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on Business Economics |
| By: | Ander Pérez Orive |
| Abstract: | This paper studies the macroeconomic implications of firms' precautionary investment behavior in response to the anticipation of future financing constraints. Firms increase their demand for liquid and safe investments in order to alleviate future borrowing constraints and decrease the probability of having to forego future profitable investment opportunities. This results in an increase in the share of short-term projects that produces a temporary increase in output, at the expense of lower long-run investment and future output. I show in a calibrated model that this behavior is at the source of a novel and powerful channel of shock transmission of productivity shocks that produces short-run dampening and long-run propagation. Furthermore, it can account for the observed business cycle patterns of the aggregate and firm-level composition of investment. |
| Keywords: | Investment Choice, Financial Frictions, Business Cycles, Idiosyncratic Production Risk. |
| JEL: | D92 E22 E32 G32 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1237&r=bec |
| By: | Pau Rabanal; Juan F. Rubio-Ramirez; Federico S. Mandelman; Diego Vilan |
| Abstract: | In this paper, we first introduce investment-specific technology (IST) shocks to an otherwise standard international real business cycle model and show that a thoughtful calibration of them along the lines of Raffo (2009) successfully addresses the "quantity", "international comovement", "Backus-Smith", and "price" puzzles. Second, we use OECD data for the relative price of investment to build and estimate these IST processes across the U.S and a "rest of the world" aggregate, showing that they are cointegrated and well represented by a vector error correction model (VECM). Finally, we demonstrate that when we fit such estimated IST processes in the model instead of the calibrated ones, the shocks are actually not as powerful to explain any of the four montioned puzzles. |
| Keywords: | Business cycles , Consumption , Cross country analysis , Demand , Economic models , External shocks , International trade , Investment , Productivity , United States , |
| Date: | 2010–09–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/207&r=bec |
| By: | Ana Fostel; John Geanakoplos |
| 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: | Asset prices , Business cycles , Debt , Economic models , External shocks , Financial crisis , Housing , Housing prices , Price elasticity , |
| Date: | 2010–09–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/206&r=bec |
| By: | Fransesco Furlanetto; Martin Seneca |
| Abstract: | In this paper we study the transmission for capital depreciation shocks. The existing literature in the Real Business Cycle tradition has concluded that these shocks are irrelevant for business cycle fluctuations. We show that these shocks are a potentially important drivers of aggregate fluctuations in a New Keynesian model. Nominal rigidities and some persistence in the shock process are the key ingredients to generate co-movement across real variables. |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:ice:wpaper:wp48&r=bec |
| By: | Fabian Valencia |
| Abstract: | An important role for bank capital is that of a buffer against unexpected losses. As uncertainty about these losses increases, the theory predicts an increase in the optimal level of bank capital. This paper investigates this implication empirically with U.S. Commercial Banks data and finds statistically significant and robust evidence supporting it. A counterfactual experiment suggests that a decline in uncertainty to the lowest level measured in the sample generates an average reduction in bank capital ratios of slightly over 1 percentage point. However, I also find suggestive evidence that the intensity of this precautionary motive is stronger during recessions. From a policy perspective, these results suggest that the effectiveness of countercyclical capital requirements during bad times will be undermined by banks desire to hold more capital in response to increased uncertainty. |
| Keywords: | Banking , Banks , Business cycles , Capital , Debt , Economic models , Financial crisis , Financial risk , Global Financial Crisis 2008-2009 , Risk management , United States , |
| Date: | 2010–09–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/208&r=bec |
| By: | Smith, Jennifer (Department of Economics, University of Warwick); Elsby, Michael (University of Michigan and NBER) |
| Abstract: | The increase in unemployment in the United Kingdom that accompanied the Great Recession has been conspicuous by its moderation. The rise in joblessness is dwarfed by the recent experience of the United States, by past recessionary episodes in the U.K. and by the contraction in GDP in the U.K. Increased rates of job loss have played a dominant role in shaping the rise in British unemployment. Unemployment duration has not increased to the levels seen in previous recessions, in contrast to the U.S. where duration substantially exceeds previous peaks. Looking forward, the U.K. labour market appears to have adjusted fully to the shocks that prompted the recession. Signs of reductions in match efficiency witnessed recently in the U.S. are not mirrored in the U.K. In contrast, while long-term unemployment currently remains well below historical levels, recent estimates of job finding rates suggest that it has the potential to rise much further. Thus, a timely recovery in aggregate demand will play an important role in averting persistently high unemployment in the future. |
| Keywords: | Labour market ; business cycle ; unemployment ; worker flows JEL Classification: E24 ; J6 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:945&r=bec |
| By: | Ana Hidalgo-Cabrillana |
| Abstract: | This paper endogenizes both the choice of governance transparency at the firrm level and the portfolio decisions of investors. ln the model, managers raise money in financial markets that are subject to imperfections arising from the non-observability of output for financiers. Investors, on the other hand, observe a signal correlated with returns. Formal contracting are needed to prevent expropriation of the investor`s wealth by the manager. The contract endogenously determines the nature and formation of the cost and benefits of voluntary disclosure. Managers optimally decide on the quality of the signal —used here as the measure of governance transparency- trading off the possibility of expropriating profits against the opportunity to raise more capital. We show that one important driving force behind governance transparency is product market competition: tougher competition translates into lower frictions on the capital market, since investors have better possibilities for portfolio diversification. Managers react to this loss of bargaining power by increasing transparency. Furthermore, firms characterized by low corporate profits or firms where investor protection is strong at the country level will be more likely to avoid voluntary disclosure regimes. |
| Keywords: | Corporate governance, Voluntary disclosure, Portfolio choice, Incentives, Product market competition |
| JEL: | D82 G11 G32 G34 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we1021&r=bec |
| By: | Galina Hale; Cheryl Long |
| Abstract: | It appears to be common knowledge that external financing in China is mostly limited to state-owned firms and is hard to obtain for smaller private firms. In this paper we first confirm this pattern for more recent data and then investigate ways in which private firms overcome their financing constraints. We find that private firms reduce their need for external funds through more efficient management of inventory levels and accounts receivable. We further show that the low levels of inventories and accounts receivable in Chinese private firms are not below efficient levels and are unlikely to be a hindrance to their efficient operations. Instead, these low levels of working capital seem to be correlated with higher financial returns as well as higher productivity. We conclude that while limited access to external financing may limit the growth of private sector in the medium and long run, in the short run the lean operating budget may be contributing to Chinese private firms’ efficiency. |
| Keywords: | Business enterprises ; China |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2010-21&r=bec |
| By: | Philippe Bacchetta; Cédric Tille; Eric van Wincoop |
| Abstract: | Recent crises have seen very large spikes in asset price risk without dramatic shifts in fundamentals. We propose an explanation for these risk panics based on self-fulfilling shifts in risk made possible by a negative link between the current asset price and risk about the future asset price. This link implies that risk about tomorrow's asset price depends on uncertainty about risk tomorrow. This dynamic mapping of risk into itself gives rise to the possibility of multiple equilibria and self-fulfilling shifts in risk. We show that this can generate risk panics. The impact of the panic is larger when the shift from a low to a high risk equilibrium takes place in an environment of weak fundamentals. The sharp increase in risk leads to a large drop in the asset price, decreased leverage and reduced market liquidity. We show that the model can account well for the developments during the recent financial crisis. |
| Keywords: | financial panics and sunspot-like equilibria |
| JEL: | E44 G11 G12 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:lau:crdeep:10.05&r=bec |
| By: | Melissa Bjelland; Bruce Fallick; John Haltiwanger; Erika McEntarfer |
| Abstract: | We use administrative data linking workers and firms to study employer-to-employer flows. After discussing how to identify such flows in quarterly data, we investigate their basic empirical patterns. We find that the pace of employer-to-employer flows is high, representing about 4 percent of employment and 30 percent of separations each quarter. The pace of employer-to-employer flows is highly procyclical, and varies systematically across worker, job and employer characteristics. Our findings regarding job tenure and earnings dynamics suggest that for those workers moving directly to new jobs, the new jobs are generally better jobs; however, this pattern is highly procyclical. There are rich patterns in terms of origin and destination of industries. We find somewhat surprisingly that more than half of the workers making employer-to-employer transitions switch even broadly-defined industries (NAICS supersectors). |
| JEL: | E24 J62 J63 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:cen:wpaper:10-26&r=bec |
| By: | Shane B. Evans |
| Abstract: | This paper examines the contracting relationship between a manufacturer and a retailer when the retailer has ex ante private information, and is subject to limited liability. The contract takes place over two periods. In the first period, the retailer can make a report of private information, or take an action, either of which influences the manufacturer's beliefs about the distribution of demand states for a final good in the second period. In the second period, the retailer sells the manufacturers intermediate good into a final output market according to a variable fee schedule. The interaction of the limited liability constraints with incentive compatibility in the second stage gives rise to an expected surplus to the retailer, which the manufacturer can extract with a franchise fee. The franchise fee can also be used as a screening device or a means of eliciting the efficient first stage action from the retailer. |
| JEL: | D82 D86 L42 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2010-529&r=bec |
| By: | Laszlo Goerke; Markus Pannenberg |
| Abstract: | In Germany, there is no trade union membership wage premium, while the membership fee amounts to 1% of the gross wage. Therefore, prima facie, there are strong incentives to freeride on the benefits of trade unionism. We establish empirical evidence for a private gain from trade union membership which has hitherto not been documented: in West Germany, union members are less likely to lose their jobs than non-members. In particular, using data from the German Socio-Economic Panel we can show that roughly 50% of the observed raw differential in individual dismissal rates can be explained by the estimated average partial effect of union membership. |
| Keywords: | free-riding, trade union membership, survey data |
| JEL: | C H J J |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwsop:diw_sp324&r=bec |
| By: | Raphael A. Espinoza; Ananthakrishnan Prasad |
| Abstract: | According to a dynamic panel estimated over 1995 - 2008 on around 80 banks in the GCC region, the NPL ratio worsens as economic growth becomes lower and interest rates and risk aversion increase. Our model implies that the cumulative effect of macroeconomic shocks over a three year horizon is indeed large. Firm-specific factors related to risk-taking and efficiency are also related to future NPLs. The paper finally investigates the feedback effect of increasing NPLs on growth using a VAR model. According to the panel VAR, there could be a strong, albeit short-lived feedback effect from losses in banks’ balance sheets on economic activity, with a semi-elasticity of around 0.4. |
| Date: | 2010–10–04 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/224&r=bec |
| By: | OGAWA Kazuo; Elmer STERKEN; TOKUTSU Ichiro |
| Abstract: | This paper proposes a novel approach to investigating the propagation mechanism of balance sheet deterioration in financial institutions and firms, by extending the input-output analysis. First, we use input-output tables classified by firm size. Second, we link the input-output table with the balance sheet conditions of financial institutions and firms. Based on Japanese input-output tables, we find that the lending attitude of financial institutions affected firms' input decision in the late 1990s and the early 2000s. Simulation exercises are conducted to evaluate the effects of changes in the lending attitude toward small firms, as favorable as toward large firms, on sectoral allocations. We find that output was increased for small firms and reduced for large firms. The change in output was non-negligible, about 5.5% of the initial output of each sector. In particular it exceeded 20% in textile, iron and steel and fabricated metal products. |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:10048&r=bec |
| By: | Jaison R. Abel (Federal Reserve Bank of New York); Ishita Dey (University at Buffalo); Todd M. Gabe (University of Maine) |
| Abstract: | We estimate a model of urban productivity in which the agglomeration effect of density is enhanced by a metropolitan area’s stock of human capital. Estimation accounts for potential biases due to the endogeneity of density and industrial composition effects. Using new information on output per worker for U.S. metropolitan areas along with a measure of density that accounts for the spatial distribution of population, we find that a doubling of density increases productivity by 2 to 4 percent. Consistent with theories of learning and knowledge spillovers in cities, we demonstrate that the elasticity of average labor productivity with respect to density increases with human capital. Metropolitan areas with a human capital stock one standard deviation below the mean realize no productivity gain, while doubling density in metropolitan areas with a human capital stock one standard deviation above the mean yields productivity benefits that are about twice the average. |
| Keywords: | Agglomeration, productivity, density, knowledge spillovers |
| JEL: | R12 R30 J24 O40 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ieb:wpaper:2010/9/doc2010-30&r=bec |
| By: | Kwee, Z.; Bosch, F.A.J. van den; Volberda, H.W. |
| Abstract: | Using the upper echelons perspective together with corporate governance and strategic renewal literature, this paper investigates how top managers’ corporate governance orientation influences a firm’s strategic renewal trajectories over time. Through both a qualitative analysis (1907-2004) and a quantitative analysis (1959-2004), we investigate this under-researched question within the context of a large incumbent firm: Royal Dutch Shell plc. Our results indicate that top managers having an Anglo-Saxon corporate governance orientation are more likely to pursue exploitative and external-growth strategic renewal trajectories, while those having a Rhine corporate governance orientation are more likely to pursue exploratory and internal-growth strategic renewal trajectories. We also found a positive moderating effect of the proportion of shareholders from the Anglo-Saxon countries on exploitative and external-growth strategic renewal trajectories. Our findings indicate that top managers’ corporate governance orientation can be an important antecedent of strategic renewal and of organisational ambidexterity, both of which influence corporate longevity. |
| Keywords: | corporate governance;exploitation and exploration;Royal Dutch Shell;strategic renewal;top management team;upper echelons perspective |
| Date: | 2010–07–23 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:1765020455&r=bec |
| By: | Subhayu Bandyopadhyay; Sugata Marjit; Lei Yang |
| Abstract: | Barriers to outsourcing that are being currently implemented in the US effectively tax its companies who “export” jobs through outsourcing. The objective is to raise domestic employment. Given that many of the important international markets where the US has a comparative advantage feature non-atomistic firms, we evaluate the implications of such policies in an oligopolistic context. We find that while an outsourcing tax favors domestic workers by causing firms to switch to a greater use of domestic sources (the substitution effect), the loss in international competitiveness has a negative volume effect (the output effect), which pulls in the other direction. First, we identify the conditions that determine the relative strengths of these effects, which inform us about the conditions under which such a tax achieves its stated objective. Next, we consider the international policy interdependence that arises when a competing nation also engages in such a policy. An interesting finding is that even if a unilateral tax by the US raises its employment, this may turn around in a Nash policy equilibrium, where the competing nation abandons free trade and also engages in unilateral outsourcing policies. Finally, we extend the basic model to look at the effects of credit shortage and product differentiation. Interesting findings are that both a credit crisis (as in recent years) and increased product differentiation tend to worsen the employment effects of the outsourcing tax. The qualitative nature of our findings is similar between Cournot and Bertrand competition, suggesting that our results are robust to the mode of strategic behavior. |
| Keywords: | Contracting out ; Taxation ; Labor market |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2010-030&r=bec |