nep-bec New Economics Papers
on Business Economics
Issue of 2011‒02‒26
thirty-two papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Search Frictions and the Liquidity of Large Blocks of Shares By Rui Albuquerque; Enrique Schroth
  2. Inventories and sales uncertainty By Mustafa Caglayan; Sara Maioli; Simona Mateut
  3. Past Market Variance and Asset Prices By Federico M. Bandi; Benoit Perron
  4. Labor Supply and Consumption Smoothing When Income Shocks Are Non-Insurable By Danzer, Alexander M.
  5. The Cyclicality of Effective Wages within Employer-Employee Matches in a Rigid Labor Market By Anger, Silke
  6. Minu, Startu and All That: Pitfalls in Estimating the Sensitivity of a Worker's Wage to Aggregate Unemployment By Martins, Pedro S.; Snell, Andy; Thomas, Jonathan P.
  7. Globalization, the Business Cycle, and Macroeconomic Monitoring By M. Ayhan Kose; S. Boragan Aruoba; Marco Terrones; Francis X. Diebold
  8. Evidence on a Real Business Cycle Model with Neutral and Investment-Specific Technology Shocks using Bayesian Model Averaging By Rodney W. Strachan; Herman K. van Dijk
  9. Vertical Differentiation in a Cournot Industry: The Porter Hypothesis and Beyond By L. Lambertini; A. Tampieri
  10. Market Timing, Investment, and Risk Management By Patrick Bolton; Hui Chen; Neng Wang
  11. Collective Bargaining under Non-Binding Contracts By Dobbelaere, Sabien; Luttens, Roland Iwan
  12. Employment Protection, Technology Choice, and Worker Allocation By Eric J. Bartelsman; Pieter A. Gautier; Joris de Wind
  13. Export Growth and Factor Market Competition: Theory and Evidence By Julian Emami Namini; Giovanni Facchini; Ricardo Lopez
  14. The role of fundamental Q and financing frictions in agricultural investment decisions: an analysis pre and post financial crisis By Conor M. O'Toole; Carol Newman; Thia Hennessy
  15. Do Firms sell forward for Strategic Reasons? An Application to the Wholesale Market for Natural Gas By Remco van Eijkel; J.L. Moraga
  16. Peer Evaluation: Incentives and Co-Worker Relations By Joeri Sol
  17. Selling, Passing on or Closing? Determinants of Entrepreneurial Intentions on Exit Modes By Martina Battisti; Hiroyuki Okamuro
  18. Information and Communication Technologies and Skill Upgrading: The Role of Internal vs. External Labour Markets By Behaghel, Luc; Caroli, Eve; Walkowiak, Emmanuelle
  19. Occupational Choice, Aggregate Productivity, and Trade By Meckl, Jürgen; Weigert, Benjamin
  20. To Fire or to Hoard? Explaining Japan’s Labor Market Response in the Great Recession By Chad Steinberg; Masato Nakane
  21. Corporate Ownership and Initial Training in Britain, Germany and Switzerland By Paul Ryan; Karin Wagner; Silvia Teuber; Uschi Backes-Gellner
  22. Capacity Constraints and Beliefs about Demand By Nick Vikander
  23. Competitive Prices as Profit-Maximizing Cartel Prices By Harold Houba; Evgenia Motchenkova; Quan Wen
  24. Does Anti-Competitive Regulation Matter for Productivity? Evidence from European Firms By Arnold, Jens; Nicoletti, Giuseppe; Scarpetta, Stefano
  25. Moral Hazard with Soft Information By Guillaume Roger
  26. The Relationship Between Financial Risk Premia and Macroeconomic Volatility: Issues and Perspectives on the Run-Up to the Turmoil By M. Marzo; L. Zhoushi; P. Zagaglia
  27. The Incidence and Impact of Firm-Provided Training among Japanese Non-Regular Workers By Hiromi Hara
  28. A Triptych Inquiry: Rethinking Sustainability, Innovation, and Financial Performance By Timo Busch; Bryan T. Stinchfield; Matthew S. Wood
  29. Transaction Management: Value Creation by Reducing Transaction Costs By Frank A.G. den Butter
  30. Japan and Her Dealings with Offshoring: An Empirical Analysis with Aggregate Data By Agnese, Pablo
  31. Is Our World Going to Get a Whole Lot Smaller? By Byron Gangnes; Alyson C. Ma; Ari Van Assche
  32. Repeated moral hazard and contracts with memory: The case of risk-neutrality By Ohlendorf, Susanne; Schmitz, Patrick W.

  1. By: Rui Albuquerque (Boston University School of Management, ECGI, and CEPR); Enrique Schroth (University of Amsterdam)
    Abstract: This paper investigates empirically the illiquidity of majority blocks of shares in the context of a search model of block trades. The search model incorporates two aspects of illiquidity, or search frictions. First, upon a liquidity shock, the incumbent blockholders may be forced to sell to a less efficient buyer. Second, a block liquidity sale may occur at a fire sale price. We conduct a structural estimation of the model using data on majority block trades in the U.S. The structural estimation is particularly useful in this exercise as it allows us to evaluate the counterfactual price that would result absent liquidity shocks. Our results help shed light into the size of the marketability discount, the control discount and an illiquidity-spillover discount we identify, and on the determinants of aggregate liquidity.
    Keywords: Block pricing; marketability discount; liquidity; control transactions; search frictions; structural estimation
    JEL: G34
    Date: 2011–02–11
  2. By: Mustafa Caglayan (Department of Economics, The University of Sheffield); Sara Maioli; Simona Mateut
    Abstract: We investigate the empirical linkages between sales uncertainty and fi?rms? inventory investment behavior while controlling for fi?rms? fi?nancial strength. Using large panels of manufacturing fi?rms from several European countries we ?nd that higher sales uncertainty leads to larger stocks of inventories. We also identify an indirect effect of sales uncertainty on inventory accumulation through the fi?nancial strength of fi?rms. Our results provide evidence that ?nancial strength mitigates the adverse effects of uncertainty
    Keywords: inventory investment, uncertainty, financial constraints
    JEL: D92 D81 F14
    Date: 2011–02
  3. By: Federico M. Bandi; Benoit Perron
    Abstract: Recent work in asset pricing has focused on market-wide variance as a systematic factor and on firm-specific variance as idiosyncratic risk. We study an alternative channel through which the variability of financial market returns may help our understanding of cross-sectional price formation in financial markets. Invoking the countercyclical nature of market variance, we allow the (stochastic) discounting of future cash-flows to depend on the level of past market variance (pmv). Employing pmv as a conditioning variable in a classical consumption-CAPM framework, we derive economically meaningful conditional factor loadings and conditional risk premia. We show that scaling by pmv may also yield more effective pricing results than scaling by successful, alternative variables (such as the consumption-to-wealth ratio) precisely at frequencies at which their predictive ability for excess market returns should be (in theory) and is (empirically) maximal, i.e., business-cycle frequencies. <P>
    Keywords: Asset prices, financial markets,
    Date: 2011–02–01
  4. By: Danzer, Alexander M. (University of Munich)
    Abstract: The paper investigates how employees use secondary employment to smooth out consumption shortfalls from non-anticipated wage shocks in their main employment. The identification strategy exploits surprising changes in firms’ wage payment and repayment behavior in Ukraine. Based on unique nationally representative panel data, the econometric approach accounts for workers' unobserved heterogeneity and measurement error in the wage shock information. The estimated labor supply responses suggest that secondary activities are used as temporary coping strategies against wage shocks and that they closely follow the lifecycle of wage arrears. Households that engage in secondary employment can successfully smooth their consumption. The results are robust to several alternative hypotheses concerning the observed labor supply pattern.
    Keywords: dual job holding, wage shock, consumption smoothing, subsidiary farming, reaction time to shocks
    JEL: J22 J33 P36 O17
    Date: 2011–02
  5. By: Anger, Silke (DIW Berlin)
    Abstract: This study analyzes real wage cyclicality for male full-time workers within employer-employee matches in Germany over the period 1984-2004. Five different wage measures are compared: the standard hourly wage rate; hourly wage earnings including overtime and bonus pay; the effective wage, which takes into account unpaid overtime; and monthly earnings, with and without additional pay. None of the hourly wage measures exhibits cyclicality except for the group of salaried workers with unpaid overtime. Their effective wages show a strongly procyclical reaction to changes in unemployment. Despite acyclical wage rates, salaried workers without unpaid overtime experienced procyclical earnings movements if they had income from extra pay. Monthly earnings were also procyclical for hourly paid workers with overtime pay. These findings suggest that cyclical earnings movements are generated by variable pay components, such as bonuses and overtime, and by flexible working hours. The degree of earnings procyclicality revealed for the German labor market is comparable to the United States.
    Keywords: real wage cyclicality, effective wages, unpaid overtime, bonus payments, firm stayers
    JEL: E32 J31
    Date: 2011–02
  6. By: Martins, Pedro S. (Queen Mary, University of London); Snell, Andy (University of Edinburgh); Thomas, Jonathan P. (University of Edinburgh)
    Abstract: In this paper we show that panel estimates of tenure specific sensitivity to the business cycle of wages is subject to serious pitfalls. Three canonical variates used in the literature – the minimum unemployment rate during a worker’s time at the firm (min u), the unemployment rate at the start of her tenure (Su) and the current unemployment rate interacted with a new hire dummy (δu) – can all be significant and "correctly" signed even when each worker in the firm receives the same wage, regardless of tenure (equal treatment). In matched data the problem can be resolved by the inclusion in the panel of firm-year interaction dummies. In unmatched data where this is not possible, we propose a solution for min u and Su based on Solon, Barsky and Parker's (1994) two step method. Our proposed solution method is however suboptimal because it removes a lot of potentially informative variation in average wages. Unfortunately δu cannot be identified in unmatched data because a differential wage response to unemployment of new hires and incumbents will appear under both equal treatment and unequal treatment.
    Keywords: wage cyclicality, unemployment
    JEL: J50 J31
    Date: 2011–02
  7. By: M. Ayhan Kose; S. Boragan Aruoba; Marco Terrones; Francis X. Diebold
    Abstract: We propose and implement a framework for characterizing and monitoring the global business cycle. Our framework utilizes high-frequency data, allows us to account for a potentially large amount of missing observations, and is designed to facilitate the updating of global activity estimates as data are released and revisions become available. We apply the framework to the G-7 countries and study various aspects of national and global business cycles, obtaining three main results. First, our measure of the global business cycle, the common G-7 real activity factor, explains a significant amount of cross-country variation and tracks the major global cyclical events of the past forty years. Second, the common G-7 factor and the idiosyncratic country factors play different roles at different times in shaping national economic activity. Finally, the degree of G-7 business cycle synchronization among country factors has changed over time.
    Keywords: Business cycles , Cross country analysis , Globalization , Group of seven ,
    Date: 2011–02–01
  8. By: Rodney W. Strachan (The Australian National University); Herman K. van Dijk (Erasmus University Rotterdam)
    Abstract: The empirical support for a real business cycle model with two technology shocks is evaluated using a Bayesian model averaging procedure. This procedure makes use of a finite mixture of many models within the class of
    Keywords: Posterior probability; Real business cycle model; Cointegration; Model averaging; Stochastic trend; Impulse response; Vector autoregressive model
    JEL: C11 C32 C52
    Date: 2010–05–17
  9. By: L. Lambertini; A. Tampieri
    Abstract: We modify the vertically differentiated duopoly model by André et al. (2009) replacing Bertrand with Cournot behaviour to show that firms may spontaneously adopt a green technology even in the complete absence of any form of regulation.
    JEL: L13 L51 Q55 Q58
    Date: 2011–02
  10. By: Patrick Bolton; Hui Chen; Neng Wang
    Abstract: Firms face uncertain financing conditions and are exposed to the risk of a sudden rise in financing costs during financial crises. We develop a tractable model of dynamic corporate financial management (cash accumulation, investment, equity issuance, risk management, and payout policies) for a financially constrained firm facing time-varying external financing costs. Firms value financial slack and build cash reserves to mitigate financial constraints. However, uncertainty about future financing opportunities also induce firms to rationally time the equity market, even if they have no immediate needs for cash. The stochastic financing conditions have rich implications for investment and risk management: (1) investment can be decreasing in financial slack; (2) firms may invest less as expected future financing costs fall; (3) investment-cash sensitivity, marginal value of cash, and firm's risk premium can all be non-monotonic in cash holdings; (4) speculation (as opposed to hedging) can be value-maximizing for financially constrained firms.
    JEL: E22 G12 G3
    Date: 2011–02
  11. By: Dobbelaere, Sabien (VU University Amsterdam); Luttens, Roland Iwan (Ghent University)
    Abstract: We introduce collective bargaining in a static framework where the firm and its risk-neutral employees negotiate over wages in a non-binding contract setting. Our main result is the equivalence between the non-binding collective equilibrium wage-employment contract and the equilibrium contract under binding risk-neutral efficient bargaining. We also demonstrate that our non-cooperative equilibrium wages and profits coincide with the Owen values of the corresponding cooperative game with the coalitional structure that follows from unionization.
    Keywords: collective bargaining, union, firm, bargaining power, non-binding contract
    JEL: C71 J51 L20
    Date: 2011–02
  12. By: Eric J. Bartelsman (VU University Amsterdam, IZA); Pieter A. Gautier (VU University Amsterdam, CEPR, IZA); Joris de Wind (De Nederlandsche Bank, University of Amsterdam)
    Abstract: Using a country-industry panel dataset (EUKLEMS) we uncover a robust empirical regularity, namely that high-risk innovative sectors are relatively smaller in countries with strict employment protection legislation (EPL). To understand the mechanism, we develop a two-sector matching model where firms endogenously choose between a safe technology with known productivity and a risky technology with productivity subject to sizeable shocks. Strict EPL makes the risky technology relatively less attractive because it is more costly to shed workers upon receiving a low productivity draw. We calibrate the model using a variety of aggregate, industry and micro-level data sources. We then simulate the model to reflect both the observed differences across countries in EPL and the observed increase since the mid-1990s in the variance of firm performance associated with the adoption of information and communication technology. The simulations produce a differential response to the arrival of risky technology between low- and high-EPL countries that coincides with the findings in the data. The described mechanism can explain a considerable portion of the slowdown in productivity in the EU relative to the US since 1995.
    Keywords: employment protection legislation; exit costs; Information and Communications Technology; heterogeneous productivity; sectoral allocation
    JEL: J65 O38
    Date: 2010–04–19
  13. By: Julian Emami Namini (Erasmus University Rotterdam); Giovanni Facchini (Erasmus University Rotterdam); Ricardo Lopez (International Business School, Brandeis University)
    Abstract: Empirical evidence suggests that sectoral export growth decreases exporters' survival probability, whereas non-exporters are unaffected. Models with firm heterogeneity in total factor productivity predict the opposite. To solve this puzzle, we develop a two-factor framework where firms differ in factor shares. In this model, export growth increases competition for the factor used intensively by exporters, eliminating some of them, while non-exporters benefit. Our empirical analysis shows that the forces highlighted in the model drive the firm selection experienced by the Chilean manufacturing sector, suggesting that heterogeneity in factor shares is crucial to understand how firms react to trade liberalization.
    Keywords: Firm Dynamics, Two-factor Trade Model, Firm Heterogeneity in Factor Input Shares, Chile, Manufacturing Industry
    JEL: F12 F14 F16 L11
    Date: 2011–02
  14. By: Conor M. O'Toole (Department of Economics, Trinity College Dublin); Carol Newman (Department of Economics, Trinity College Dublin); Thia Hennessy (Rural Economy Development Programme, Teagasc)
    Abstract: This paper uses a fundamental Q model of investment to consider the role played by financing frictions in agricultural investment decisions, controlling econometrically for censoring, heterogeneity and errors-in-variables. Our findings suggest that farmer's investment decisions are not driven by market fundamentals. We find some evidence that debt overhang restricts investment but investment is not dependent on liquidity or internal funds. The role of financing frictions in determining investment decisions changes in the post-financial crisis period when debt overhang becomes a significant impediment to farm investment. The evidence suggests that farmers increasingly rely on internal liquidity to drive investment. Finally, we find no evidence that farmers use off-farm capital to fund on-farm investment.
    Keywords: Credit Constraints, Firm Level Investment, Tobin's Q, Debt
    JEL: G31 G32 F34
    Date: 2011–02
  15. By: Remco van Eijkel (Dept. of Economics, Econometrics and Finance, University of Groningen); J.L. Moraga (ICREA, IESE Business School, and University of Groningen)
    Abstract: Building on a model of the interaction of risk-averse frms that compete in forward and spot markets, we develop an empirical strategy to test whether oligopolistic frms use forward contracts for strategic motives, for risk-hedging, or for both. An increase in the number of players weakens the incentives to sell forward for risk-hedging reasons.
    Keywords: market power; risk-hedging; forward contracts; spot market; over-thecounter trade; market transparency; churn rates
    JEL: D43 L13 G13 L95
    Date: 2010–06–10
  16. By: Joeri Sol (Erasmus University Rotterdam)
    Keywords: peer evaluation; peer appraisal; incentive contracts; co-worker relations; likeability bias
    JEL: D86 J33 M50
    Date: 2010–05–28
  17. By: Martina Battisti; Hiroyuki Okamuro
    Abstract: Exit is an important part of the entrepreneurial lifecycle. In contrast to numerous previous studies on entry, however, little attention has been paid to entrepreneurial exit, and much less on exit modes thus far. Using a recent original survey data on small business owners in New Zealand, where a large majority of them prefer selling their firms when they exit, we empirically investigate the determinants of intended entrepreneurial exit modes: selling out, succession, or closure. Estimation results of multinomial logit analysis suggest that the intention to sell the business is significantly affected by the size and performance of the firm, the involvement of family and how the owner entered the business. Moreover, we find that the intention to liquidate the business is significantly affected by the size and performance of the firm and partly by family involvement in the business.
    Keywords: entrepreneurial exit, liquidation, small and medium enterprise (SME), New Zealand
    Date: 2010–10
  18. By: Behaghel, Luc (CREST-INSEE); Caroli, Eve (University Paris Ouest-Nanterre); Walkowiak, Emmanuelle ((CEE) Centre D'Ètudes de L'Emploi)
    Abstract: Following the adoption of information and communication technologies (ICT), firms are likely to face increasing skill requirements. They may react either by training or hiring the new skills, or by a combination of both. We first show that ICT are indeed skill biased and we then assess the relative importance of external and internal labour market strategies. We show that skill upgrading following ICT adoption takes place mostly through internal labour markets adjustments. The introduction of ICT is associated with an upward shift in firms’ occupational structure, of which one third is due to hiring and firing workers from and to the external labour market, whereas two-thirds are due to promotions. Moreover, we find no compelling evidence of external labour market strategies based on "excess turnover". In contrast, French firms heavily rely on training in order to upgrade the skill level of their workforce, even if this varies across industries.
    Keywords: technical change, labour turnover, skill bias, training, internal labour markets
    JEL: J23 J24 J41
    Date: 2011–02
  19. By: Meckl, Jürgen (Justus Liebig University, Giessen); Weigert, Benjamin (German Council of Economic Experts)
    Abstract: We propose occupational decisions of heterogeneous individuals as an alternative mechanism of explaining the distribution of firm productivities emphasized by empirical studies. Thus, we integrate the frameworks of Melitz (2003), and of Manasse and Turrini (2001) that establish the theoretical base of trade models with heterogeneous firms. Our model is technically much simpler than the Melitz approach while preserving the main results on firm-selection effects due to international market integration. Our approach paves the way for detailed analysis of institutions in a heterogeneous firm model to better understand the link between institutions and an economy’s productivity distribution.
    Keywords: intra-industry trade, heterogeneous productivities, firm selection, occupational choice
    JEL: F12 F16 J24
    Date: 2011–02
  20. By: Chad Steinberg; Masato Nakane
    Abstract: The Great Recession pushed Japan’s unemployment rate to historic highs, but the increase has been small by international standards and small relative to the large output shock. This paper explores Japan’s cyclical labor market response to the global financial crisis. Our findings suggest that: (i) employment responsiveness has been historically low but rising over time with the increasing importance of the non-regular workforce; (ii) the labor market response was consistent with historical patterns once we control for the size of the output shock; and (iii) the comparatively lower employment response vis-à-vis other countries can in part be explained by the quick implementation of an employment subsidy program, a more flexible wage system, and a corporate governance structure that places workers rights above shareholders.
    Keywords: Business cycles , Economic recession , Employment , Global Financial Crisis 2008-2009 , Japan , Labor markets , Manufacturing sector , Unemployment ,
    Date: 2011–01–24
  21. By: Paul Ryan (King's College Cambridge); Karin Wagner (Hochschule für Technik und Wirtschaft Berlin); Silvia Teuber (Department of Business Administration, University of Zurich); Uschi Backes-Gellner (Department of Business Administration, University of Zurich)
    Abstract: This paper considers whether listed companies with dispersed ownership invest less in training than do other firms, as part of a short-termist stance caused by pressure from the stock market. An analytical framework that supports the proposition involves three factors: high agency costs between the shareholders and managers of listed firms that have dispersed ownership; the use of highly geared performance-related pay to reward top managers; and accounting conventions that distort performance measures by requiring that spending on intangible assets be expensed not amortised. Managers then have the incentive and ability to restrict spending on training in order to increase their remuneration. Countervailing factors, including institutions of corporate governance, may however weaken or destroy such effects. Evidence is presented concerning the initial training programmes of 56 companies in engineering and retailing in Britain, Germany and Switzerland. The evidence is consistent with ownership effects in both sectors, but those effects are at most moderate in both incidence and strength. The skill requirements of competitive success in product markets appear more important than ownership.
    Date: 2011–02
  22. By: Nick Vikander (Erasmus University Rotterdam, and University of Edinburgh)
    Abstract: This paper examines how a firm can strategically choose its capacity to manipulate consumer beliefs about aggregate demand. It looks at a market with social effects where consumers want to do what is popular, to buy what they believe others want to buy. By imposing a capacity constraint and setting a price just low enough for it to bind, the firm can fool certain naive consumers into believing that demand is greater than it actually is. This will in turn increase the willingness to pay of all consumers through social effects. In equilibrium, the firm will impose a capacity constraint whenever demand is lower than expected, even when the number of naive consumers is arbitrarily small.
    Keywords: capacity constraints; bandwagon effects; naive consumers; bounded rationality
    JEL: D80 L00
    Date: 2011–01–24
  23. By: Harold Houba (VU University Amsterdam); Evgenia Motchenkova (VU University Amsterdam); Quan Wen (Vanderbilt University)
    Abstract: Even under antitrust enforcement, firms may still form a cartel in an infinitely-repeated oligopoly model when the discount factor is sufficiently close to one. We present a linear oligopoly model where the profit-maximizing cartel price converges to the competitive equilibrium price as the discount factor goes to one. We then identify a set of necessary conditions for this seemingly counter-intuitive result.
    Keywords: Antitrust enforcement; Cartel; Oligopoly; Repeated game
    JEL: L4 C7
    Date: 2010–04–27
  24. By: Arnold, Jens (OECD); Nicoletti, Giuseppe (OECD); Scarpetta, Stefano (OECD)
    Abstract: Using firm-level data for a sample of European countries, we focus on the effects that product-market regulations have on firm-level TFP growth. We proxy regulatory burdens using the OECD indicators of sectoral non-manufacturing regulations. These allow accounting for both the direct effects of sectoral regulation on within-sector performance and the indirect effects of sectoral regulation on firms in other sectors through intersectoral input-output linkages. Our econometric specification of TFP is based on a "neo-Schumpeterian" empirical specification in which productivity improvements depend on growth at the global technological frontier and a catch up term. We assume that regulation can affect productivity growth both directly and by slowing down the rate of catch up. We find that product market regulations that curb competitive pressures tend to reduce the productivity performance of firms. The negative effect is particularly strong on firms characterised by an above-average productivity growth. Domestic regulations that affect all regulated firms in the same way seem to be more important than border regulations in this context.
    Keywords: total factor productivity, firm-level data, product market regulation
    JEL: D24 L11 L51
    Date: 2011–02
  25. By: Guillaume Roger (School of Economics, The University of New South Wales)
    Abstract: We study a model of moral hazard with soft information: the risk-averse agent takes an action and she alone observes the stochastic outcome; hence the principal faces a problem of ex post adverse selection. High-power contracts may not be appropriate when information is soft. The optimal truth-telling mechanism with audit requires a two-part tariff to be offered to the agent. The fixed component affords the agent a constant ex post information rent, which weakens the ex ante incentives for effort. We then establish an equivalence between a truthful mechanism and the general mechanism, for the agent’s payoff set and action choice. For the principal a truth-telling mechanism strictly dominates because it shields the agent from variations in the ex post payoffs. In that sense the optimal contract is unique.
    Date: 2010–11
  26. By: M. Marzo; L. Zhoushi; P. Zagaglia
    Abstract: This note sketches the issues that arise while interpreting the relation between macroeconomic volatility and financial risk premia from the perspective of the standard consumption-based asset pricingmodel. The relation arises from the fact that all assets are priced by the same "pricingkernel", given by the inter-temporal marginal rate of substitution in consumption of the representative investor. Since the pricing kernel is a function of aggregate consumption, financial risk premia are positively related to consumption growth volatility. Therefore, from the perspective of this workhorse often employed in the academic debate, the persistent reduction in macroeconomic volatility can be considered a cause for the low average risk premia prevailing during the so-called Great Moderation, namely the period preceding the recent turmoil in financial markets. We challenge this view by shedding light on the issues that generate an inconsistent interpretation of the model outcomes. In particular, since the consumption-based model is geared towards asset prices consistent with macroeconomic fundamentals, we argue that it is not suited for interpreting current developments where underestimation of risk may have subsidized asset prices. In particular, according to the evidence for the Great Moderation, the model view suffers from observational equivalence.
    JEL: E43 G12
    Date: 2011–02
  27. By: Hiromi Hara
    JEL: J23 J24 J31
    Date: 2010–07
  28. By: Timo Busch (ETH Zuerich, Switzerland); Bryan T. Stinchfield (Franklin & Marshall College, Lancaster, Carbondale); Matthew S. Wood (Cameron School of Business, University of North Carolina Wilmington)
    Abstract: Management scholars have sought to answer the question: is there a financial payoff for ad-dressing ecological and social issues? We move beyond this question and include a time com-ponent for corporate financial performance (CFP) and a firm’s innovativeness in order to ask: when does it pay? Combining a contingency perspective with the resource-based view of the firm clarifies the positive relationship between corporate environmental and social perform-ance (ESP) and CFP, which only holds in the long-term but not in the short-term. Further, we find support for a moderating effect of innovation on the relationship between the ESP and short-term CFP as suggested by the literature. However, we empirically show that in the long-term, innovation mediates the ESP-CFP relationship suggesting that innovation should be considered as a long-term investment required to unlock the full potential of ESP initiatives.
    Keywords: Sustainable development; innovation; firm performance; Tobin’s q; moderation and mediation
    JEL: G30 M14 L20 Q01
    Date: 2011–02–10
  29. By: Frank A.G. den Butter (VU University Amsterdam)
    Abstract: In this era of globalization we see an increase in specialization: the production chain is
    Keywords: transaction costs; outsourcing; trade in tasks; fragmentation of production; make or buy decision; game of trust
    JEL: D23 F2 F43 L23
    Date: 2010–05–17
  30. By: Agnese, Pablo (IESE Business School)
    Abstract: First moves towards a real understanding of offshoring date back to very recent times. In particular for Japan, the studies conducted so far focus alone on the productivity effects of offshoring at the firm level. Here I carry out the analysis of both the employment and productivity effects at the aggregate level of the industry, covering the years 1980-2005. Moreover, I consider all industries within the economy and take account of both services and materials offshoring. My results suggest that we should expect, on average, a positive effect of services and a negative effect of materials offshoring on employment. However, the effects are rather negligible and only amount to a 1.5 to 2 percent net loss of the change in employment. On the other hand, positive effects on the growth rate of productivity are found as a result of both types of offshoring, with larger effects from services. In particular, the average offshoring industry displays 1.4 to 1.98 additional percentage points for services and 0.48 to 0.64 for materials.
    Keywords: offshoring, Japan, employment, productivity
    JEL: F16 J23 O47
    Date: 2011–02
  31. By: Byron Gangnes; Alyson C. Ma; Ari Van Assche
    Abstract: The surge of oil prices in recent years has led to speculation that rising transportation costs could end the period of dramatic world trade growth — in the words of Rubin (2009), “…Your world is going to get a whole lot smaller.” Using data from China’s Customs Statistics, we examine the impact of oil prices on trade’s sensitivity to distance. We find that higher oil prices increase trade’s elasticity to distance, but that the economic effect is small. We also find that the effect is more pronounced for trade within global production networks, and less large for goods shipped by air. <P>
    Keywords: oil prices, distance, trade, vertical specialization, mode of transport, China,
    Date: 2011–02–01
  32. By: Ohlendorf, Susanne; Schmitz, Patrick W.
    Abstract: We consider a repeated moral hazard problem, where both the principal and the wealth-constrained agent are risk-neutral. In each of two periods, the agent can exert unobservable effort, leading to success or failure. Incentives provided in the second period act as carrot and stick for the first period, so that the effort level induced in the second period is higher after a first-period success than after a failure. If renegotiation cannot be prevented, the principal may prefer a project with lower returns; i.e., a project may be "too good" to be financed or, similarly, an agent can be "overqualified."
    Keywords: Dynamic moral hazard; hidden actions; limited liability
    JEL: D86 M52 J33 C73
    Date: 2011–01

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