nep-bec New Economics Papers
on Business Economics
Issue of 2010‒07‒24
twenty-two papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Rent-sharing, Holdup, and Wages: Evidence from Matched Panel Data By David Card; Francesco Devicienti; Agata Maida
  2. Strategic Orientation of Outsourcing Firms: Demystifying Key Differentiators By Kirti Sharda
  3. A Theory of Firm Decline By Gian Luca Clementi; Thomas Cooley; Sonia Di Giannatal
  4. Competition relative to Incentive Contracts in Common Agency By Seungjin Han
  5. Executive Compensation: Facts By Gian Luca Clementi; Thomas Cooley
  6. The Fixed Wage Puzzle: Why Profit Sharing Is So Hard to Implement By Jerger , Jürgen; Michaelis, Jochen
  7. The Private Memory of Aggregate Shocks By Costa, Carlos Eugênio da; Luz, Vitor F.
  8. Discordant city employment cycles By Michael T. Owyang; Jeremy M. Piger; Howard J. Wall
  9. Resolving troubled systemically important cross-border financial institutions: is a new corporate organizational form required? By Christine Cumming; Robert A. Eisenbeis
  10. Executive compensation and risk taking By Patrick Bolton; Hamid Mehran; Joel Shapiro
  11. Measuring business cycles by saving for a rainy day By Mario J. Crucini; Mototsugu Shintani
  12. Illiquidity and all its Friends By Jean Tirole
  13. Why Does Bad News Increase Volatility and Decrease Leverage? By Ana Fostel; John Geanakoplos
  14. Product Line Pricing in a Vertically Differentiated Oligopoly By George Deltas; Thanasis Stengos; Eleftherios Zacharias
  15. The asymmetric effects of tariffs on intra-firm trade and offshoring decisions By Federico J. Díez
  16. Family Values and the Regulation of Labor By Alberto Alesina; Yann Algan; Pierre Cahuc; Paola Giuliano, UCLA
  17. What Does the Corporate Income Tax Tax? A Simple Model without Capital By Laurence J. Kotlikoff; Jianjun Miao
  18. Customization in an Endogenous-Timing Game with Vertical  Differentiation By Oksana Loginova; X. Hnery Wang
  19. Nonlinearities and the Macroeconomic Effects of Oil Prices By James D. Hamilton
  20. A factor-augmented probit model for business cycle analysis By Christophe Bellégo; Laurent Ferrara
  21. Multinationals, R&D and productivity: Evidence for UK Manufacturing firms By Dolores Añon Higon; Miguel Manjon Antolin; Juan A. Mañez
  22. Leniency in Private Regulatory Enforcement: The Role of Organizational Scope and Governance By Lamar Pierce; Michael W. Toffel

  1. By: David Card; Francesco Devicienti; Agata Maida
    Abstract: When wage contracts are relatively short-lived, rent sharing may reduce the incentives for investment since some of the returns to sunk capital are captured by workers. In this paper we use a matched worker-firm data set from the Veneto region of Italy that combines Social Security earnings records for employees with detailed financial information for employers to measure the degree of rent sharing and test for holdup. We estimate wage models with job match effects, allowing us to control for any permanent differences in productivity across workers, firms, and job matches. We also compare OLS and instrumental variables specifications that use sales of firms in other regions of the country to instrument value-added per worker. We find strong evidence of rent-sharing, with a “Lester range” of variation in wages between profitable and unprofitable firms of around 10%. On the other hand we find little evidence that bargaining lowers the return to investment. Instead, firm-level bargaining in Veneto appears to split the rents after deducting the full cost of capital. Our findings are consistent with a dynamic bargaining model (Crawford, 1988) in which workers pay up front for the returns to sunk capital they will capture in later periods.
    JEL: J31
    Date: 2010–07
  2. By: Kirti Sharda
    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, super achievers, 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. [W.P. No. 2009-12-03]
    Keywords: outsourcing, highly competitive, strategic focus, super achievers, quality advocates, defenders,
    Date: 2010
  3. By: Gian Luca Clementi (New York University and RCEA); Thomas Cooley (New York University and NBER); Sonia Di Giannatal (Centro de Investigación y Docencia Económicas)
    Abstract: We study the problem of an investor that buys an equity stake in an entrepreneurial venture, under the assumption that the former cannot monitor the latter’s operations. The dynamics implied by the optimal incentive scheme is rich and quite different from that induced by other models of repeated moral hazard. In particular, our framework generates a rationale for firm decline. As young firms accumulate capital, the claims of both investor (outside equity) and entrepreneur (inside equity) increase. At some juncture, however, even as the latter keeps on growing, invested capital and firm value start declining and so does the value of outside equity. The reason is that incentive provision is costlier the wealthier the entrepreneur (the greater is inside equity). In turn, this leads to a decline in the constrained–efficient level of effort and therefore to a drop in the return to investment.
    Keywords: Principal Agent, Moral Hazard, Hidden Action, Incentives, Survival, Firm Dynamics
    JEL: D82 D86 D92 G32
    Date: 2010–06
  4. By: Seungjin Han
    Abstract: In most common agency problems, competing principals non-coop- eratively incentivize a privately-informed agent’s action choice with monetary transfer by o?ering incentive contracts (e.g., nonlinear prices) that specify the amounts of monetary transfer as a function of the part of the agent’s action that is contractible. This paper shows that when- ever contracting in common agency involves monetary transfer, the set of all equilibrium allocations relative to incentive contracts is identi- cal to the set of all equilibrium allocations relative to any complex mechanisms that assign incentive contracts contingent on the agent’s messages.
    Keywords: mechanism design; incentive contracts; nonlinear prices; common agency
    JEL: D82 C72
    Date: 2010–07
  5. By: Gian Luca Clementi (New York University and RCEA); Thomas Cooley (New York University and NBER)
    Abstract: In this paper we describe the important features of executive compensation in the US from 1993 to 2006. Some confirm what has been found for earlier periods and some are novel. Notable facts are that: the compensation distribution is highly skewed; each year, a sizeable fraction of chief executives lose money; the use of security grants has increased over time; the income accruing to CEOs from the sale of stock increased; regardless of the measure we adopt, compensation responds strongly to innovations in shareholder wealth; measured as dollar changes in compensation, incentives have strengthened over time, measured as percentage changes in wealth, they have not changed in any appreciable way.
    Keywords: CEO, Pay–Performance Sensitivity, Stock, Options
    JEL: G34 J33 M52
    Date: 2010–06
  6. By: Jerger , Jürgen; Michaelis, Jochen
    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 â€fixed wage puzzle“ by adopting a perspective of bounded rationality. We show that share arrangements that fulfill â€plausible“ constraints are not generally acceptable to both firms and unions.
    Keywords: Profit Sharing; Share Economy; Remuneration Systems
    JEL: E24 J33
    Date: 2010–04
  7. By: Costa, Carlos Eugênio da; Luz, Vitor F.
    Abstract: We study constrained efficient aggregate risk sharing and its consequence for thebehavior of macro-aggregates in a dynamic Mirrlees’s (1971) setting. Privately observedidiosyncratic productivity shocks are assumed to be independent of i.i.d. publiclyobserved aggregate shocks. Yet, private allocations display memory with respectto past aggregate shocks, when idosyncratic shocks are also i.i.d.. Under a mild restrictionon the nature of optimal allocations the result extends to more persistentidiosyncratic shocks, for all but the limit at which idiosyncratic risk disappears, andthe model collapses to a pure heterogeneity repeated Mirrlees economy identical toWerning [2007]. When preferences are iso-elastic we show that an allocation is memorylessonly if it displays a strong form of separability with respect to aggregate shocks.Separability characterizes the pure heterogeneity limit as well as the general case withlog preferences. With less than full persistence and risk aversion different from unityboth memory and non-separability characterize optimal allocations. Exploiting thefact that non-separability is associated with state-varying labor wedges, we apply abusiness cycle accounting procedure (e.g. Chari et al. [2007]) to the aggregate datagenerated by the model. We show that, whenever risk aversion is great than one ourmodel produces efficient counter-cyclical labor wedges.
    Date: 2010–07–10
  8. By: Michael T. Owyang; Jeremy M. Piger; Howard J. Wall
    Abstract: The national economy is often described as having a business cycle over which aggregate output enters and exits distinct expansion and recession phases. Analogously, national employment cycles in and out of its own expansion and contraction phases, which are closely related to the business cycle. This paper estimates city-level employment cycles for 58 large U.S. cities and documents the substantial cross-city variation in the timing, lengths, and frequencies of their employment contractions. It also shows how the spread of city-level contractions associated with U.S. recessions has tended to follow recession-specific geographic patterns. In addition, cities within the same state or region have tended to have similar employment cycles. There is no evidence, however, that similarities in employment cycles are related to similarities in industry mix. This suggests that the U.S. employment and business cycles has a spatial dimension that is independent of broad industry-level fluctuations.
    Keywords: Employment (Economic theory) ; Business cycles
    Date: 2010
  9. By: Christine Cumming; Robert A. Eisenbeis
    Abstract: This paper explores the advantages of a new financial charter for large, complex, internationally active financial institutions that would address the corporate governance challenges of such organizations, including incentive problems in risk decisions and the complicated corporate and regulatory structures that impede cross-border resolutions. The charter envisions a single entity with broad powers in which the extent and timing of compensation are tied to financial results, senior managers and risk takers form a new risk-bearing stakeholder class, and a home-country-based resolution regime operates for the benefit of all creditors. The proposal is offered 1) to highlight the point that even in the face of a more efficient and effective resolution process, incentives for excessive risk taking will continue unless the costs of risk decisions are internalized by institutions, 2) to suggest another avenue for moving toward a streamlined organizational structure and single global resolution process, and 3) to complement other proposals aimed at preserving a large role for market discipline and firm incentives in a post-reform financial system.
    Keywords: International business enterprises ; Corporate governance ; Executives - Salaries ; Financial risk management ; Reward (Psychology) ; Bank charters
    Date: 2010
  10. By: Patrick Bolton; Hamid Mehran; Joel Shapiro
    Abstract: This paper studies the connection between risk taking and executive compensation in financial institutions. A theoretical model of shareholders, debtholders, depositors, and an executive suggests that 1) in principle, excessive risk taking (in the form of risk shifting) may be addressed by basing compensation on both stock price and the price of debt (proxied by the credit default swap spread), but 2) shareholders may be unable to commit to designing compensation contracts in this way and indeed may not want to because of distortions introduced by either deposit insurance or naive debtholders. The paper then provides an empirical analysis that suggests that debt-like compensation for executives is believed by the market to reduce risk for financial institutions.
    Keywords: Executives - Salaries ; Financial risk management ; Stock - Prices
    Date: 2010
  11. By: Mario J. Crucini; Mototsugu Shintani
    Abstract: We propose a simple saving-based measure of the cyclical component in GDP. The measure is motivated by the prediction that the representative consumer changes savings in response to temporary deviations of income from its stochastic trend, while satisfying a present-value budget constraint. To evaluate our procedure, we employ the bivariate error correction model of Cochrane (1994) to the member countries of the G-7 and Australia. Our estimates reveal, that to a close approximation, the stochastic trend component of GDP is consumption and the transitory component is the error correction term, which justifies the use of our saving-based measure.
    Keywords: Business cycles ; Saving and investment ; Gross domestic product ; Consumer behavior
    Date: 2010
  12. By: Jean Tirole (Toulouse School of Economics)
    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 macro-prudential policies.
    Keywords: Liquidity, Contagion, Bailouts, Regulation
    JEL: E44 E52 G28
    Date: 2010–06
  13. By: Ana Fostel (George Washington University); John Geanakoplos (Cowles Foundation, Yale University)
    Abstract: The literature on leverage until now shows how an increase in volatility reduces leverage. However, in order to explain pro-cyclical leverage it assumes that bad news increases volatility. This paper suggests a reason why bad news is more often than not associated with higher future volatility. We show that, in a model with endogenous leverage and heterogeneous beliefs, agents have the incentive to invest mostly in technologies that become volatile in bad times. Together with the old literature this explains pro-cyclical leverage. The result also gives rationale to the pattern of volatility smiles observed in the stock options since 1987. Finally, the paper presents for the first time a dynamic model in which an asset is endogenously traded simultaneously at different margin requirements in equilibrium.
    Keywords: Endogenous leverage, Post-bad news volatility, Post-good news volatility, Volatility smile
    JEL: D52 D53 E44 G11 G12
    Date: 2010–07
  14. By: George Deltas (Department of Economics, University of Illinois, U.-C.); Thanasis Stengos (Department of Economics,University of Guelph); Eleftherios Zacharias (Department of Economics, Athens University of Business and Economics)
    Abstract: This paper empirically examines the joint pricing decision of products in a firm's product line. When products are distinguished by a vertical characteristic, those products with higher values of that characteristic will command higher prices. We investigate whether, holding the value of the characteristic constant, there is a price premium for products on the industry and/or the firm frontier, i.e., for the products with the highest value of the characteristic in the market or in a firm's product line. The existence of price premia for lower ranked products is also investigated. Finally, the paper investigates whether firms set prices to avoid cannibalizing the other products in their portfolio, whether competition with rival firms is stronger for products that are closer to the frontier compared to other products, and whether a product's price declines with the time it is offered by a firm. Using personal computer price data, we show that prices decline with the distance from the industry and firm frontiers. We find evidence that consumer tastes for brands is stronger for the consumers of frontier products (and thus competition between firms weaker in the top end of the market). Finally, there is evidence that a product's price is higher if a firm offers products with the immediately faster and immediately slower computer chip (holding the total number of a firm's offerings constant), possibly as an attempt way to reduce cannibalization.
    Keywords: Pricing, Multiproduct rms, Personal Computers, Product Entry and Exit
    JEL: L11 D43 L63
    Date: 2010
  15. By: Federico J. Díez
    Abstract: This paper studies the effects of tariffs on intra-firm trade. Building on the Antràs and Helpman (2004) North-South theoretical framework, I show that higher Northern tariffs reduce the incentives for outsourcing and offshoring, while higher Southern tariffs have the opposite effects. I also show that increased offshoring and outsourcing imply an increase in the ratio of Northern intra-firm imports to total imports, which is an empirically testable prediction. Using a highly disaggregated dataset of U.S. (the North) imports and relevant tariffs, I find robust evidence to support the model's predictions.
    Keywords: Tariff ; Contracting out ; Trade
    Date: 2010
  16. By: Alberto Alesina (Harvard and Igier); Yann Algan (Sciences Po, Ofce); Pierre Cahuc (Ecole Polytechnique, Crest); Paola Giuliano, UCLA (UCLA)
    Abstract: Flexible labor markets requires geographically mobile workers to be efficient. Otherwise, firms can take advantage of the immobility of workers and extract monopsony rents. In cultures with strong family ties, moving away from home is costly. Thus, individuals with strong family ties rationally choose regulated labor markets to avoid moving and limiting the monopsony power of firms, even though regulation generates lower employment and income. Empirically, we do find that individuals who inherit stronger family ties are less mobile, have lower wages, are less often employed and support more stringent labor market regulations. There are also positive cross-country correlations between the strength of family ties and labor market rigidities. Finally, we find positive correlations between labor market rigidities at the beginning of the twenty first century and family values prevailing before World War II, which suggests that labor market regulations have deep cultural roots.
    Keywords: Family Values, Regulation of Labor, Labor Markets
    JEL: J J2 J4
    Date: 2010–05
  17. By: Laurence J. Kotlikoff; Jianjun Miao
    Abstract: The economics workings of the corporate income tax remain controversial. Harberger’s seminal 1962 article viewed the tax as raising the cost of capital used to produce corporate goods. But corporate goods can be and generally are made by non-corporate firms, suggesting that the corporate tax penalizes the act of incorporating, not the decision of already incorporated firms to hire capital. This paper makes this point with a simple, capital-less model featuring entrepreneurs, with risky production technologies, deciding whether or not to go public. Doing so means selling shares, which is costly and triggers the firm’s classification as a corporation subject to income taxation. But going public has an upside. It permits entrepreneurs to diversify their assets. In discouraging incorporation, the corporate tax taxes business risk-sharing, keeping more entrepreneurs private and, thus, exposed to more risk. The added risk experienced by these entrepreneurs limits their demands for labor whose costs must be paid come what may. And less demand for labor spells a lower wage. Thus, the corporate tax is, as a general rule, borne, in part, by labor. But it is borne primarily by high-skilled entrepreneurs who decide to remain incorporated despite the attendant tax liability. While it hurts high-skilled entrepreneurs and low-skilled workers, the corporate tax benefits middle-skilled entrepreneurs who remain private, but are able, thanks to the tax, to hire labor at a lower cost. The reduction in labor costs has one other key effect. It induces low-skilled entrepreneurs to set up their own risky businesses rather than work for others. This represents a second channel through which the corporate tax induces excessive business.
    JEL: H22 H31 H32
    Date: 2010–07
  18. By: Oksana Loginova (Department of Economics, University of Missouri-Columbia); X. Hnery Wang (Department of Economics, University of Missouri-Columbia)
    Abstract: We study customization in a duopoly game in which the firms' products have different qualities. Whether customization choices are made simultaneously or sequentially is endogenously determined. Specifically, the customization stage of the game involves two periods. Each firm either selects its product type in period 1 or postpones this decision to period 2. We show that both quality and endogenous timing play important roles in determining the equilibrium outcome. Customization occurs only if the quality difference is sufficiently large. Endogeneity of timing in the customization stage sometimes enables the firms to achieve an outcome that is Pareto superior to that if they were to make their customization choices simultaneously. Although the higher quality firm is more likely to customize, in some circumstances endogenous timing allows the lower quality firm to obtain an advantage that it would not have under simultaneous customization choices.
    Keywords: customization, horizontal differentiation, vertical differentiation, endogenous timing
    JEL: D43 L13 C72
    Date: 2010–07–02
  19. By: James D. Hamilton
    Abstract: This paper reviews some of the literature on the macroeconomic effects of oil price shocks with a particular focus on possible nonlinearities in the relation and recent new results obtained by Kilian and Vigfusson (2009).
    JEL: E32 Q43
    Date: 2010–07
  20. By: Christophe Bellégo; Laurent Ferrara
    Abstract: Dimension reduction of large data sets has been recently the topic of interest of many research papers dealing with macroeconomic modelling. Especially dynamic factor models have been proved to be useful for GDP nowcasting or short-term forecasting. In this paper, we put forward an innovative factor-augmented probit model in order to analyze the business cycle. Factor estimation is carried either by standard statistical methods or by allowing a richer dynamic behaviour. An application is provided on euro area data in order to point out the ability of the model to detect recessions over the period 1974-2008.
    Date: 2010
  21. By: Dolores Añon Higon (ERI-CES); Miguel Manjon Antolin (Universidad Rovira i Virgili); Juan A. Mañez (ERI-CES)
    Abstract: In this study we analyze multinationality (domestic-based firms vs. multinationals) and foreignness (foreign vs. domestic firms) effects in the returns of R&D to productivity. We follow a two-step strategy. In the first step, we consistently estimate firm’s productivity by GMM and numerically compute the sample distribution of the R&D returns. In the second step, we use stochastic dominance techniques to make inferences on the multinationality and foreignness effects. Results for a panel of UK manufacturing firms suggest that multinationality and foreignness effects operate in an opposite way: whilst the multinationality effect enhances R&D returns, the foreignness diminishes them.
    Keywords: multinationals, foreignness, R&D, productivity
    JEL: C14 D24 F23
    Date: 2010–07
  22. By: Lamar Pierce (Olin Business School, Washington University in St. Louis); Michael W. Toffel (Harvard Business School, Technology and Operations Management Unit)
    Abstract: Profit-seeking firms can present efficiency improvements when performing functions traditionally relegated to government. Yet these potential cost-efficiencies from market competition are often offset by poor enforcement quality resulting from moral hazard, which can be particularly onerous when outsourcing enforcement of government regulation. In this paper, we argue that the considerable moral hazard of private regulatory enforcement can be mitigated by the scope of organizations' product/service portfolios and by private governance mechanisms. These organizational characteristics affect the stringency of enforcement through reputation and customer loyalty, differential impacts of government sanctions, and standardization and internal monitoring of operations. We test our theory in the context of vehicle emissions testing in a state in which the government has outsourced inspection and enforcement to private sector establishments. Analyzing millions of emissions tests, we find empirical support for our hypotheses that particular forms of firm governance and product portfolios can mitigate moral hazard.
    Date: 2010–07

This nep-bec issue is ©2010 by Christian Calmes. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.