nep-bec New Economics Papers
on Business Economics
Issue of 2010‒10‒30
fifteen papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Cross–Sectoral Variation in Firm–Level Idiosyncratic Risk By CASTRO, Rui; CLEMENTI, Gian Luca; LEE, Yoonsoo
  2. Corporate Control and Executive Selection By Francesco Lippi; Fabiano Schivardi
  3. Endogenous Information Flows and the Clustering of Announcements By Viral V. Acharya; Peter M. DeMarzo; Ilan Kremer
  4. Financial Frictions, Investment, and Institutions By Stijn Claessens; Kenichi Ueda; Yishay Yafeh
  5. Relational Incentive Contracts By James M. Malcomson
  6. Hayashi meets Kiyotaki and Moore: a theory of capital adjustment costs By Pengfei Wang; Yi Wen
  7. Disarmed and Disadvantaged: Canada’s Workers Need More Physical Capital to Confront the Productivity Challenge By Colin Busby; William B.P. Robson
  8. Labor Laws and Innovation By Viral V. Acharya; Ramin P. Baghai; Krishnamurthy V. Subramanian
  9. The Output Gap, the Labor Wedge, and the Dynamic Behavior of Hours By Sala, Luca; Söderström, Ulf; Trigari, Antonella
  10. Complementarities between Workplace Organisation and Human Resource Management: By Michael Beckmann; Dieter Kuhn
  11. "Firm Heterogeneity under Financial Imperfection: Impacts of Trade and Capital Movement" By Taiji Furusawa; Noriyuki Yanagawa
  12. Changes in the Second-Moment Properties of Disaggregated Capital Flows By Silvio Contessi; Pierangelo De Pace; Johanna Francis
  13. Managerial Incentives and Stackelberg Equilibria in Oligopoly By Marcella Scrimitore
  14. Similarities and Differences between the Manufacturing and the Service Sectors: An empirical analysis of Japanese automobile related industries By KATO Atsuyuki
  15. Partial collusion with asymmetric cross-price effects By L. Savorelli

  1. By: CASTRO, Rui; CLEMENTI, Gian Luca; LEE, Yoonsoo
    Date: 2010
  2. By: Francesco Lippi; Fabiano Schivardi
    Abstract: We present a model in which the owner of the firm enjoys a private benefit from developing a personal relationship with the executives. This may lead the owner to retain a senior executive in office even though a more productive replacement is available. The model shows that the private returns of the employment relationship distort executive selection, reducing the executives’ average ability and the firm productivity. We estimate the structural parameters of the model using a panel of Italian firms with information on the nature of the controlling shareholder, matched with individual records of their executives. These estimates are used to quantify the relevance of private returns and the related productivity gap across firms characterized by four different types of ownership - government, family, conglomerate and foreign. We find that private returns are large in family and government controlled firms, while smaller with other ownership types. The resulting distortion in executive selection can account for TFP differentials between control types of about 10%. The structural estimates are fully consistent with a set of model-based OLS regressions, even though the sample moments used by the two approaches are different.
    Keywords: corporate governance; private returns; TFP
    JEL: D2 G32 L2
    Date: 2010
  3. By: Viral V. Acharya; Peter M. DeMarzo; Ilan Kremer
    Abstract: We consider the strategic timing of information releases in a dynamic disclosure model. Because investors don’t know whether or when the firm is informed, the firm will not necessarily disclose immediately. We show that bad market news can trigger the immediate release of information by firms. Conversely, good market news slows the release of information by firms. Thus, our model generates clustering of negative announcements. Surprisingly, this result holds only when firms can preemptively disclose their own information prior to the arrival of external information. These results have implications for conditional variance and skewness of stock returns.
    JEL: D82 G14 G30 M41
    Date: 2010–10
  4. By: Stijn Claessens; Kenichi Ueda; Yishay Yafeh
    Abstract: Financial frictions have been identified as key factors affecting economic fluctuations and growth. But, can institutional reforms reduce financial frictions? Based on a canonical investment model, we consider two potential channels: (i) financial transaction costs at the firm level; and (ii) required return at the country level. We empirically investigate the effects of institutions on these financial frictions using a panel of 75,000 firm-years across 48 countries for the period 1990 - 2007. We find that improved corporate governance (e.g., less informational problems) and enhanced contractual enforcement reduce financial frictions, while stronger creditor rights (e.g., lower collateral constraints) are less important.
    Date: 2010–10–15
  5. By: James M. Malcomson
    Abstract: This chapter reviews the literature on the theory of relational incentive contracts. It motivates the discussion by the classic applications of relational contracts to the GM-Fisher Body relationship and the relationships between Japanese automobile manufacturers and their subcontractors. It presents basic models with symmetric information to illustrate the fundamental issues and then goes on to consider specific investments, the role of legally enforceable contracts alongside relational contracts, private information, multiple suppliers, and issues of organization design.
    Keywords: Relational contracts, informal enforcement, legal enforcement, incentives, private information, partnerships, vertical integration, organization design
    JEL: D21 D2 D82 D86 L14 L22 L23 L24
    Date: 2010
  6. By: Pengfei Wang; Yi Wen
    Abstract: Firm-level investment is lumpy and volatile but aggregate investment is much smoother and highly serially correlated. These different patterns of investment behavior have been viewed as indicating convex adjustment costs at the aggregate level but non-convex adjustment costs at the firm level. This paper shows that financial frictions in the form of collateralized borrowing at the firm level (Kiyotaki and Moore, 1997) can give rise to convex adjustment costs at the aggregate level yet at the same time generate lumpiness in plant-level investment. In particular, our model can (i) derive aggregate capital adjustment cost functions identical to those assumed by Hayashi (1982) and (ii) explain the weak empirical relationship between Tobin’s Q and plant-level investment. Although aggregate adjustment cost functions can be derived from microfoundations, they are subject to the Lucas critique because parameters in such functions may not be structural and policy invariant.>
    Keywords: Capital investments ; Tobin's q
    Date: 2010
  7. By: Colin Busby (C.D. Howe Institute); William B.P. Robson (C.D. Howe Institute)
    Abstract: Canadian workers have enjoyed less robust investment in plant and equipment than their counterparts in the United States and other major developed countries over the past 15 years. And notwithstanding Canada’s relative economic resilience through the recent slump, the per-worker investment gap vis-à-vis other countries appears to have widened. The authors say if this pattern continues, Canadian businesses will continue equipping their workers less well than those in other countries, a setback in the quest for rising living standards in the coming expansion.
    Keywords: Economic Growth and Innovation, Canadian workers, business investment per worker
    JEL: E22 J24
    Date: 2010–10
  8. By: Viral V. Acharya; Ramin P. Baghai; Krishnamurthy V. Subramanian
    Abstract: Stringent labor laws can provide firms a commitment device to not punish short-run failures and thereby spur their employees to pursue value-enhancing innovative activities. Using patents and citations as proxies for innovation, we identify this effect by exploiting the time-series variation generated by staggered country-level changes in dismissal laws. We find that within a country, innovation and economic growth are fostered by stringent laws governing dismissal of employees, especially in the more innovation-intensive sectors. Firm-level tests within the United States that exploit a discontinuity generated by the passage of the federal Worker Adjustment and Retraining Notification Act confirm the cross-country evidence.
    JEL: F30 G31 J08 J5 K31
    Date: 2010–10
  9. By: Sala, Luca (Department of Economics and IGIER); Söderström, Ulf (Research Department, Central Bank of Sweden); Trigari, Antonella (Department of Economics and IGIER)
    Abstract: We use a standard quantitative business cycle model with nominal price and wage rigidities to estimate two measures of economic inefficiency in recent U.S. data: the output gap - the gap between the actual and efficient levels of output - and the labor wedge - the wedge between households' marginal rate of substitution and firms' marginal product of labor. We establish three results. (i) The output gap and the labor wedge are closely related, suggesting that most inefficiencies in output are due to the inefficient allocation of labor. (ii) The estimates are sensitive to the structural interpretation of shocks to the labor market, which is ambiguous in the model. (iii) Movements in hours worked are essentially exogenous, directly driven by labor market shocks, whereas wage rigidities generate a markup of the real wage over the marginal rate of substitution that is acyclical. We conclude that the model fails in two important respects: it does not give clear guidance concerning the efficiency of business cycle fluctuations, and it provides an unsatisfactory explanation of labor market and business cycle dynamics.
    Keywords: Business cycles; Efficiency; Labor markets; Monetary policy
    JEL: E24 E32 E52
    Date: 2010–09–01
  10. By: Michael Beckmann; Dieter Kuhn (University of Basel)
    Abstract: Owing to changes in the business environment, there has been a tremendous adoption of innovative<br />workplace organisation (WO) and human resource (HR) practices during the last few<br />decades. Assuming a holistic perspective on human resource management (HRM), the present<br />study establishes the hypothesis of mutually reinforcing WO and HR practices that, thus, constitute<br />a so-called high-performance work system. Precisely, it is argued that there may be a<br />complementary relationship between a more decentralised way of allocating tasks and decision<br />rights on the one hand and continuing training (or skilled labour), incentive pay or a more<br />intensive use of long-term, as opposed to temporary, employment on the other. This hypothesis<br />is examined empirically using latest nationally representative panel data of about 2,500<br />firms in Switzerland and applying econometric estimation techniques on the basis of an augmented<br />Cobb-Douglas production function. The estimation results show statistically significant<br />complementarities between the WO and HR practices mentioned above. In addition, socalled<br />innovative HRM systems of mutually reinforcing WO and HR practices increase firm<br />performance significantly. These results are robust to unobserved firm heterogeneity and to<br />the problem of reversed causality.
    Date: 2010
  11. By: Taiji Furusawa (Weatherhead Center for International Affairs, Harvard University, Faculty of Economics, Hitotsubashi University); Noriyuki Yanagawa (Faculty of Economics, University of Tokyo)
    Abstract: The paper examines the impacts of trade and capital movement between North and South, which differ in the quality of financial institution, on the productivity distribution and other characteristics of a financially-dependent industry. We find that financial imperfection causes firm heterogeneity and that trade and capital movement are complements in the sense that trade in goods affects the productivity distribution only when accompanied by international capital movement (trade induces capital outflow from South when capital has been internationally mobile). We also find that an international difference in financial development induces reciprocal foreign direct investment.
    Date: 2010–10
  12. By: Silvio Contessi (Federal Reserve Bank of St. Louis, Reseach Division); Pierangelo De Pace (Pomona College, Department of Economics); Johanna Francis (Fordham University, Department of Economics)
    Abstract: Using formal statistical tests, we detect (i) significant volatility increases for various types of capital flows for a period of changes in business cycle comovement among the G7 countries, and (ii) mixed evidence of changes in covariances and correlations with a set of macroeconomic variables.
    Keywords: Capital Flows, International Business Cycles.
    JEL: E32 F21 F32 F36
    Date: 2010
  13. By: Marcella Scrimitore
    Abstract: The paper investigates both quantity and price oligopoly games in markets with a variable number of managerial and entrepreneurial firms which defines market structure. Following Vickers (Economic Journal, 1985) which establishes an equivalence between the equilibrium under unilateral delegation and the Stackelberg quantity equilibrium, the outcomes of these games are compared with the ones in sequential multi-leaders and multi-followers games. The profitability of a managerial/entrepreneurial attitude vs leadership/followership is shown to critically depend upon the kind of strategy, price or quantity, and upon the assumed market structure. Indeed, the latter turns out to be crucial in determining the equivalence result that is shown to be contingent on the assumption that just one leader or one managerial firm operate in the market. A welfare analysis finally highlights the differences between the delegation and the sequential games, focusing on the impact of market structure and imperfect substitutability on the equilibria of the two games.
    Keywords: Strategic delegation, sequential games, quantity and price competition, welfare analysis.
    JEL: C72 L13 L22
    Date: 2010–10–19
  14. By: KATO Atsuyuki
    Abstract: This paper examines the similarities and differences between the manufacturing and the service sectors in terms of market power and productivity dispersion, using data of Japanese automobile manufacturers and dealers. Applying a newly developed approach proposed by Martin (2010), we estimate the firm-specific productivity and mark-up under imperfect competition, and discuss features of them by industry. From those estimates, we find that both industries have similar relations between productivity and mark-up, and their transition probabilities are almost the same. On the other hand, the roles of industries in the production process or the conditions of market competition are different between those industries. In addition, the relations between business scale and productivity are conflicting. As a whole, the implicit assumption that the service industries are structurally different from manufacturing is controversial. However, ignoring the differences in the conditions of their market competition possibly gives significant bias to the policy implications.
    Date: 2010–10
  15. By: L. Savorelli
    Abstract: Asymmetries in cross-price elasticities have been demonstrated by several empirical studies. In this paper we study from a theoretical stance how introducing asymmetry in the substitution effects influences the sustainability of collusion. We characterize the equilibrium of a linear Cournot duopoly with substitute goods, and consider substitution e¤ects which are asymmetric in magnitude. Within this framework, we study partial collusion using Friedman (1971) solution concept. Our main result shows that the interval of quantities supporting collusion in the asymmetric setting is always smaller than the interval in the symmetric benchmark. Thus, the asymmetry in the substitution effects makes collusion more difficult to sustain. This implies that previous Antitrust decisions could be reversed by considering the role of this kind of asymmetry.
    JEL: C72 D43 L13
    Date: 2010–10

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