nep-bec New Economics Papers
on Business Economics
Issue of 2010‒07‒31
twenty papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Organizational Capital and the International Co-movement of Investment By Alok Johri; Marc-Andre Letendre; Daqing Luo
  2. The CSR-Firm Performance Missing Link: Complementarity Between Environmental, Social and Business Behavior Criteria? By Sandra Cavaco; Patricia Crifo
  3. Wages, labor or prices : How do firms react to shocks ? By Emmanuel Dhyne; Martine Druant
  4. Financial regulation, financial globalization and the synchronization of economic activity By Sebnem Kalemli-Ozcan; Elias Papaioannou; José-Luis Peydró
  5. Subsidizing Consumption to Signal Quality of Workers By De Borger B.; Glazer A.
  6. Exports, Imports and Wages:Evidence from Matched Firm-Worker-Product Panels By Pedro Martins; Luca David Opromolla
  7. Does housing really lead the business cycle? By Luis J. Álvarez; Alberto Cabrero
  8. Endogenized Production Sets in a General Equilibrium Model with Incomplete Markets By Pascal Christian Stiefenhofer;
  9. Corporate Equilibrium Properties of a Centralized Objective Function GEI Model By Pascal Christian Stiefenhofer;
  10. Bankers' pay and extreme wage inequality in the UK. By Bell, Brian; Van Reenen, John
  11. Expectations-Driven Cycles in the Housing Market By Luisa Lambertini; Caterina Mendicino; Maria Tereza Punzi
  12. Nonstationary Extremes and the US Business Cycle By Miguel de Carvalho; K. Feridum Turkman; António Rua
  13. Do Banking Shocks Matter for the U.S. Economy? By Naohisa Hirakata; Nao Sudo; Kozo Ueda
  14. On the co-evolution of investment and bargaining norms By L. Bagnoli; G. Negroni
  15. The internationalization process of Italian fashion firms: the governance role of the founding team By Ernesto Tavoletti
  17. A Dynamic Duopoly Investment Game under Uncertain Market Growth By Boyer, Marcel; Lasserre, Pierre; Moreaux, Michel
  18. The Fundamental Determinants of Credit Default Risk for European Large Complex Financial Institutions By Inci Ötker; Jiri Podpiera
  19. A Model of Housing Stock for Canada By David Dupuis; Yi Zheng
  20. The information value of the stress test and bank opacity By Donald P. Morgan; Stavros Peristiani; Vanessa Savino

  1. By: Alok Johri; Marc-Andre Letendre; Daqing Luo
    Abstract: A productivity shock leads to a large international transfer of capital and negative co-movement of investment in the typical two-country real business cycle model. Most recent models that attempt to reduce or remove this transfer produce unrealistically low investment volatility. We show that adding organizational capital to the technological environment of a relatively standard international business cycle model can ameliorate this problem. In addition we show that GHH preferences along with the above modification are sufficient to deliver positive cross-country correlations of consumption, hours, output and investment.
    Keywords: International RBC; learning by doing; organizational capital; cross-country correlations; investment
    JEL: F41 F21 E32
    Date: 2010–07
  2. By: Sandra Cavaco (LEM - Laboratoire d'Economie Moderne - Université Panthéon-Assas - Paris II); Patricia Crifo (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, University Paris X - (-), Catholic University of Louvain - (-))
    Abstract: This article analyzes the relationship between corporate social responsibility (CSR) and firm performance by proposing a theoretical model and by testing empirically its main predictions on a matched panel database for the biggest European listed firms over the 2002-2007 period. Our dataset gathers two sources of information: environmental, social and governance (ESG) ratings from the Vigeo database, and economic and financial performance data from the Orbis database. Using the System GMM estimator for dynamic panel data model, we test the complementarity and substitutability, that is the super- and sub- modularity between various corporate social responsibility practices, along with its impact on firm performance. We do observe that a complementarity premium on specific CSR dimensions (human resources and business behavior towards customers and suppliers) exists but also that some practices are relative substitutes (environment and business behaviors).
    Keywords: Corporate social responsibility ; supermodularity ; panel data
    Date: 2010–07–21
  3. By: Emmanuel Dhyne (National Bank of Belgium, Research Department; Université de Mons); Martine Druant (National Bank of Belgium, Research Department)
    Abstract: Survey results in 15 European countries for almost 15,000 firms reveal that Belgian firms react more than the average European firm to adverse shocks by reducing permanent and temporary employment. On the basis of a firm-level analysis, this paper confirms that the different reaction to shocks is significant and investigates what factors explain this difference. Although the explanatory value of the variables is limited, most of the explanatory power of the model being associated with the dummy variables coding for firm size, sector and country, the variables investigated provide valuable information. The importance of wage bargaining above the firm level, the automatic system of index-linking wages to past inflation, the limited use of flexible pay, the high share of low-skilled blue-collar workers, the labor intensive production process as well as the less stringent legislation with respect to the protection against dismissal are at the basis of the stronger employment reaction of Belgian firms. On the contrary, employment is safeguarded by the presence of many small firms and a wage cushion
    Keywords: survey, wage rigidity, cost-push shocks, demand shock, wage bargaining institutions, indexation
    JEL: D21 E30 J31
    Date: 2010–07
  4. By: Sebnem Kalemli-Ozcan (University of Houston, Department of Economics, Houston, TX, 77204, USA.); Elias Papaioannou (Dartmouth College, 6106 Rockefeller Hall, 319 Silsby Hanover, NH 03755, USA.); José-Luis Peydró (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We identify the effect of financial integration on international business cycle synchronization, by utilizing a confidential database on banks’ bilateral exposure and employing a country-pair panel instrumental variables approach. Countries that become more integrated over time have less synchronized growth patterns, conditional on global shocks and country-pair factors. To account for reverse causality and measurement error, we exploit variation in the transposition dates of financial legislation. We find that increases in financial integration stemming from regulatory harmonization policies are followed by more divergent cycles. Our results contrast with those of the previous studies which suffer from the standard identification problems. JEL Classification: E32, F15, F36, G21, G28, O16.
    Keywords: Banking Integration, Co-movement, Fluctuations, Financial Legislation.
    Date: 2010–07
  5. By: De Borger B.; Glazer A.
    Abstract: A firm whose profits increase when outsiders believe that it pays high wages may induce its workers to over-consume goods that signal high compensation. One implication is that firms may lobby for government subsidies when they offer fringe benefits with high signaling value, such as company cars, to their employees. We show that under plausible conditions the provision of fringe benefits indeed can signal the firm's type. Moreover, we demonstrate the existence of multiple equilibria---one equilibrium has no firm providing certain fringe benefits, whereas another equilibrium has fringe signal the firm's type. The paper further shows that a firm that provides the fringe benefit may oppose a government subsidizing it too heavily, because a large subsidy could destroy the signaling value of the benefit. The analysis shows that an employer may even provide a fringe benefit to employees who place no value on it. Our results are consistent with many stylized facts on the provision of fringe benefits by firms.
    Date: 2010–07
  6. By: Pedro Martins; Luca David Opromolla
    Abstract: The analysis of the effects of firm-level international trade on wages has so far focused on the role of exports, which are also typically treated as a composite good. However, we show in this paper that firm-level imports can actually be a wage determinant as important as exports. Furthermore, we also find significant differences in the relationship between trade and wages across types of products. In particular, firms that increase their exports (imports) of high- (intermediate-) technology products tend to increase their salaries. Our analysis is based on unique data from Portugal, obtained by merging a matched firm-worker panel and a matched firm-transaction panel. Our data set follows the population of manufacturing firms and all their workers from 1995 to 2005 and allows for several control variables, including jobspell fixed effects.
    JEL: F16 J31 F15
    Date: 2010
  7. By: Luis J. Álvarez (Banco de España); Alberto Cabrero (Banco de España)
    Abstract: The aim of this paper is to characterize the cyclical properties of Spanish real and nominal housing related variables. Our three main results are: First, housing appears to lead the business cycle. Second, fluctuation in home prices are positively related to those of residential investment, suggesting the dominant role of demand factors over supply ones. Third,there are interesting asymmetries in cyclical fluctuations: contractions in GDP appear to be briefer than expansions.
    Keywords: Housing, business cycles, filtering
    JEL: E32 R21 R32
    Date: 2010–07
  8. By: Pascal Christian Stiefenhofer;
    Abstract: The paper develops a general equilibrium model with incomplete markets where the asset structure is endogenized. This asset structure allows to consider a new class of objective functions of profit maximizing firms. This class of objective functions is independent of the utilities of the stock holders. Corporate equilibrium properties are studied for this model. It is shown that the organization of production is generally efficient. This result is a consequence of the generalization of the separation theorem of the Arrow-Debreu model to incomplete markets. Finally, the paper shows that corporate equilibria are not independent of the firms financial activities.
    Date: 2010–07
  9. By: Pascal Christian Stiefenhofer;
    Abstract: We introduce an incomplete markets general equilibrium model with idiosyncratic risk, where production is financed via stock market, and where the ownership structure endogenized. This model is a variation of Drèze (1974), Grossman and Hart (1979), and Magill and Quinzii (2002). The paper discusses two main corporate equilibrium properties. It shows that (i) the class of centralized objective functions introduces a further source of inefficiency into the organization of production, and (ii) the indeterminacy of corporate equilibria. (iii) It further shows the separation of the economic decisions of the agents.
    Date: 2010–07
  10. By: Bell, Brian; Van Reenen, John
    Abstract: It is well known that the distribution of income in the United Kingdom has widened considerably in the last three decades. This rise has been a result of a widening at both the top and bottom of the wage distribution. More recently, most of the action appears to have occurred at the top of the distribution with lower wage workers keeping pace with the median. This paper explores this increased dispersion at the very top of the wage distribution. We show that the growth has occurred primarily within the top few percentiles and that the rise in inequality in recent years is much more pronounced when we focus on annual earnings as opposed to weekly wages (where most work has concentrated). This is because annual wages include bonuses. By the end of the decade to 2008, the top tenth of earners received £20bn more purely due to the increase in their share (it would have been only £173bn had their share of the pie remained the same as 1998), and £12bn of this went to workers in the financial sector (almost all of which was bonus payments). We consider various reasons why the bankers have managed to capture an increasing share of the wage bill over the last decade.
    Date: 2010
  11. By: Luisa Lambertini; Caterina Mendicino; Maria Tereza Punzi
    Abstract: This paper analyzes housing market boom-bust cycles driven by changes in households' expectations. We explore the role of expectations not only on productivity but on several other shocks that originate in the housing market, the credit market and the conduct of monetary policy. We find that, in the presence of nominal rigidities, expectations on both the conduct of monetary policy and future productivity can generate housing market boom-bust cycles in accordance with the empirical findings. Moreover, expectations of either a future reduction in the policy rate or a temporary increase in the central bank's inflation target that are not fulfilled generate a macroeconomic recession. Increased access to credit generates a boom-bust cycle in most variables only if it is expected to be reversed in the near future.<br>
    JEL: E32 E44 E52
    Date: 2010
  12. By: Miguel de Carvalho; K. Feridum Turkman; António Rua
    Abstract: Considerable attention has been devoted to the statistical analysis of extreme events. Classical peaks over threshold methods are a popular modelling strategy for extreme value statistics of stationary data. For nonstationary series a variant of the peaks over threshold analysis is routinely applied using covariates as a means to overcome the lack of stationarity in the series of interest. In this paper we concern ourselves with extremes of possibly nonstationary processes. Given that our approach is, in some way, linked to the celebrated Box-Jenkins method, we refer to the procedure proposed and applied herein as Box-Jenkins-Pareto. Our procedure is particularly appropriate for settings where the parameter covariate model is non-trivial or when well qualified covariates are simply unavailable. We apply the Box-Jenkins-Pareto approach to the weekly number of unemployment insurance claims in the US and exploit the connection between threshold exceedances and the US business cycle.
    JEL: C16 C50 E32
    Date: 2010
  13. By: Naohisa Hirakata (Deputy Director and Economist, Research and Statistics Department, Bank of Japan (E-mail:; Nao Sudo (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Kozo Ueda (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: kouzou.ueda
    Abstract: Recent financial turmoil and existing empirical evidence suggest that adverse shocks to the financial intermediary (FI) sector cause substantial economic downturns. The quantitative significance of these shocks to the U.S. business cycle, however, has not received much attention up to now. To determine the importance of these shocks, we estimate a sticky-price dynamic stochastic general equilibrium model with what we describe as chained credit contracts. In this model, credit- constrained FIs intermediate funds from investors to credit-constrained entrepreneurs through two types of credit contract. Using Bayesian estimation, we extract the shocks to the FIs' net worth. The shocks are cyclical, typically negative during a recession, such as the one that began in 2007. Their effects are persistent, lowering economic activity for several quarters after the recessionary trough. According to the variance decomposition, shocks to the FI sector are a main source of the spread variations, explaining 39% of the FIs' borrowing spread and 23% of the entrepreneurial borrowing spread. At the same time, these shocks play an important but not dominant role for investment, accounting for 15% of its variations.
    Keywords: Monetary Policy, Financial Accelerators, Financial Intermediaries, Chained Credit Contracts
    JEL: E31 E44 E52
    Date: 2010–07
  14. By: L. Bagnoli; G. Negroni
    Abstract: Two parties bargaining over a pie whose size is determined by the investment decisions of both. The bargaining rule is sensitive to the investment behavior. If a symmetric investments profile is observed, bargaining proceeds according to the Nash Demand Game; otherwise bargaining proceeds according to the Ultimatum Game. We are interested in the evolutionary emergence of both an efficient investment norm and a bargaining norm. Under some conditions we prove that these norms co-evolve; when this happens they support the efficient investment and the egalitarian distribution of the surplus. In addition, when surplus requires that at least one agent invests, then either both norms co-evolve or no norm evolves.
    JEL: C78 L41
    Date: 2010–07
  15. By: Ernesto Tavoletti (University of Macerata)
    Abstract: <div style="text-align: justify;">This study aims at exploring the process of internationalization in the Italian fashion firms, focusing on strategy-structure fit and the governance role of the founding team in providing such a fit. It does so with a single case study of a leading fashion firm. It suggests that classic deterministic theories about strategy-structure fit in growing firms offer poor guide. The strategy is entirely \emergent" and inspired by the specific talents of the founding team. Evidence confirms the causal link between strategy and structure: company structure is network based and evolves according to the emerging strategy. However, the development route does not follow any deterministic model: Uppsala's model of incremental and cognitive internationalisation, especially in its revisited and network based form, appears to be the more appropriate reference for the case, characterised by creative dynamics that are constantly evolving, following the vision and strategy that are constantly provided by the founding team.</div>
    Keywords: network,fashion industry,strategy,founding team,internationalisation,structure
    JEL: L20 L21 F23 M10
    Date: 2010–07
  16. By: Mohamed Belhaj (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579)
    Abstract: This paper proposes a simple continuous time model to analyze capital charges for operational risk. We find that undercapitalized banks have less incentives to reduce their operational risk exposure. We view operational risk charge as a tool to reduce the moral hazard problem. Our results show, that only Advanced Measurement Approach may create appropriate incentives to reduce the frequency of operational losses, while Basic Indicator Approach appears counterproductive.
    Keywords: Operational Risk, Capital Requirements, Dividends, Basel Accords
    Date: 2010–07–20
  17. By: Boyer, Marcel (Université de Montréal); Lasserre, Pierre (Université du Québec à Montréal); Moreaux, Michel (Toulouse School of Economics (IDEI and LERNA))
    Abstract: We model investments in capacity in a homogeneous product duopoly facing uncertain demand growth. Capacity building is achieved through adding production units that are durable and lumpy and whose cost is irreversible. There is no exogenous order of moves, no first-mover or second-mover advantage, no commitment, and no finite horizon; while building their capacity over time, firms compete `a la Cournot in the product market. We investigate Markov Perfect Equilibrium (MPE) paths of the investment game, which may include preemption episodes and tacit collusion episodes. However, when firms have not yet invested in capacity, the sole pattern that is MPEcompatible is a preemption episode with firms investing at different times, but both have equal value. The first such investment may occur earlier, and therefore be riskier, than socially optimal. When both firms hold capacity, tacit collusion episodes may be MPE-compatible with firms investing simultaneously at a postponed time (generating an investment wave in the industry). We show that the emergence of such episodes is favored by higher demand volatility, faster market growth, and lower discount rate (cost of capital).
    JEL: C73 D43 D92 L13
    Date: 2010–07–06
  18. By: Inci Ötker; Jiri Podpiera
    Abstract: This paper attempts to identify the fundamental variables that drive the credit default swaps during the initial phase of distress in selected European Large Complex Financial Institutions (LCFIs). It uses yearly data over 2004 - 08 for 29 European LCFIs. The results from a dynamic panel data estimator show that LCFIs’ business models, earnings potential, and economic uncertainty (represented by market expectations about the future risks of a particular LCFI and market views on prospects for economic growth) are among the most significant determinants of credit risk. The findings of the paper are broadly consistent with those of the literature on bank failure, where the determinants of the latter include the entire CAMELS structure - that is, Capital Adequacy, Asset Quality, Management Quality, Earnings Potential, Liquidity, and Sensitivity to Market Risk. By establishing a link between the financial and market fundamentals of LCFIs and their CDS spreads, the paper offers a potential tool for fundamentals-based vulnerability and early warning system for LCFIs.
    Date: 2010–06–29
  19. By: David Dupuis; Yi Zheng
    Abstract: Using an error-correction model (ECM) framework, the authors attempt to quantify the degree of disequilibrium in Canadian housing stock over the period 1961–2008 for the national aggregate and over 1981–2008 for the provinces. They find that, based on quarterly data, the level of housing stock in the long run is associated with population, real per capita disposable income, and real house prices. Population growth (net migration, particularly for the western provinces) is also an important determinant of the short-run dynamics of housing stock, after controlling for serial correlation in the dependent variable. Real mortgage rates, consumer confidence, and a number of other variables identified in the literature are found to play a small role in the short run. The authors’ model suggests that the Canadian housing stock was 2 per cent above its equilibrium level at the end of 2008. There was likely overbuilding, to varying degrees, in Saskatchewan, New Brunswick, British Columbia, Ontario, and Quebec.
    Keywords: Domestic demand and components
    JEL: E21 J00
    Date: 2010
  20. By: Donald P. Morgan; Stavros Peristiani; Vanessa Savino
    Abstract: We investigate whether the “stress test,” the extraordinary examination of the nineteen largest U.S. bank holding companies conducted by federal bank supervisors in 2009, produced the information demanded by the market. Using standard event study techniques, we find that the market had largely deciphered on its own which banks would have capital gaps before the stress test results were revealed, but that the market was informed by the size of the gap; given our proxy for the expected gap, banks with larger capital gaps experienced more negative abnormal returns. Our findings suggest that the stress test helped quell the financial panic by producing vital information about banks. Our findings also contribute to the academic literature on bank opacity and the value of government monitoring of banks.
    Keywords: Bank capital ; Bank examination ; Bank holding companies
    Date: 2010

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