nep-bec New Economics Papers
on Business Economics
Issue of 2011‒03‒12
eighteen papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Business Conditions and Default Risks across Countries By Pflüger, Michael P.; Russek, Stephan
  2. Managerial Incentives and Favoritism in Promotion Decisions: Theory and Field Evidence By Berger, Johannes; Herbertz, Claus; Sliwka, Dirk
  3. On the economic architecture of the workplace: Repercussions of social comparisons among heterogeneous workers By Stark, Oded; Hyll, Walter
  4. Inventories, Markups and Real Rigidities in Sticky Price Models of the Canadian Economy By Oleksiy Kryvtsov; Virgiliu Midrigan
  5. Managers' Mobility, Trade Status and Wages By Giordano Mion; Luca David Opromolla
  6. Exclusive Dealing Contracts by Distributors By Ryoko Oki; Noriyuki Yanagawa
  7. Corporate Payout Policy in Japan By Abhinav Goyal; Cal Muckley
  8. Exogenous Productivity Shocks and Capital Investment in Common-pool Resources By Fissel, Benjamin E; Glibert, Ben
  9. Asian Business Cycle Synchronisation By Dong He; Wei Liao
  10. Why are some prices stickier than others? Firm-data evidence on price adjustment lags By Daniel A. Dias; Carlos Robalo Marques; Fernando Martins; Joao M.C. Santos Silva
  11. Deals versus Rules: Policy Implementation Uncertainty and Why Firms Hate It By Hallward-Driemeier, Mary; Khun-Jush, Gita; Pritchett, Lant
  12. Age Biased Technical and Organisational Change, Training and Employment Prospects of Older Workers By Behaghel, Luc; Caroli, Eve; Roger, Muriel
  13. Misleading Advertising in Duopoly By Keisuke Hattori; Keisaku Higashida
  14. Does High Involvement Management Lead to Higher Pay? By Alex Bryson; Petri Böckerman; Pekka Ilmakunnas
  15. Do we need big banks ? evidence on performance, strategy and market By Demirguc-Kunt , Asli; Huizinga, Harry
  16. Going multinational and ownership:evidence from French matched firms. By Alexandre Gazaniol; Frédéric Peltrault
  17. How Does Size Matter? Investigating the Relationships Among Plant Size, Industrial Structure, and Manufacturing Productivity By Joshua Drucker
  18. The Margins of Labour Cost Adjustment: Survey Evidence from European Firms By Jan Babecky; Philip Du Caju; Theodora Kosma; Martina Lawless; Julian Messina; Tairi Room

  1. By: Pflüger, Michael P. (University of Passau); Russek, Stephan (University of Passau)
    Abstract: The risk of default that business firms face is very significant and differs widely across countries. This paper explores the links between countries' business conditions and international trade embedment and the default risk at the country level from a theoretical point of view. Our main contribution is to set up a general equilibrium model which allows us to derive sharp predictions concerning how key factors which shape a country's business and trade environment impact on the default risk of firms which operate in these environments. The predictions are in accord with readily available data.
    Keywords: firm death, firm heterogeneity, business conditions and firm productivity, trade integration
    JEL: F12 F13 F15 L25
    Date: 2011–02
  2. By: Berger, Johannes (University of Cologne); Herbertz, Claus (University of Cologne); Sliwka, Dirk (University of Cologne)
    Abstract: This paper investigates the effects of managerial incentives on favoritism in promotion decisions. First, we theoretically show that favoritism leads to a lower quality of promotion decisions and in turn lower efforts. But the effect can be mitigated by pay-for-performance incentives for managers who decide upon promotion. Second, we analyze matched employer-employee survey data with detailed firm level information on managerial incentive schemes and find that perceived promotion quality is indeed substantially higher when managers receive performance-related pay or participate in gain sharing plans.
    Keywords: incentives, favoritism, nepotism, tournaments
    JEL: J33 M51 M52 M54 J71
    Date: 2011–03
  3. By: Stark, Oded; Hyll, Walter
    Abstract: We analyze the impact on a firm’s profits and optimal wage rates, and on the distribution of workers’ earnings, when workers compare their earnings with those of co-workers. We consider a low-productivity worker who receives lower wage earnings than a high-productivity worker. When the low-productivity worker derives (dis)utility not only from his own effort but also from comparing his earnings with those of the high-productivity worker, his response to the sensing of relative deprivation is to increase the optimal level of effort. Consequently, the firm’s profits are higher, its wage rates remain unchanged, and the distribution of earnings is compressed.
    Keywords: Social comparisons; Heterogeneous workforce; Relative deprivation; Effort exertion; Earnings gap; Earnings compression
    JEL: D21 J31 J22 J24 M54 D01
    Date: 2011
  4. By: Oleksiy Kryvtsov; Virgiliu Midrigan
    Abstract: Recent New Keynesian models of macroeconomy view nominal cost rigidities, rather than nominal price rigidities, as the key feature that accounts for the observed persistence in output and inflation. Kryvtsov and Midrigan (2010a,b) reassess these conclusions by combining a theory based on nominal rigidities and storable goods with direct evidence on inventories for the U.S. This paper applies Kryvtsov and Midrigan’s model to the case of Canada. The model predicts that if costs of production are sticky and markups do not vary much in response to, say, expansionary monetary policy, firms react by excessively accumulating inventories in anticipation of future cost increases. In contrast, in the Canadian data inventories are fairly constant over the cycle and in response to changes in monetary policy. Similarly to Kryvtsov and Midrigan, we show that markups must decline sufficiently in times of a monetary expansion in order to reduce firms’ incentive to hold inventories and thus bring the model’s inventory predictions in line with the data. The model consistent with salient features of the dynamics of inventories in the Canadian data implies that countercyclical markups account for a sizable (50-80%) fraction of the response of real variables to monetary shocks.
    Keywords: Business fluctuations and cycles; Transmission of monetary policy
    JEL: E31 F12
    Date: 2011
  5. By: Giordano Mion; Luca David Opromolla
    Abstract: This paper investigates whether the arrival of managers with export experience, i.e. experience acquired through participation in the export activity of previous employers, is related to firms' international trade status and to what extent this relationship is of a causal nature. We construct a worker-firm matched panel dataset which enables us to track managers across different firms over time and observe firms' trading stance as well as a large set of workers' and firms' characteristics. Contrary to blue and white collars, we find that managers are paid a sizeable premium for export experience which has both a level and a trend component. Conditioning for the firm past trade status, we find that a one standard deviation increase in the firm's share of managers' with export experience corresponds to about 35% more chances of starting to export. The impact is stronger for larger firms and is roughly of the same order of magnitude of the firm productivity effect. On the contrary, export experience acquired by managers from previous employers positively affects the capacity to keep exporting in small firms only. To give a causality flavor to our findings, we use in a final step an IV strategy that mimics a random matching between managers with export experience and firms. IV estimations indicate that export experience matters even more for entry while it has no effect on exit.
    Keywords: Managers, worker mobility, trade status, wage premia, displacement, export experience
    JEL: F10 L25 J31 J60 M50
    Date: 2011–02
  6. By: Ryoko Oki (Graduate School of Economics, University of Tokyo); Noriyuki Yanagawa (Faculty of Economics, University of Tokyo)
    Abstract: The existing literature about exclusive dealing contracts has focused on cases where an incumbent manufacturer offers exclusive contracts to deter an entry. In contrast, we consider the case where an incumbent distributor offers exclusive dealing contracts to deter an entry. Exclusive dealing contracts by a distributor are less effective. We will show that the outcome of such contracts is quite different from the outcomes in the traditional literature. If the number of manufacturers is sufficiently high, it is impossible to exclude an efficient entry. Furthermore, if we allow two- part tariff contracts, the entrant distributor can enter the market for any number of manufacturers.
    Date: 2011–02
  7. By: Abhinav Goyal (University College Dublin); Cal Muckley (University College Dublin)
    Abstract: This paper examines cash dividends and share repurchases in Japan - discerning between keiretsu and non-keiretsu groupings of firms - during the period 1990 to 2008, a period of extensive Japanese corporate governance reform. As in the United States, share repurchases in Japan have grown strikingly across firm groupings even relative to cash dividends which have also increased. Unlike in the United States, cash dividends remain the dominant form of payout across the groupings of firms in Japan. Despite extensive corporate governance reform, the keiretsu grouping of firms exhibits a comparative reticence to alter its corporate payout policy. In particular, it remains the case that keiretsu firms disburse relatively large amounts of cash, they rely relatively heavily on cash dividends rather than share repurchases, they exhibit a greater tendency to discontinue cash dividend payouts, their payouts are relatively sensitive to earnings and these payouts respond relatively rapidly with respect to earnings. In addition, the cash dividend payouts in keiretsu firms have been relatively concentrated, while these payouts from non-keiretsu firms concentrate increasingly over time. The findings also suggest that larger firms in Japan are more likely to payout and if they decide to do so they tend to payout more. As the level of concentration of ownership in Japanese firms increases the amount of cash dividends disbursed decreases. Privatized firms are more likely to pay cash dividends and if they decide to do so and they are not keiretsu affiliated they tend to payout more.
    Keywords: Payout policy, dividends, share repurchases, corporate governance
    JEL: G15 G32 G35
    Date: 2011–03–02
  8. By: Fissel, Benjamin E; Glibert, Ben
    Abstract: We model exogenous technology shocks in common-pool industries using a compound Poisson process for total factor productivity. Rapid di�usion of exogenous innovations is typical in the commons, but technology is rarely modeled this way. Technology shocks lower the equilibrium resource stock while causing capital buildup based on transitory pro�ts with myopic expectations. The steady state changes from a stable node to a shifting focus with boom and bust cycles, even if only technology is uncertain. A �sheries application is developed, but the results apply to many settings with discontinuous changes in value and open access with costly exit.
    Keywords: technology shocks
    Date: 2010–09–23
  9. By: Dong He (Hong Kong Institute for Monetary Research); Wei Liao (Hong Kong Institute for Monetary Research)
    Abstract: This paper develops a multi-level structural factor model to study international output comovement and its underlying driving forces. Our method combines a structural VAR with a multi-level factor model, which helps us understand the economic meaning of the estimated factors. Using quarterly data of real GDP growth covering nine emerging Asian economies and G-7 countries, we estimate a global supply factor, a global demand factor, and group supply and demand factors for each group of the economies. We find that, while the role of the global factors has intensified over the past fifteen years for most of the economies, output fluctuations in Asia have remained less synchronised with the global factor than those in the industrial countries. The Asian regional factors have become increasingly important in tightening the interdependence within the region over time. Thus while emerging Asian economies cannot "decouple" completely from the advanced economies, they have nonetheless sustained a strong independent cycle among themselves. We also find that synchronised supply shocks contributed more to the observed synchronisation in output fluctuations among the Asian economies than demand shocks. This points to the role of productivity enhancement through vertical trade integration, rather than dependence on external demand, as the primary source of business cycle synchronisation in emerging Asia.
    Keywords: Business Cycle Synchronization, Asia's External Dependency, Decoupling, Multi-Level Factor Model, Structural VAR
    Date: 2011–02
  10. By: Daniel A. Dias (Department of Economics, University of Illinois.); Carlos Robalo Marques (Banco de Portugal, Research Department.); Fernando Martins (Banco de Portugal, Research Department, ISEG (Technical University of Lisbon) and Universidade Lusíada de Lisboa.); Joao M.C. Santos Silva (Department of Economics, University of Essex and CEMAPRE.)
    Abstract: Infrequent price changes at the firm level are now well documented in the literature. However, a number of issues remain partly unaddressed. This paper contributes to the literature on price stickiness by investigating the lags of price adjustments to different types of shocks. We find that adjustment lags to cost and demand shocks vary with firm characteristics, namely the firm’s cost structure, the type of pricing policy, and the type of good. We also document that firms react asymmetrically to demand and cost shocks, as well as to positive and negative shocks, and that the degree and direction of the asymmetry varies across firms. JEL Classification: C41, D40, E31.
    Keywords: Firm heterogeneity, Panel-ordered probit, Real rigidities, Survey data.
    Date: 2011–03
  11. By: Hallward-Driemeier, Mary (World Bank); Khun-Jush, Gita (University of Chicago); Pritchett, Lant (Harvard University)
    Abstract: Firms in Africa report "regulatory and economic policy uncertainty" as a top constraint to their growth. We argue that often firms in Africa do not cope with policy rules, rather they face deals; firm-specific policy actions that can be influenced by firm actions (e.g. bribes) and characteristics (e.g. political connections). Using Enterprise Survey data we demonstrate huge variability in reported policy actions across firms notionally facing the same policy. The within-country dispersion in firm-specific policy actions is larger than the cross-national differences in average policy. We show that variability in this policy implementation uncertainty within location-sector-size cells is correlated with firm growth rates. These measures of implementation variability are more strongly related to lower firm employment growth than are measures of "average" policy action. Finally, we show that the de jure measures such as Doing Business indicators are virtually uncorrelated with ex-post firm-level responses, further evidence that deals rather than rules prevail in Africa. Strikingly, the gap between de jure and de facto conditions grows with the formal regulatory burden. The evidence also shows more burdensome processes open up more space for making deals; firms may not incur the official costs of compliance, but they still pay to avoid them. Finally, measures of institutional capacity and better governance are closely associated with perceived consistency in implementation.
    JEL: D81 H32 J23 K20 O17
    Date: 2010–06
  12. By: Behaghel, Luc (CREST-INSEE); Caroli, Eve (University Paris Ouest-Nanterre); Roger, Muriel (INRA-CORELA)
    Abstract: We analyse the role of training in mitigating the negative impact of technical and organizational changes on the employment prospects of older workers. Using a panel of French firms in the late 1990s, we first estimate wage bill share equations for different age groups. Consistently with what is found in the literature, we find that adopting new technologies and innovative work practices negatively affects the wage bill share of older workers. In contrast, training older workers more than average increases their share in the wage bill in the next period. So, training contributes to offset the negative impact of ICT and innovative work practices. However, it does not reduce the age bias associated with these innovative devices: the interaction terms between training and ICT/innovative work practices are either insignificant or negative. As a second step, we estimate the impact of ICT, innovative work practices and training on employment flows by age group in the next period. We get similar results to those obtained with wage bill shares. Overall, training appears to have a positive impact on the employability of older workers, but it offers limited prospects to dampen the age bias associated with new technologies and innovative work practices.
    Keywords: technical change, organizational change, training, older workers
    JEL: J14 J24 J26 O30
    Date: 2011–03
  13. By: Keisuke Hattori (Faculty of Economics, Osaka University of Economics); Keisaku Higashida (School of Economics, Kwansei Gakuin University)
    Abstract: In this paper, we build a model of strategic misleading advertising in duopolistic markets with horizontal product differentiation and advertising externality between firms. We investigate the effects of regulating misinformation on market competition, behavior of firms, and social welfare. We show that the degree of advertising externality and the magnitude of advertising costs are crucial for determining the welfare effects of several regulations, including prohibiting misleading advertising, educating consumers, taxing production, and taxing misleading advertising. We then extend the model by introducing two types of heterogeneities; heterogeneous consumers and heterogeneous production costs between firms.
    Keywords: Misleading Advertising, Regulation; Duopoly, Product Differentiation, Advertising Externality
    JEL: L13 L15 M37
    Date: 2011–03
  14. By: Alex Bryson; Petri Böckerman; Pekka Ilmakunnas
    Abstract: Using nationally representative survey data for Finnish employees linked to register data on their wages and work histories we find wage effects of high involvement management (HIM) practices are generally positive and significant. However, employees with better wage and work histories are more likely to enter HIM jobs. The wage premium falls substantially having accounted for employees' work histories suggesting that existing studies' estimates are upwardly biased due to positive selection into HIM. Results do not differ significantly when using propensity score matching as opposed to standard regression techniques. The premium rises with the number of HIM practices and differs markedly across different types of HIM practice.
    Keywords: wages, high involvement management, high performance work system, incentivepay, training, team working, information sharing, propensity score matching
    JEL: J24 J31 J33 M12 M50 M52 M53 M54
    Date: 2011–02
  15. By: Demirguc-Kunt , Asli; Huizinga, Harry
    Abstract: For an international sample of banks, the authors construct measures of a bank's absolute size and its systemic size defined as size relative to the national economy. They examine how a bank's risk and return, its activity mix and funding strategy, and the extent to which it faces market discipline depend on both size measures. Although absolute size presents banks with a trade-off between risk and return, systemic size is an unmitigated bad, reducing return without a reduction in risk. Despite too-big-to-fail subsidies, the analysis finds that systemically large banks are subject to greater market discipline as evidenced by a higher sensitivity of their funding costs to risk proxies, suggesting that they are often too big to save. The finding that a bank's interest cost tends to rise with its systemic size can also in part explain why a bank's rate of return on assets tends to decline with systemic size. Overall, the results cast doubt on the need to have systemically large banks. Bank growth has not been in the interest of bank shareholders in small countries, and it is not clear whether those in larger countries have benefited. Although market discipline through increasing funding costs should keep systemic size in check, clearly it has not been effective in preventing the emergence of such banks in the first place. Inadequate corporate governance structures at banks seem to have enabled managers to pursue high-growth strategies at the expense of shareholders, providing support for greater government regulation.
    Keywords: Banks&Banking Reform,Debt Markets,Economic Theory&Research,Access to Finance,Bankruptcy and Resolution of Financial Distress
    Date: 2011–02–01
  16. By: Alexandre Gazaniol (Université Paris Dauphine, LEDa UMR 225 DIAL, IRD); Frédéric Peltrault (Université Paris Dauphine, LEDa UMR 225 DIAL, IRD)
    Abstract: (english) This paper estimates the impact of initiating production abroad on firms’ home performance. The analysis covers French manufacturers over the 1996 – 2007 period, and uses propensity-score matching techniques to compare firms which start to invest abroad (“switchers”) to similar domestic firms. The main particularity of our work is to distinguish the impact of initiating production abroad by firm ownership: we separately investigate the performance effect for independent switchers, switchers that own affiliates in France, and French- and foreign-owned switchers. Our first general result is that going multinational has a positive impact on sales, value added, employment, exports and profitability at home. However, we also find evidence that this impact is not independent of ownership. First, firms at the head of business groups are more likely to go multinational, even after controlling for size, Total Factor Productivity (TFP) and industry. Second, we find that parent companies and independent firms do not benefit from improved performance when going multinational: this may reflect that these firms face higher fixed costs than do affiliates of business groups when investing abroad (lack of experience in foreign markets, managerial costs, monitoring and coordinating affiliates, developing and/or adapting support functions etc.). Affiliates of domestic French business groups significantly improve their performance when switching, whereas the performances of foreign-owned firms and affiliates of multinational French groups remain relatively stable. This could show that firms which are already part of multinational groups have little to gain from going multinational themselves, since their group already provides them with skills and network effects, the security of supplies, and knowledge of foreign markets. _________________________________ (français) Ce travail étudie l’impact de l’implantation à l’étranger sur les performances des entreprises françaises du secteur manufacturier au cours de la période 1996-2007. A l’aide d’une méthode d’appariement, les performances des firmes qui s’implantent pour la première fois sont comparées à celles des entreprises domestiques ayant des caractéristiques similaires. La particularité de notre travail est de caractériser l’effet de l’implantation à l’étranger selon l’appartenance à un groupe : nous étudions ainsi séparément l’effet sur les entreprises indépendantes, les entreprises françaises ayant une filiale en France et les entreprises filiales de groupes français et étrangers. L’étude montre que l’implantation à l’étranger a un impact positif en France sur le chiffre d’affaires, la valeur ajoutée, les effectifs, les exportations et la rentabilité. Cependant, il s’avère que le résultat dépend de l’appartenance à un groupe. Tout d’abord, les entreprises têtes de groupe ont une plus forte propension à s’implanter à l’étranger, une fois que l’on tient compte de la taille, de la productivité totale des facteurs (PTF) et du secteur. Ensuite, nous montrons que les têtes de groupes et les entreprises indépendantes n’améliorent pas leurs performances quand elles s’implantent à l’étranger. Ce résultat peut s’expliquer par le fait que ces entreprises supportent des coûts fixes d’implantation plus élevés que les filiales de groupe. Enfin, nous montrons que les entreprises françaises filiales de groupes français améliorent significativement leurs performances alors que celles des filiales de groupes étrangers restent relativement stables. Les entreprises déjà intégrées dans une multinationale pourraient obtenir des gains plus faibles de leur propre implantation à l’étranger dans la mesure où leur groupe leur offre déjà l’accès à un réseau international.
    Keywords: multinational, ownership, firm heterogeneity.
    JEL: D23
    Date: 2011–01
  17. By: Joshua Drucker
    Abstract: Industrial concentration and market power have been studied extensively at the national scale, in fields ranging from economics and industrial organization to regional science and economic development. At the regional scale, however, industrial structure and firm size relationships have received little attention outside of non-generalizable case studies, primarily because accurate measurements require difficult-to-obtain plant- or firm-level information. Readily available secondary data sources on establishment size distributions (such as County Business Patterns or the Census of Manufactures) cannot be linked to performance information for particular establishments or firms. Yet region-specific industrial structure may be a crucial determinant of firm performance and thus regional economic fortunes as well (Chinitz 1961; Christopherson and Clark 2007). This paper examines how industrial concentration and agglomeration economies impact plant performance, focusing on the influence of establishment size in mediating these effects. The Longitudinal Research Database of the U.S. Census Bureau is accessed to construct production functions for three manufacturing industries nationwide. These production functions, specified at the establishment level, incorporate characteristics of establishments, industries, and regions, including spatially-differentiated measures of agglomeration economies. Establishment size is evaluated both as an absolute metric and relative to other regional industry plants, as theory suggests that absolute size may be most pertinent to agglomeration benefits but relative size more relevant to industrial structure (Caves and Barton 1990; Bothner 2005). The research builds on earlier work by the author that establishes a direct link between regional industry concentration and the productivity of manufacturing establishments.
    Date: 2011–03
  18. By: Jan Babecky; Philip Du Caju; Theodora Kosma; Martina Lawless; Julian Messina; Tairi Room
    Abstract: Firms have multiple options at the time of adjusting their wage bills. However, previous literature has mainly focused on base wages. We broaden the analysis beyond downward rigidity in base wages by investigating the use of other margins of labour cost adjustment at the firm level. Using data from a unique survey, we find that European firms make frequent use of other, more flexible, components of compensation to adjust the cost of labour. Changes in bonuses and non-pay benefits are some of the potential margins firms use to reduce costs. We also show how the margins of adjustment chosen are affected by firm and worker characteristics.
    Keywords: European Union, firm survey, labour costs, wage rigidity.
    JEL: J30 C81 P5
    Date: 2010–12

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