribution using actual quarterly BOS results; (iii) considering the possibility that statistical accuracy varies across questions; and (iv) investigating whether the statistical accuracy of the survey results changes with variations in the business cycle. The main findings are that confidence intervals around the population-proportion questions are about half of those for the balance-of-opinion questions, and that the confidence bands around both types of question can change from survey to survey when the underlying response distribution becomes more or less concentrated in particular response categories (such as “higher,” “the same,” or “lower”). The author finds that confidence intervals around the BOS population-proportion questions become somewhat narrower during periods of recession, while those for the balance-of-opinion questions vary within a similar range across the cycle.
    Keywords: Business Fluctuations and cycles; Central bank research; Regional economic developments
    JEL: C46 C81
    Date: 2010
  4. By: Bond, Stephen R. (Nuffield College, Department of Economics and Centre for Business Taxation, University of Oxford, UK and Institute for Fiscal Studies); Söderbom, Måns (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: We study the sensitivity of investment to cash flow conditional on measures of q in an adjustment costs framework with costly external …nance. We present a benchmark model in which this conditional investment-cash flow sensitivity increases monotonically with the cost premium for external …- finance, for …firms in a fi…nancially constrained regime. Using simulated data, we show that this pattern is found in linear regressions that relate invest- ment rates to measures of both cash flow and average q. We also derive a structural equation for investment from the …first order conditions of our model, and show that this can be estimated directly.<p>
    Keywords: Investment; cash flow; …financing constraints.
    JEL: D92 E22 G31
    Date: 2010–05–17
  5. By: Dupaigne, Martial; Fève, Patrick
    Date: 2009–10
  6. By: Zhiqi Chen (Department of Economics, Carleton University); Bo Zhao (School of International Trade and Economics, University of International Business and Economics)
    Abstract: This paper analyzes the impact of product market competition on unemployment, wage and welfare in a model where unemployment is caused by efficiency wage considerations and oligopolistic firms compete in quantity. It is shown that while more intensive competition in product market increases output and reduces price, it does not necessarily lead to a lower unemployment rate or a higher wage for workers. Consequently, the relationship between the intensity of competition and the level of employment (respectively, wage, welfare) is not monotonic, and, in some instances, has an inverted-U shape.
    Keywords: Cournot competition, unemployment, efficiency wage
    Date: 2010–05–17
  7. By: Ashoka Mody; Alina Carare
    Abstract: Even prior to the extreme volatility just observed, output growth volatility-following protracted decline-was flattening or mildly rising in some countries. More widespread was an increasing tendency from the mid-1990s for shocks in one country to transmit rapidly to other countries, creating the potential for heightened global volatility. The higher sensitivity to foreign shocks, in turn, appears related to stepped-up vertical specialization associated with the integration of emerging markets in international trade. Increased international spillovers call for stronger ex post coordination mechanisms when shocks are large but the best ex ante prevention strategy probably is sensible national policies.
    Keywords: Business cycles , Cross country analysis , Developed countries , Economic integration , Economic policy , Emerging markets , External shocks , Globalization , Industrial production , International trade , Production growth , Spillovers ,
    Date: 2010–03–25
  8. By: Lawrence Christiano (Northwestern University, 633 Clark Street Evanston, IL 60208 Evanston, USA.); Roberto Motto (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Massimo Rostagno (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We augment a standard monetary DSGE model to include a banking sector and financial markets. We fit the model to Euro Area and US data. We find that agency problems in financial contracts, liquidity constraints facing banks and shocks that alter the perception of market risk and hit financial intermediation — ‘financial factors’ in short — are prime determinants of economic fluctuations. They have been critical triggers and propagators in the recent financial crisis. Financial intermediation turns an otherwise diversifiable source of idiosyncratic economic uncertainty, the ‘risk shock’, into a systemic force. JEL Classification: E3, E22, E44, E51, E52, E58, C11, G1, G21, G3.
    Keywords: DSGE model, Financial frictions, Financial shocks, Bayesian estimation, Lending channel, Funding channel.
    Date: 2010–05
  9. By: Rodney W. Strachan; Herman K. van Dijk
    Abstract: The empirical support for a real business cycle model with two technology shocks is evaluated using a Bayesian model averaging procedure. This procedure makes use of a finite mixture of many models within the class of vector autoregressive (VAR) processes. The linear VAR model is extended to permit cointegration, a range of deterministic processes, equilibrium restrictions and restrictions on long-run responses to technology shocks. We find support for a number of the features implied by the real business cycle model. For example, restricting long run responses to identify technology shocks has reasonable support and important implications for the short run responses to these shocks. Further, there is evidence that savings and investment ratios form stable relationships, but technology shocks do not account for all stochastic trends in our system. There is uncertainty as to the most appropriate model for our data, with thirteen models receiving similar support, and the model or model set used has significant implications for the results obtained.
    JEL: C11 C32 C52
    Date: 2010–05
  10. By: Aghion, P.; Hemous, D.; Kharroubi, E.
    Abstract: This paper evaluates whether the cyclical pattern of fiscal policy can affect growth. We first build a simple endogenous growth model where entrepreneurs can invest either in short-run projects or in long-term growth enhancing projects. Long-term projects involve a liquidity risk which credit constrained firms try to overcome by borrowing on the basis of their short-run profits. By increasing firms' market size in recessions, a countercyclical fiscal policy will boost investment in productivity-enhancing long-term projects, and the more so in sectors that rely more on external financing or which display lower asset tangibility. Second, the paper tests this prediction using Rajan and Zingales (1998)'s diff-and-diff methodology on a panel data sample of manufacturing industries across 17 OECD countries over the period 1980-2005. The evidence confirms that the positive effects of a more countercyclical fiscal policy on value added growth, productivity growth, and R&D expenditure, are indeed larger in industries with heavier reliance on external finance or lower asset tangibility.
    Date: 2009–06
  11. By: Matthias Kräkel; Anja Schöttner
    Abstract: We identify a new problem that may arise when heterogeneous workers are motivated by relative performance schemes: If workers’ abilities and the production technology are complements, the firm may prefer not to adopt a more advanced technology even though this technology would costlessly increase each worker’s productivity. Due to the complementarity between ability and technology, under technology adoption the productivity of a more able worker increases more strongly than the productivity of a less able colleague, thereby reducing the motivation of both workers to exert effort under a relative incentive scheme. We show that this adverse incentive effect is dominant and, consequently, keeps the firm from introducing a better production technology if talent uncertainty is sufficiently high and/or monitoring of workers is sufficiently precise.
    Keywords: complementarities; heterogeneous workers; production technology; tournament.
    JEL: D82 D86 J33 M52
    Date: 2010–05
  12. By: Anusha Chari (University of North Carolina & NBER); Wenjie Chen (George Washington University); Kathryn M.E. Dominguez (University of Michigan & NBER)
    Abstract: This paper examines the recent upsurge in foreign direct investment by emerging-market firms into the United States. Traditionally, direct investment flowed from developed to developing countries, bringing with it superior technology, organizational capital, and access to international capital markets, yet increasingly there is a trend towards Òcapital flowing uphillÓ with emerging market investors acquiring a broad range of assets in developed countries. Using transaction-specific information and firm-level accounting data we evaluate the operating performance of publicly traded U.S. firms that have been acquired by firms from emerging markets over the period 1980-2007. Our empirical methodology uses a difference-in-differences approach combined with propensity score matching to create an appropriate control group of non-acquired firms. The results suggest that emerging country acquirers tend to choose U.S. targets that are larger in size (measured as sales, total assets and employment), relative to matched non-acquired U.S. firms before the acquisition year. In the years following the acquisition, sales and employment decline while profitability rises, suggesting significant restructuring of the target firms.
    Keywords: foreign direct investment, capital flows, emerging markets, acquisitions, firm performance
    JEL: F21 F37 G34
    Date: 2009–11
  13. By: Ana Paula Matias (Departamento de Gestão e Economia, Universidade da Beira Interior); Jorge Galvão (Martifer – Inovação e Gestão)
    Abstract: Most countries often have public companies with large controlling owners, typically a family or a private person (La Porta et al., 1999, 2002). This empirical evidence contrasts with the classical view of the largest dispersed firm presented by Berle and Means (1932). This picture challenges the findings by Bhattacharya and Ravikumar (2001), who predict that the shares held by families will decrease if an efficient financial market is put in place. Therefore, family firms represent an important group in the stock market today and motivate a thorough investigation of the effect of the family as a controlling owner on the firms’ performance, valuation and capital structure. The objective of this paper is three fold: first, we discuss whether family firms do really behave differently from non-family firms, and if so, how and why they are different; second, we review current literature related to how family (taking in account specific governance characteristics such as family ownership, family control and family management) affects the firms’ performance and value; third, we focus on how ownership/governance structure influences capital structure, as a proxy for risk aversion. The literature review allows us to conclude that the founder’s family control and professional (outside) management increase performance, whereas excess control via control enhancing mechanisms (such as dual class shares and pyramidal structures) and descendent management produce both lower valuation and performance. This evidence means that families have the incentives and the power to systematically expropriate the wealth from minority shareholders. Furthermore, the low debt level of family firms is considered as an external manifestation of a firm’s control risk aversion.
    Keywords: Family Firms, Ownership Structure, Firm Value, Firm Performance, Capital Structure, Risk Aversion.
    JEL: G31 G32 L25
    Date: 2010
  14. By: Spiegler, R.
    Abstract: This paper reformulates and simpli…fies a recent model by Heidhues and Koszegi (2005), which in turn is based on a behavioral model due to Koszegi and Rabin (2006). The model analyzes optimal pricing when consumers are loss averse in the sense that an unexpected price hike lowers their willingness to pay. The main message of the Heidhues-Koszegi model, namely that this form of consumer loss aversion leads to rigid price responses to cost fluctuations, carries over. I demonstrate the usefulness of this "cover version" of the Heidhues-Koszegi-Rabin model by obtaining new results: (1) loss aversion lowers expected prices; (2) the firm's incentive to adopt a rigid pricing strategy is stronger when fluctuations are in demand rather than in costs.
    Date: 2010–03
  15. By: Rebekka Christopoulou (Bronfenbrenner Life Course Center, Beebe Hall, Cornell University, Ithaca, NY 14853, USA.); Juan F. Jimeno (Banco de España, Alcalá 50, 28014 Madrid, Spain.); Ana Lamo (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We study changes in the wage structures in nine EU countries over 1995-2002 and the role of demand, supply and institutional developments in shaping these changes. Using comparable cross-country microeconomic data, we compute for each country and at each decile of the wage distribution, the part of the observed wage change that is due to changes in the composition of workers, employers, and jobs’ characteristics, and the part due to changes in the returns to these characteristics. We find that composition effects derived from changes in age, gender or education of the labour force, largely exogenous to economic developments, had a minor contribution to the observed wage dynamics. In contrast, return and composition effects from characteristics likely driven by economic developments are found most relevant to explain the observed changes. We relate wages and their various components with macroeconomic and institutional trends and find that technology and globalisation are associated with wage increases; migration is associated with declines in wages; whereas the effect of labour market institutions has been mixed. JEL Classification: J31.
    Keywords: Wage Structure, Quantile Regressions.
    Date: 2010–05
  16. By: Wiel, H.P. van der (Tilburg University)
    Abstract: This PhD thesis deals with competition and innovation as drivers of productivity. According to literature, competition and innovation seem to be indivisibly connected to each other. Competition stimulates innovation by firms, and firms that innovate try to beat their competitors otherwise they will be swallowed by them. Competition as well as innovation are main drivers of productivity growth, but according to recent insights a trade-off may exist between these drivers. In fact, the relationship could look like an inverted U suggesting that competition is not always positively correlated with innovation. If competition is too intense, it has a negative effect on innovation (and productivity). This thesis has two main goals. First, it sheds more light on how to measure competition on product markets. In that respect, it elaborates on a new competition measure, the profit elasticity (PE). Chapter 2 extensively discusses this indicator and explicitly focus on what is meant by ‘competition’. Chapter 3 provides a guide for researchers how to measure PE in practice. The second goal of this thesis is to analyze the relationship between competition, innovation and productivity. As empirical evidence for this relationship is hardly available for the Netherlands, chapter 4 fills this gap by using Dutch (aggregate) firm level data. Chapter 5 examines the link between competition and product innovation at the firm level. It particularly analyzes the effect of product differentiation related to making products less close substitutes, and hence making markets less competitive.
    Date: 2010
  17. By: Martimort, David; Piccolo, Salvatore
    JEL: D2 D23 D82 K21
    Date: 2010–02
  18. By: Peters, M.; Szentes, B.
    Abstract: This paper analyzes a normal form game in which players write contracts that condition their actions on the contracts of the other players. These contracts are required to be representable in a formal language. This is accomplished by constructing contracts which are definable functions of the Godel code of every other player’s contract. We characterize the set of outcomes that are supportable as (pure strategy) equilibrium with such contracts. With symmetric information, this is all outcomes in which all players receive at least their min max payoff. With incomplete information this all allocation rules that are incentive compatible and satisfy an individual rationality condition that we describe. We contrast the set of allocation rules that can be supported by Bayesian equilibrium with those attainable by a mechanism designer.
    Date: 2009–02
  19. By: Steven Gjerstad (Economic Science Institute, CHapman University); Vernon L. Smith (Economic Science Institute, Chapman University)
    Abstract: The recent economic crisis – already deservedly labeled the ‘great recession’ – continues to plague the health of the economy as a whole and has motivated us to probe its characteristic features and compare it to the typical economic downturn. Events during the boom and crash have been sharply delineated, progressing from (1) an unprecedented housing price bubble from 1997 to 2006, (2) rapid house price decline beginning early in 2007, (3) freezing of credit markets in August 2007, (4) rapid declines in equities prices and economic output by the middle of 2008, and (5) deterioration of the financial system in 2008 and an aggressive and unprecedented Federal Reserve intervention in the fall of 2008. This sequence of events has provided a fresh perspective with which to examine past economic cycles, and, we believe, is likely to change how economists, policy makers, investors, and others think about monetary policy, housing cycles, and business cycles. We find that eleven of the most recent fourteen economic downturns in the U.S. – from the great depression that began in 1929 to the great recession starting in late 2007 – were led by declines in housing investment. In these eleven downturns, housing investment declined before any other major component of GDP and its total decline before and during the recession was larger in percentage terms than the decline in any other major sector. In the 1945 recession – one of the three recessions in which housing was not implicated – national defense expenditures fell while all major components of private expenditure rose. The other two – in 1937-38 and 2001 – resulted primarily from declines in non-residential fixed investment that preceded and exceeded declines in any other major component of GDP. Figure 1 shows the percentage of GDP contributed by housing expenditures over the past 81 years. Although housing is not a large component of GDP – which may explain its limited role in accounts of recessions – it is volatile, it has declined before almost every recession, it has rarely declined substantially without a recession following soon afterward, and the extent of its decline emerges as a good predictor of the depth and duration of the recession that follows.2 In addition to its role as a leading indicator, and its volatility over the business cycle, housing investment has recovered faster than any other sector of the economy in every recession since 1921, with the single exception of the 1980 recession, which lasted only 12 months.
    Date: 2010–04
  20. By: Antti Kauhanen; Sami Napari
    Abstract: This paper explores performance measurement in incentive plans. Based on theory, we argue that differences in the nature of jobs between blue- and white-collar employees lead to differences in incentive systems. We find that performance measurement for white-collar workers is broader in terms of the performance measures, the organizational level of performance measurement and the time horizon. The intensity of incentives is also stronger for white-collar employees. All of these findings are consistent with theory.
    Keywords: incentive pay, performance measurement, risk versus distortion trade-off, agency theory
    JEL: J33 M52 M54
    Date: 2010–05–18
  21. By: Herings, P. Jean-Jacques (Maastricht University); Predtetchinski, Arkadi
    JEL: C78
    Date: 2010
  22. By: Argandoña, Antonio (IESE Business School)
    Abstract: Since Coase's (1937) pioneering article, the theory of the firm, especially in its neoclassical form, has developed tremendously. The criticisms leveled against it confirm its interest and usefulness - which is not to say that it cannot be improved upon or corrected in many respects. This chapter is intended to contribute to a broadening of the theory of the firm, starting from a theory of human action that encompasses a wide range of motivations. It also suggests specific ways in which the conception of the firm can be improved.
    Keywords: Action; Action theory; Firm; Motivations; Organization; Theory of the firm;
    Date: 2010–04–09
  23. By: Gielen, A. C. (Tilburg University); Kerkhofs, M.; Ours, J.C. van (Tilburg University)
    Date: 2010

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