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on Business Economics |
| By: | Arantxa Jarque; Edward S. Prescott |
| Abstract: | We present a sequence of two-period models of incentive-based compensation in order to understand how the properties of optimal compensation structures vary with changes in the model environment. Each model corresponds to a different occupation within a bank, such as credit line managers, loan originators, or traders. All models share a common trait: the effects of hidden actions are persistent, and hence are revealed over time. We characterize the corresponding optimal contracts that are consistent with prudent risk taking. We compare the contracts by ranking them according to the average wage, the proportion of deferred compensation, and the structure and importance of variable pay (bonuses). We also compare these characteristics of the models with persistence with those of a standard repeated moral hazard. We find that small changes in the structure of asymmetric information have important implications for the characteristics of optimal pay, and that persistence does not necessarily imply a higher proportion of deferred pay. |
| Keywords: | Financial institutions ; Financial markets ; Labor market ; Moral hazard |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:10-16&r=bec |
| By: | Jan P.A.M Jacobs; Simon van Norden |
| Abstract: | Productivity growth is carefully scrutinized by macroeconomists because it plays key roles in understanding private savings behaviour, the sources of macroeconomic shocks, the evolution of international competitiveness and the solvency of public pension systems, among other things. However, estimates of recent and expected productivity growth rates suffer from two potential problems: (i) recent estimates of growth trends are imprecise, and (ii) recently published data often undergo important revisions. This paper documents the statistical (un)reliability of several measures of aggregate productivity growth in the U.S. by examining the extent to which they are revised over time. The authors also examine the extent to which such revisions contribute to errors in forecasts of U.S. productivity growth. The authors find that data revisions typically cause appreciable changes in published estimates of productivity growth rates across a range of different productivity measures. Substantial revisions often occur years after the initial data release, which they argue contributes significantly to the overall uncertainty policymakers face. This emphasizes the need for means of reducing the uncertainty facing policymakers and policies robust to uncertainty about current economic conditions.> |
| Keywords: | Productivity - United States ; Statistics ; Real-time data |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:11-1&r=bec |
| By: | H. Evren Damar; Césaire A. Meh; Yaz Terajima |
| Abstract: | Some evidence points to the procyclicality of leverage among financial institutions leading to aggregate volatility. This procyclicality occurs when financial institutions finance their assets with non-equity funding (i.e., debt financed asset expansions). Wholesale funding is an important source of market-based funding that allows some institutions to quickly adjust their leverage. As such, financial institutions that rely on wholesale funding are expected to have higher degrees of leverage procyclicality. Using high frequency balance sheet data for the universe of banks, this study tries to identify (i) if such a positive link exists between the assets and leverage in Canada, (ii) how wholesale funding plays a role for this link, and (iii) market and macroeconomic factors associated with this link. The findings of the empirical analysis suggest that a strong positive link exists between asset growth and leverage growth, and the use to wholesale funding is an important determinant of this relationship. Furthermore, liquidity of several short-term funding markets matters for procyclicality of leverage. |
| Keywords: | Financial stability; Financial system regulation and policies; Recent economic and financial developments |
| JEL: | G21 G28 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:10-39&r=bec |
| By: | Charlotte Østergaard (Norwegian School of Management and Norges Bank (Central Bank of Norway)); Amir Sasson (Norwegian School of Management); Bent E. Sørensen (University of Houston and the CEPR) |
| Abstract: | We study how non-listed firms trade off financial, real, and distributive uses of cash. We show that firms' marginal value of cash (MVC) affects the mix of external and internal finance used to absorb fluctuations in cash flows; in particular, high-MVC firms employ substantially more external finance on the margin. Linking firms to their main bank, we find that shocks to bank finance affect corporate trade-offs and have real effects in high-MVC firms, making investment more sensitive to firm cash flows. Our analysis suggests that external finance constraints affect the real economy via firms' marginal value of cash. |
| Keywords: | Cash Management, Cash Holdings, Cost of External Finance, Non_listed Firms, Bank Lending Channel |
| Date: | 2010–12–16 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2010_27&r=bec |
| By: | Mimir, Yasin |
| Abstract: | I document cyclical properties of aggregate measures of liabilities, equity, and leverage ratio in the U.S. financial sector and those of credit spread. I find that (i) liabilities and equity are procyclical, leverage ratio is acyclical, and credit spread is countercyclical, (ii) financial variables are three to ten times more volatile than output, and (iii) financial variables lead the business cycle. I present a dynamic stochastic general equilibrium model with profit maximizing banks where bank equity mitigates a moral hazard problem between banks and their depositors. The driving sources of business cycles are shocks to bank equity as well as standard productivity shocks. The model generates real and financial fluctuations consistent with the U.S. data. The model also delivers some policy prescriptions about capital adequacy requirements of banks. |
| Keywords: | Banks; Financial Fluctuations; Credit Frictions; Bank Equity; Real Fluctuations |
| JEL: | E32 E44 E10 E20 |
| Date: | 2010–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:27643&r=bec |
| By: | Kimberly Beaton; René Lalonde; Stephen Snudden |
| Abstract: | This paper examines the transmission of U.S. real and financial shocks to Canada and, in particular, the role of financial frictions in affecting the transmission of these shocks. These questions are addressed within the Bank of Canada's Global Economy Model (de Resende et al. forthcoming), a dynamic stochastic general-equilibrium model with an active banking sector and a detailed role for financial frictions. We find that U.S. financial shocks, as well as real shocks, have important effects on the Canadian economy. Moreover, financial frictions on both the demand and supply sides of credit amplify the first round impact of all types of U.S. shocks on the U.S. economy, as well as the second round impact on Canada. Real-financial linkages also increase the persistence of the Canadian response to U.S. shocks. We find that the interaction between the endogenous response of commodity prices and U.S. financial frictions plays an important role in the propagation of U.S. shocks to the Canadian economy. Finally, real-financial linkages also help to generate the positive cross correlation between domestic demand in the United States and Canada observed in the data, which is difficult to explain with a model where the transmission of shocks between countries is only based only on trade. |
| Keywords: | Business fluctuations and cycles; Economic models; International topics |
| JEL: | E21 E27 E32 F36 F40 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:10-40&r=bec |
| By: | Alex Coad; Mercedes Teruel |
| Abstract: | Inter-firm competition has received much attention in the theoretical literature, but recent empirical work suggests that the growth rates of rival firms are uncorrelated, and that firm growth can be taken as an essentially independent process. We begin by investigating the correlations of the growth rates of competing firms (i.e. the largest and second-largest firms in the same industry) and observe that, surprisingly, the growth of these firms can be taken as independent. Nevertheless, peer-effect regressions, that take into account the simultaneous interdependence of growth rates of rival firms, are able to identify significant negative effects of rivals' growth on a firm's growth. |
| Keywords: | Competition, Firm growth, Peer effects econometrics Length 32 pages |
| JEL: | L25 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:esi:evopap:2010-18&r=bec |
| By: | António Afonso; Ana Sequeira |
| Abstract: | We assess the business cycle synchronization features of aggregate output in the 27 EU countries using annual data for the period 1970-2009. In particular, we compute measures of synchronisation for private consumption, government spending, gross fixed capital formation, exports and imports. Our results show a rise in synchronization over the full period, and although private consumption is the biggest component of GDP, external demand tends to be a more important determinant of business cycle synchronization. |
| Keywords: | EU, business cycle synchronization. |
| JEL: | E32 F15 F41 F42 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp222010&r=bec |
| By: | Viral V. Acharya; Hamid Mehran; Anjan V. Thakor |
| Abstract: | Banks face two moral hazard problems: asset substitution by shareholders (e.g., making risky, negative net present value loans) and managerial rent seeking (e.g., investing in inefficient “pet” projects or simply being lazy and uninnovative). The privately-optimal level of bank leverage is neither too low nor too high: It balances effi ciently the market discipline imposed by owners of risky debt on managerial rent-seeking against the asset-substitution induced at high levels of leverage. However, when correlated bank failures can impose significant social costs, regulators may bail out bank creditors. Anticipation of this generates an equilibrium featuring systemic risk in which all banks choose inefficiently high leverage to fund correlated assets. A minimum equity capital requirement can rule out asset substitution but also compromises market discipline by making bank debt too safe. The optimal capital regulation requires that a part of bank capital be unavailable to creditors upon failure, and be available to shareholders only contingent on good performance. |
| Keywords: | Bank capital ; Moral hazard ; Systemic risk |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1024&r=bec |
| By: | Sai Ding; Alessandra Guariglia; John Knight |
| Abstract: | This paper addresses the hotly-debated question: do Chinese firms overinvest? A firm-level dataset of 100,000 firms over the period of 2000-07 is employed for this purpose. We initially calculate measures of investment efficiency, which is typically negatively associated with overinvestment. Despite wide disparities across various ownership groups, industries and regions, we find that corporate investment in China has become increasingly efficient over time. However, based on direct measures of overinvestment that we subsequently calculate, we find evidence of overinvestment for all types of firms, even in the most efficient and most profitable private sector. We find that the free cash flow hypothesis provides a good explanation for China’s overinvestment, especially for the private sector, while in the sector, overinvestment is attributable to the poor screening and monitoring of enterprises by banks. |
| Keywords: | Overinvestment, investment efficiency, free cash flow, debt, China |
| JEL: | G31 O16 O53 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:520&r=bec |
| By: | Alison L Booth; Pamela Katic |
| Abstract: | In this paper we estimate the elasticity of the labour supply to a firm, using data from the Household, Income and Labour Dynamics in Australia (HILDA) Survey. Estimation of this elasticity is of particular interest not only in its own right but also because of its relevance to the debate about the competitiveness of labour markets. The essence of monopsonistically competitive labour markets is that labour supply to a firm is imperfectly elastic with respect to the wage rate. The intuition is that, where workers have heterogeneous preferences or face mobility costs, firms can offer lower wages without immediately losing their workforce. This is in contrast to the perfectly competitive extreme, in which the elasticity is infinite. Therefore a simple test of whether labour markets are perfectly or imperfectly competitive involves estimating the elasticity of the labour supply to a firm. We find that the Australian wage elasticity of labour supply to a firm is around 0.71, only slightly smaller than the figure of 0.75 reported by Manning (2003) for the UK. These estimates are so far from the perfectly competitive assumption of an infinite elasticity that it would be difficult to make a case that labour markets are perfectly competitive. |
| JEL: | J42 J21 J71 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2010-35&r=bec |
| By: | A. Arrighetti; A. Lasagni |
| Abstract: | Firm growth is a selective and non-homogeneous phenomenon. In fact, “Most firms start small, live small and die small” (Davidsson et al. 2005). Few firms seem to grow in a rapid way, but their contribution to employment growth is often impressive. The main purpose of this paper is to analyze both external and internal factors which can affect the probability of being a high-growth firm (henceforth HGF) in Italy. We found that HGFs are on average young firms and are present in different sectors, but the role of demand is important to understand their performance. The most original results of this paper regard endogenous determinants of fast growth. First, we found that the concentration of ownership is important for HGFs that grow in sales. Second, the quality of human capital is a strong point for firms experiencing rapid employment growth. |
| Keywords: | : high-growth firms, firm growth, human capital, rapid firm growth |
| JEL: | D24 L25 L26 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:par:dipeco:2010-ep07&r=bec |
| By: | David E. Allen (School of Accounting, Finance and Economics, Edith Cowan University); Michael McAleer (Erasmus University Rotterdam, Tinbergen Institute, The Netherlands, and Institute of Economic Research, Kyoto University); Marcel Scharth (Tinbergen Institute, The Netherlands, Department of Econometrics, VU University Amsterdam) |
| Abstract: | In this paper we show that realized variation measures constructed from high- frequency returns reveal a large degree of volatility risk in stock and index returns, where we characterize volatility risk by the extent to which forecasting errors in realized volatility are substantive. Even though returns standardized by ex post quadratic variation measures are nearly Gaussian, this unpredictability brings greater uncertainty to the empirically relevant ex ante distribution of returns. Explicitly modeling this volatility risk is fundamental. We propose a dually asymmetric realized volatility model, which incorporates the fact that realized volatility series are systematically more volatile in high volatility periods. Returns in this framework display time varying volatility, skewness and kurtosis. We provide a detailed account of the empirical advantages of the model using data on the S&P 500 index and eight other indexes and stocks. |
| Keywords: | Realized volatility, volatility of volatility, volatility risk, value-at-risk, forecasting, conditional heteroskedasticity. |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:753&r=bec |
| By: | Andreev, Ivan |
| Date: | 2010–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:dissen:12403&r=bec |
| By: | Hirsch, Boris; Mueller, Steffen |
| Abstract: | Auf Grundlage eines großen kombinierten Firmen-Beschäftigten-Datensatzes untersuchen wir Unterschiede im unerklärten geschlechtsspezifischen Lohndifferential zwischen eigentümer- und managergeführten Betrieben für Deutschland. Wir stellen die Hypothese auf, dass eigentümergeführte Betriebe höhere Lohndifferentiale aufweisen sollten, da diskriminierende aktive Eigentümer im Vergleich zu diskriminierenden angestellten Managern in der Auslebung ihrer gewinnsenkenden diskriminatorischen Präferenzen weniger eingeschränkt sein dürften. Empirisch finden wir statistisch wie ökonomisch signifikant höhere Lohndifferentiale in eigentümergeführten Betrieben. Eine gründlichere Untersuchung dieser Ergebnisse durch Beschränkung der Stichproben auf hinreichend ähnliche eigentümer- und managergeführte Betriebe lässt diese markanten Lohndifferentiale jedoch verschwinden. Unsere Ergebnisse deuten daher nicht darauf hin, dass aktive Eigentümer per se mehr diskriminieren. -- Using a large linked employer-employee data set for Germany, we investigate differences in the unexplained gender pay gap between owner-run and manager-run firms. We hypothesise that owner-run firms have higher pay gaps because active owners are less inhibited to live out profit-reducing discriminatory preferences against women than hired managers. We indeed find that the pay gaps are significantly higher in owner-run plants, both statistically and economically. Yet, scrutinising these results by restricting our analysis to plants that only differ in leadership regime, this substantial difference disappears. Therefore, our findings do not support that active owners are more discriminatory per se. |
| Keywords: | gender pay gap,firm leadership,Germany |
| JEL: | J31 J16 J71 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:faulre:72&r=bec |
| By: | Pflüger, Michael P. (University of Passau); Russek, Stephan (University of Passau) |
| Abstract: | This paper explores the role of country asymmetries for trade and industrial policies with heterogeneous firms. Our analysis delivers a number of novel results. First, trade policies, infrastructure policies and industrial policies which improve the business conditions in one country have negative productivity and welfare effects on the trading partner. Second, symmetric trade liberalization is immiserizing for a trading partner whose business conditions are inferior. Third, there are gains from trade even for a country whose monopolistically competitive sector with heterogeneous firms is wiped out by the switch from autarky to trade. |
| Keywords: | firm heterogeneity, welfare, trade policies, industrial policies, business conditions |
| JEL: | F12 F13 F15 L25 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5387&r=bec |
| By: | Jaap H. Abbring; Jeffrey R. Campbell; Nan Yang |
| Abstract: | This paper develops a tractable model for the computational and empirical analysis of infinite-horizon oligopoly dynamics. It features aggregate demand uncertainty, sunk entry costs, stochastic idiosyncratic technological progress, and irreversible exit. We develop an algorithm for computing a symmetric Markov-perfect equilibrium quickly by finding the fixed points to a finite sequence of low-dimensional contraction mappings. If at most two heterogenous firms serve the industry, the result is the unique "natural" equilibrium in which a high profitability firm never exits leaving behind a low profitability competitor. With more than two firms, the algorithm always finds a natural equilibrium. We present a simple rule for checking ex post whether the calculated equilibrium is unique, and we illustrate the model's application by assessing how price collusion impacts consumer and total surplus in a market for a new product that requires costly development. The results confirm Fershtman and Pakes' (2000) finding that collusive pricing can increase consumer surplus by stimulating product development. A distinguishing feature of our analysis is that we are able to assess the results' robustness across hundreds of parameter values in only a few minutes on an off-the-shelf laptop computer. |
| Keywords: | Markov processes |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2010-21&r=bec |
| By: | Dufrénot, G.; Malik, S. |
| Abstract: | In this paper, we attempt to analyse the relationship between house price developments and the business cycle. Employing a time-varying transition probability Markov switching framework, we provide empirical evidence that house price growth may prove a useful leading indicator for turning point detection. In focusing on three countries, the US, UK and Spain, we furthermore provide evidence that although potentially informative from an overall perspective in business cycle modelling, the signi.cance of signals contained in house prices may not be symmetric across the identi.ed high growth and low growth states. In addition, we suggest a possible range of values for house price de.ation which may trigger a recession the following period. |
| Keywords: | Business cycles, leading indicators, housing, Markov switching. |
| JEL: | C11 C32 G15 R31 E32 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:309&r=bec |
| By: | Nguyen, Quoc Hung |
| Abstract: | It is well known that several quantitative properties of international real business cycle models with are at odds with the data. First, the cross-country correlations are much higher for consumption than for output, while in the data the opposite is true (the BKK puzzle). Second, cross-country correlations of employment and investment are negative, while in the data they are positive. This paper quantitatively shows that preferences with a zero income effect on labor supply help generate a correct cross-country correlation in employment even without any restrictions on financial markets. In a bond economy, a zero income effect in labor supply, combined with time-to-build investment, can generate a positive cross-country correlation in investment, and the BKK puzzle is also resolved when the inter-temporal elasticity of substitution in labor supply is low. |
| Keywords: | International real business cycles, Income effects, GHH preferences, Business cycles, International economic relations, Consumption, Investments, Employment |
| JEL: | E21 E22 E24 E32 F41 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:jet:dpaper:dpaper269&r=bec |
| By: | Gartner, Hermann; Schank, Thorsten; Schnabel, Claus |
| Abstract: | Since there is scant evidence on the role of industrial relations in wage cyclicality, this paper analyzes the effect of collective wage contracts and of works councils on real wage growth. Using linked employer-employee data for western Germany, we find that works councils affect wage growth only in combination with collective bargaining. Wage adjustments to positive and negative economic shocks are not always symmetric. Only under sectoral bargaining there is a (nearly symmetric) reaction to rising and falling unemployment. In contrast, wage growth in establishments without collective bargaining adjusts only to falling unemployment and is unaffected by rising unemployment. -- |
| Keywords: | wage cyclicality,wage bargaining,works council,Germany |
| JEL: | J31 E32 J53 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:faulre:70&r=bec |
| By: | carsten Eckel; Leonardo Iacovone; Beata Javorcik; J. Peter Neary |
| Abstract: | We develop a new model of multi-product firms which invest to improve both the quality of their individual products and of their brand. Because of flexible manufacturing, products closer to firms’ core competence have lower costs, so they produce more of them, and also have higher incentives to invest in their quality. These two effects have opposite implications for the profile of prices. Mexican data provide robust confirmation of the model’s key prediction: firms in differentiated-good sectors exhibit quality-based competence (prices fall with distance from core competence), but export sales of firms in non-differentiated-good sectors exhibit the opposite. |
| Keywords: | Flexible manufacturing, multi-product firms, quality competition |
| JEL: | F12 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:522&r=bec |
| By: | Belderbos, Rene (UNU-MERIT, Maastricht University, and Katholieke Universiteit Leuven); Wakasugi, Ryuhei (University of Kyoto); Zou, Jianglei (ABN AMRO Bank) |
| Abstract: | We examine the impact of buyer-supplier relationships within business group on capital goods trade in the context of foreign direct investment by buyer firms and capital goods producers. A simple model in which cost-reducing relationship specific investments are underlying business group ties suggests that 1) foreign affiliates of business group firms have a greater propensity to import capital goods from the home country, increasing Japanese exports 2) if the establishment of overseas affiliates by business groups firms attracts FDI by their capital goods suppliers, the 'trade creating' impact of business group ties may disappear or even be reversed. Empirical analysis of capital goods imports by 1790 manufacturing affiliates operated abroad by Japanese multinational firms in 1996 provides broad support for these predictions and demonstrates a sizeable impact of buyer-supplier ties in business groups on trade. Affiliates of member firms of horizontal and vertical business groups with supplier ties exhibit a greater propensity to import from Japan, but this impact is mitigated or transformed into a smaller import propensity if the groups' capital goods producers have substantial manufacturing investments abroad. |
| Keywords: | : Multinational firms, imports, capital goods, FDI, business groups |
| JEL: | F23 F14 D21 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:unumer:2010066&r=bec |