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on Business Economics |
| By: | Danthine, Jean-Pierre (Swiss National Bank); Donaldson, John B. (School of Business, Columbia University) |
| Abstract: | We study the dynamic general equilibrium of an economy where risk averse shareholders delegate the management of the firm to risk averse managers. The optimal contract has two main components: an incentive component corresponding to a non-tradable equity position and a variable “salary” component indexed to the aggregate wage bill and to aggregate dividends. Tying a manager’s compensation to the performance of her own firm ensures that her interests are aligned with the goals of firm owners and that maximizing the discounted sum of future dividends will be her objective. Linking managers’ compensation to overall economic performance is also required to make sure that managers use the appropriate stochastic discount factor to value those future dividends. General equilibrium considerations thus provide a potential resolution of the “pay for luck” puzzle. We also demonstrate that one sided “relative performance evaluation” follows equally naturally when managers and shareholders are differentially risk averse. |
| Keywords: | incentives; optimal contracting; stochastic discount factor; pay-for-luck; relative performance |
| JEL: | E32 E44 |
| Date: | 2010–09–17 |
| URL: | http://d.repec.org/n?u=RePEc:ris:snbwpa:2010_019&r=bec |
| By: | Nicola Meccheri (Department of Economics, University of Pisa, Italy; The Rimini Centre for Economic Analysis (RCEA), Italy); Luciano Fanti (Department of Economics, University of Pisa, Italy) |
| Abstract: | This paper studies the interaction between incentive labour contracts, competition à la Cournot and industry profits, in a context where workers’ effort is not verifiable and the probability of the unemployed getting a job can depend on their employment histories according to the degree of product market competition. It is shown that efficiency wages paid by each firm can decrease when competition becomes fiercer. With discretionary bonuses, instead, wages are generally uncorrelated with competition, but there exists an upper threshold for the number of competing firms, over which profits collapse to zero. Moreover, if information about firms’ misbehaviour in paying bonuses flows in the labour market at a low rate, firms can make positive profits only by paying efficiency wages. |
| Keywords: | industry profits, Cournot competition, efficiency wages, performance pay |
| JEL: | J33 J41 L13 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:37_10&r=bec |
| By: | Luciano Fanti; Nicola Meccheri |
| Abstract: | This paper studies equilibrium incentive contracts in a Cournot duopoly, in which institutional arrangements constrain firms to pay (risk-neutral) workers a given salary. In this context, performance-related-pay (PRP) and relative performance evaluation (RPE) are compared in terms of resulting levels of workers’ effort (firms’ expected output), market price, profits, consumer surplus and social welfare. It is shown that, while under principal-agent standard assumptions (i.e. all wage components are “freely” negotiated by each firm-worker pair) PRP and RPE are equivalent, in the presence of institutional “frictions”, RPE outperforms PRP in relation to output, profits, consumer surplus and social welfare. Moreover, RPE also permits to replicate results obtained without institutional constraints, even if the mechanism driving final outcomes is very different. |
| Keywords: | Cournot duopoly, principal-agent model, relative performance evaluation, institutional constraints. |
| JEL: | J33 J41 L13 |
| Date: | 2010–09–10 |
| URL: | http://d.repec.org/n?u=RePEc:pie:dsedps:2010/103&r=bec |
| By: | Luciano Fanti (Department of Economics, University of Pisa, Italy); Nicola Meccheri (Department of Economics, University of Pisa, Italy; The Rimini Centre for Economic Analysis (RCEA), Italy) |
| Abstract: | This paper studies equilibrium incentive contracts in a Cournot duopoly, in which institutional arrangements constrain firms to pay (risk-neutral) workers a given salary. In this context, performance-related-pay (PRP) and relative performance evaluation (RPE) are compared in terms of resulting levels of workers' effort (firms' expected output), market price, profits, consumer surplus and social welfare. It is shown that, while under principal-agent standard assumptions (i.e. all wage components are "freely" negotiated by each firm-worker pair) PRP and RPE are equivalent, in the presence of institutional "frictions", RPE outperforms PRP in relation to output, profits, consumer surplus and social welfare. Moreover, RPE also permits to replicate results obtained without institutional constraints, even if the mechanism driving final outcomes is very different. |
| Keywords: | Cournot duopoly, principal-agent model, relative performance evaluation, institutional constraints |
| JEL: | J33 J41 L13 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:38_10&r=bec |
| By: | Prat, Julien (IAE Barcelona (CSIC)); Jovanovic, Boyan (New York University) |
| Abstract: | We analyze a long-term contracting problem involving common uncertainty about a parameter capturing the productivity of the relationship, and featuring a hidden action for the agent. We develop an approach that works for any utility function when the parameter and noise are normally distributed and when the effort and noise affect output additively. We then analytically solve for the optimal contract when the agent has exponential utility. We find that the Pareto frontier shifts out as information about the agent's quality improves. In the standard spot-market setup, by contrast, when the parameter measures the agent's "quality", the Pareto frontier shifts inwards with better information. Commitment is therefore more valuable when quality is known more precisely. Incentives then are easier to provide because the agent has less room to manipulate the beliefs of the principal. Moreover, in contrast to results under one-period commitment, wage volatility declines as experience accumulates. |
| Keywords: | principal-agent model, optimal contract, learning, private information, reputation, career |
| JEL: | D82 D83 E24 J41 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5323&r=bec |
| By: | Luciano Fanti; Nicola Meccheri |
| Abstract: | This paper compares Cournot and Bertrand equilibria in a differentiated duopoly (with imperfect substitutes), total wage bill maximizing unions and labour decreasing returns. It is shown that the standard result, that equilibrium profits are always higher under Cournot, may be reversed even for a fairly low degree of product differentiation. Moreover, the presence of labour decreasing returns tends to reinforce the mechanisms that contribute to the reversal result, making this event possible for a wider range of situations, with respect to those identified by the earlier literature. |
| Keywords: | Cournot-Bertrand profit differential, unions, labour decreasing returns. |
| JEL: | J43 J50 L13 |
| Date: | 2010–11–10 |
| URL: | http://d.repec.org/n?u=RePEc:pie:dsedps:2010/107&r=bec |
| By: | Martin Uebele |
| Abstract: | This article analyzes international business cycles in Europe 1862-1913 using disaggregated data and Dynamic Factor Analysis. In comparison with estimates of real national product there is more evidence for international business cycles in disaggregated data of Germany, France and Great Britain before World War I. This is because data used to construct historical national accounts are often not sufficient to date business cycles, and especially because little is known about general price fluctuations. Thus, national products in current prices show higher degrees of international correlation than deflated ones although price indices themselves are not very well correlated across countries. |
| Keywords: | International Business Cycles, Historical National Accounting, Disaggregate Data, Dynamic Factor Models |
| JEL: | E31 E32 F15 N13 N73 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:cqe:wpaper:1610&r=bec |
| By: | Lisa Bruttel; Simeon Schudy |
| Abstract: | We investigate the role of incentives set by a parent firm for competition among its subsidiaries. In a Cournot experiment four subsidiaries of the same parent operate in the same market. Parents earn a speciffic share of the joint profit and can choose how to distribute the remaining surplus (or loss). Results show that parents allocating profits equally among their subsidiaries reach outcomes close to collusion. However, almost half of the parent firms employ a proportional sharing rule instead. These groups end up with profits around the Cournot level. |
| Keywords: | Cournot Competition, Subsidiary, Subcompany, Experiment |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:twi:respas:0062&r=bec |
| By: | Costas Azariadis (Department of Economics, Washington University, St. Louis MO, USA; The Rimini Centre for Economic Analysis (RCEA), Rimini, Italy); Leo Kaas (Department of Economics, University of Konstanz, Konstanz, Germany) |
| Keywords: | D90, E32, O47 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:39_10&r=bec |
| By: | Claudia Tronconi; Giuseppe Vittucci Marzetti |
| Abstract: | The paper assesses the impact of Organizational Capital (OC) on firm perfor- mance for a sample of European firms. OC is proxied by capitalizing an income statement item (SGA expenses). A rationale for this methodology is provided. Results are robust and show the strong effect of OC on firm performance. |
| Keywords: | Intangibles, Knowledge-based resources, Organizational capital,R&D capital stock, Translog production function |
| JEL: | C21 D24 D29 L20 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpde:1018&r=bec |
| By: | Luis C. Corchón; Lourdes Moreno |
| Abstract: | In this paper we attempt to rationalize markups in a sample of Spanish manufacturing by assuming a representative consumer, profit-maximizing firms and constant returns to scale. We find that the standard forms of demand (CES and linear) do not provide a good explanation of markups. In contrast, a model where the representative consumer has an exponential utilty function yields results that match data more closely. |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we1030&r=bec |
| By: | Giulio Cainelli; Sandro Montresor; Giuseppe Vittucci Marzetti |
| Abstract: | The paper analyzes how (production and financial) inter-firm networks can affect firms’ default probabilities and observed default rates: an issue the recent crisis has brought to the front of the debate. A simple theoretical model of shock transfer is built up to investigate some stylized facts on how firm-idiosyncratic shocks tend to be allocated in the network, and how this allocation changes firms’ default probability. The model shows that the network works as a perfect “risk-pooling” mechanism, when it is both strongly connected and symmetric. But the resort to “risk-sharing” does not necessarily reduce default rates in the network, unless the shock they face is lower on average than their financial capacity. Conceived as cases of symmetric inter-firm networks, industrial districts might have a comparative disadvantage in front of “heavy” financial crises such as the current one. |
| Keywords: | Firm clusters, industrial districts, interlinking transactions,resilience, systemic risk |
| JEL: | R11 R12 G20 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpde:1017&r=bec |
| By: | Propper, Carol; von Hinke Kessler Scholder, Stephanie; Tominey, Emma; Ratto, Marisa; Burgess, Simon |
| Abstract: | We use an experiment to study the impact of team-based incentives, exploiting rich data from personnel records and management information systems. Using a triple difference design, we show that the incentive scheme had an impact on team performance, even with quite large teams. We examine whether this effect was due to increased effort from workers or strategic task reallocation. We find that the provision of financial incentives did raise individual performance but that managers also disproportionately reallocated efficient workers to the incentivised tasks. We show that this reallocation was the more important contributor to the overall outcome. |
| Keywords: | Public Sector; Incentives; Performance; Teams; |
| JEL: | J33 J38 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ner:dauphi:urn:hdl:123456789/4727&r=bec |
| By: | Trung T Bui; Tamim Bayoumi |
| Abstract: | The 2008 crisis underscored the interconnectedness of the international business cycle, with U.S. shocks leading to the largest global slowdown since the 1930s. We estimate spillover effects across major advanced country regions in a structural VAR (SVAR) using pre-crisis data. Our new method freely estimates the contemporaneous correlation matrix for underlying shocks in the VAR and (uniquely, to our knowledge) the associated uncertainty. Our results suggest that the international business cycle is largely driven by U.S. financial shocks with a significant impact from global shocks, mainly reflecting commodity prices. Other advanced economic regions play a much smaller and regional role in growth spillovers. Our findings are consistent with the emerging evidence on the current crisis |
| Keywords: | Business cycles , Developed countries , Economic growth , Economic models , International financial system , Spillovers , United States , |
| Date: | 2010–10–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/239&r=bec |
| By: | Marco Leonardi (University of Milan and IZA); Giovanni Pica (Università di Salerno and CSEF) |
| Abstract: | Theory predicts that the wage effects of government-mandated severance payments depend on workers’ and firms. relative bargaining power. This paper estimates the effect of employment protection legislation (EPL) on workers. individual wages in a quasi-experimental setting, exploiting a reform that introduced unjust-dismissal costs in Italy for firms below 15 employees and left .ring costs unchanged for bigger .rms. Accounting for the endogeneity of the treatment status, we find that high-bargaining power workers (stayers, white collar and workers above 45) are almost left unaffected by the increase in EPL, while low-bargaining power workers (movers, blue collar and young workers) suffer a drop both in the wage level and its growth rate. |
| Keywords: | Costs of Unjust Dismissals, Severance Payments, Policy Evaluation, Endogeneity of Treatment Status |
| JEL: | E24 J3 J65 |
| Date: | 2010–11–21 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:265&r=bec |
| By: | Kjell Erik Lommerud (Department of Economics, University of Bergen, Norway); Frode Meland (Department of Economics, University of Bergen, Norway); Odd Rune Straume (Universidade do Minho - NIPE and University of Bergen (Health Economics Bergen, Department of Economics), Norway) |
| Abstract: | We study how incentives for North-South technology transfers in multinational enterprises are affected by labour market institutions. If workers are collectively organised,incentives for technology transfers are partly governed by firms' desire to curb trade union power. This will affect not only the extent but also the type of technology transfer. While skill upgrading of southern workers benefits these workers at the expense of northern worker welfare, quality upgrading of products produced in the South may harm not only northern but also southern workers. A minimum wage policy to raise the wage levels of southern workers may spur technology transfer, possibly to the extent that the utility of northern workers decline. These conclusions are reached in a setting where a unionised multinational multiproduct firm produces two vertically differentiated products in northern and southern subsidiaries, respectively. |
| Keywords: | North-South technology transfer, Multinationals, Trade unions, Minimum wages |
| JEL: | F23 J51 O33 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:nip:nipewp:35/2010&r=bec |
| By: | Carlos Carreira (GEMF/Faculdade de Economia, Universidade de Coimbra, Portugal); Paulino Teixeira (GEMF/Faculdade de Economia, Universidade de Coimbra, Portugal) |
| Abstract: | This paper discusses the impact of newly created firms on industry productivity growth. Our central hypothesis is that there are two potential effects of new firms on productivity growth: a direct effect, as entrants may be relatively more productive than established firms; and an indirect effect, through increased competitive pressure that stimulates incumbents to elevate their productivity in order to survive. The results of the decomposition exercise of aggregate productivity growth suggest that the direct contribution of entry is small. In turn, the regression analysis on the effect of entry on productivity growth of incumbents indicates that the higher is the former, the higher is the latter, which is equivalent to say that the greater is the competitive pressure generated by new entrants, the higher is the expected aggregate productivity level. |
| Keywords: | Entry, Firm dynamics, Productivity growth, Competition effect |
| JEL: | L11 L16 L25 O12 O47 L60 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:gmf:wpaper:2010-20&r=bec |
| By: | Alessandra Chirco (University of Salento, Lecce, Italy); Marcella Scrimitore (University of Salento, Lecce, Italy; The Rimini Centre for Economic Analysis (RCEA), Rimini, Italy) |
| Abstract: | In this paper we analyze the effects of international competition in a mixed oligopoly framework, with price competition and differentiated products. The properties of equilibria, and the impact of policy measures such as privatizations and cross-border acquisitions, are studied both in a single-country and in a two-country framework, under the hypothesis that all firms share the same linear technology. Besides showing that the international competition in a mixed market allows for efficiency gains which are consistent with binding budget constraints for the public firm, we identify the market structures and the competitive environment which support welfare enhancing privatization policies, independently of any exogenous or endogenous cost differential between public and private producers. In particular, we suggest that the cross-country distribution of firms, the degree of product substitutability and the overall density of the market are the key elements in the assessment of the desirability of public ownership. |
| Keywords: | International mixed oligopoly, price competition, privatization |
| JEL: | F23 L13 L32 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:48_10&r=bec |
| By: | Fabio Pieri; Enrico Zaninotto (DISA, Faculty of Economics, Trento University) |
| Abstract: | This paper analyzes the relationship between firm efficiency and vertical integration in the Italian machine tool (MT) industry. A theoretical model of entry and competition within an industry has been set up. In this model firms can choose either to be vertically integrated or not: the most efficientfirms self-select in being vertically integrated, while less efficientfirms prefer a disintegrated structure and they both coexist in equilibrium. In the second part of the paper the relationship between efficiency and vertical integration has been tested using a stochastic frontier framework in an novel panel dataset including around 500 MT builders. The theoretical prediction is confirmed: outsourcing seems a rational choice for less efficient firms to make positive operating profits and stay in the market; on the other hand, more efficient firms exploit their efficiency advantage to control a greater part of the production chain, possibly benefiting from greater coordination among different phases and tailored intermediate inputs. |
| Keywords: | vertical integration; technical efficiency; firm heterogeneity; heteroskedastic frontier model |
| JEL: | D24 L23 L25 L64 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:trt:disawp:1006&r=bec |
| By: | Davidson, James; Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Wickens, Michael (Cardiff Business School) |
| Abstract: | A Real Business Cycle model of the UK is developed to account for the behaviour of UK nonstationary macro data. The model is tested by the method of indirect inference, bootstrapping the errors to generate 95% confidence limits for a VECM representation of the data; we find the model can explain the behaviour of main variables (GDP, real exchange rate, real interest rate) but not that of detailed GDP components. We use the model to explain how `crisis' and `euphoria' are endemic in capitalist behaviour due to nonstationarity; and we draw some policy lessons. |
| Keywords: | Nonstationarity; Productivity; Real Business Cycle; Bootstrap; Indirect Inference; Banking Crisis; Banking Regulation |
| JEL: | E32 F32 F41 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2010/13&r=bec |
| By: | Schnedler, Wendelin (University of Heidelberg) |
| Abstract: | Incentives often fail in inducing economic agents to engage in a desirable activity; implementability is restricted. What restricts implementability? When does re-organization help to overcome this restriction? This paper shows that any restriction of implementability is caused by an identification problem. It also describes organizations that can solve this identification problem and provides conditions under which such organisations exist. Applying the findings to established and new moral hazard models yields insights into optimal organization design, uncovers the reason why certain organization designs, such as advocacy or specialization, overcome restricted implementability, and formalizes a wide-spread type of multi-tasking problem. |
| Keywords: | moral hazard, hidden action, implementation, multi-tasking, identification by organization design |
| JEL: | D86 M52 J33 D82 M41 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5325&r=bec |
| By: | Scott Davis |
| Abstract: | Recessions that are accompanied by financial crises tend to be more severe and are followed by slower recoveries than ordinary recessions. This paper introduces a new Keynesian model with financial frictions on both the demand and supply side of the credit markets that can explain this empirical finding. Following a shock that leads to a decline in economic activity, an adverse feedback loop arises where falling profits and asset values lead to increased defaults in the real sector, and these increased defaults lead to increased loan losses in the banking sector. Following this increase in loan losses, financial frictions in the banking sector imply that the banking sector itself may face difficulty obtaining funds. This disruption in the intermediation process leads to a further decline in output and asset prices in the real sector. In simulations of the model it is found that this feedback loop operating through the balance sheets of financial intermediaries can lead to as much as a 20 percent increase in business cycle volatility, and impulse response analysis shows that in the presence of financial frictions the path back to the steady state after a shock is much slower. |
| Keywords: | Business cycles - Econometric models ; Financial markets ; International finance ; Financial crises ; Recessions |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:66&r=bec |
| By: | Daniel Danau; Annalisa Vinella |
| Abstract: | We study the screening problem that arises in a framework where, initially, the agent is privately informed about both the expected production cost and the cost variability and, at a later stage, he learns privately the cost realization. The specifi?c set of relevant incentive constraints, and so the characteristics of the optimal mechanism, depend ?finely upon the curvature of the principal's marginal surplus function as well as the relative importance of the two initial information problems. Pooling of production levels is optimally induced with respect to the cost variability when the principal's knowledge imperfection about the latter is sufficiently less important than that about the expected cost. |
| Keywords: | Cost uncertainty; Multidimensional screening; Sequential screening |
| JEL: | D81 D82 D86 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:san:crieff:1007&r=bec |