nep-bec New Economics Papers
on Business Economics
Issue of 2011‒04‒02
eighteen papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Input and output inventory dynamics By Yi Wen
  2. Price discrimination and business-cycle risk By Marco Cornia; Kristopher S. Gerardi; Adam Hale Shapiro
  3. Agency problems in public firms: evidence from corporate jets in leveraged buyouts By Jesse Edgerton
  4. Career Concerns and the Busy Life of the Young CEO By Li, Xiaoyang; Low, Angie; Makhija, Anil K.
  5. The Countercyclical Capital Buffer of Basel III: A Critical Assessment By Repullo, Rafael; Saurina, Jesús
  6. Is Early Retirement Encouraged by the Employer? Labor-Demand Effects of Age-Related Collective Fees By Hallberg, Daniel
  7. OPEC´s Oil Exporting Strategy and Macroeconomic (In)Stability By Luís Francisco Aguiar; Yi Wen
  8. Job Polarization in the U.S.: A Reassessment of the Evidence from the 1980s and 1990s By Lefter, Alexandru; Sand, Benjamin M.
  9. The Performance Implications of Outsourcing. By Raassens, N.
  10. Equity Sales and Manager Efficiency Across Firms and the Business Cycle By Fabio Ghironi; Karen K. Lewis
  11. New perspectives on depreciation shocks as a source of business cycle fluctuations By Francesco Furlanetto; Martin Seneca
  12. Productivity of Banks and its Impact on the Capital Investments of Client Firms By MIYAKAWA Daisuke; INUI Tomohiko; SHOJI Keishi
  13. Marginal Distance: Does Export Experience Reduce Firm Trade Costs? By Lawless, Martina
  14. Uncertain demand, consumer loss aversion, and flat-rate tariffs By Fabian Herweg; Konrad Mierendorff
  15. Retaining through Training: Even for Older Workers By Picchio, Matteo; van Ours, Jan C.
  16. The Effects of Collateral on Firm Performance By Ono, Arito; Sakai, Koji; Uesugi、Iichiro
  17. Entrepreneurship and the Discipline of External Finance By Ramana Nanda
  18. `Breaking and entering' of contracts as a matter of bargaining power and exclusivity clauses By Stephanie Rosenkranz; Utz Weitzel

  1. By: Yi Wen
    Abstract: This paper develops an analytically tractable general-equilibrium model of inventory dynamics based on a precautionary stockout-avoidance motive. The model’s predictions are broadly consistent with the U.S. business cycle and key features of inventory behavior. It is also shown that technological improvement of inventory management can increase, rather than decrease, the volatility of aggregate output. Key to this seemingly counterintuitive result is that a stockout-avoidance motive leads to a procyclical shadow value of inventories, which acts as an automatic stabilizer that discourages sales in booms and encourages demand in recessions, thereby reducing the variability of GDP.>
    Keywords: Inventories ; Business cycles
    Date: 2011
  2. By: Marco Cornia; Kristopher S. Gerardi; Adam Hale Shapiro
    Abstract: A parsimonious theoretical model of second degree price discrimination suggests that the business cycle will affect the degree to which firms are able to price-discriminate between different consumer types. We analyze price dispersion in the airline industry to assess how price discrimination can expose airlines to aggregate-demand fluctuations. Performing a panel analysis on seventeen years of data covering two business cycles, we find that price dispersion is highly procyclical. Estimates show that a rise in the output gap of 1 percentage point is associated with a 1.9 percent increase in the interquartile range of the price distribution in a market. These results suggest that markups move procyclically in the airline industry, such that during booms in the cycle, firms can significantly raise the markup charged to those with a high willingness to pay. The analysis suggests that this impact on firms' ability to price-discriminate results in additional profit risk, over and above the risk that comes from variations in cost.
    Date: 2011
  3. By: Jesse Edgerton
    Abstract: This paper uses rich, new data to examine the fleets of corporate jets operated by both publicly traded and privately held firms. In the cross-section, firms owned by private equity funds average jet fleets at least 40 percent smaller than observably similar publicly-traded firms. Similar fleet reductions are observed within firms that go private in leveraged buyouts. I discuss assumptions under which comparisons across and within firms provide estimates of lower and upper bounds on the average treatment effect of taking a firm from public to private in a leveraged buyout. Both censored and standard quantile regressions suggest that results at the mean are driven by firms in the upper 30 percent of the conditional jet distribution. Results thus suggest that executives in a substantial minority of public firms enjoy more generous perquisites than they would if subject to the pressures of private equity ownership. .
    Keywords: Corporations ; Corporate governance ; Executives ; Leveraged buyouts
    Date: 2011
  4. By: Li, Xiaoyang (University of MI); Low, Angie (Nanyang Technological University); Makhija, Anil K. (OH State University)
    Abstract: Using U.S. plant-level data for firms across a broad spectrum of industries, we compare how career concerns affect the real investment decisions of younger and older CEOs. In contrast to prior research which has examined some specialized labor markets, we find that younger CEOs undertake more active, bolder investment activities, consistent with an attempt on their part to signal confidence and superior abilities. They are more likely to enter new lines of business, as well as exit other existing businesses. They prefer growth through acquisitions, while older CEOs prefer to build new plants. This busier investment style of the younger CEOs appears to be relatively successful since younger CEOs are associated with higher plant-level efficiency compared to older CEOs.
    JEL: G34
    Date: 2011–02
  5. By: Repullo, Rafael; Saurina, Jesús
    Abstract: We provide a critical assessment of the countercyclical capital buffer in the new regulatory framework known as Basel III, which is based on the deviation of the credit-to-GDP ratio with respect to its trend. We argue that a mechanical application of the buffer would tend to reduce capital requirements when GDP growth is high and increase them when GDP growth is low, so it may end up exacerbating the inherent pro-cyclicality of risk-sensitive bank capital regulation. We also note that Basel III does not address pro-cyclicality in any other way. We propose a fully rule-based smoothing of minimum capital requirements based on GDP growth.
    Keywords: Bank capital regulation; Basel III; Business cycles; Credit crunch; Pro-cyclicality
    JEL: E32 G28
    Date: 2011–03
  6. By: Hallberg, Daniel (Uppsala Center for Labor Studies)
    Abstract: In Sweden, employers pay non-wage costs for their workforce in the form of legislated employment tax and collective fees. For parts of the workforce, the collective fees are progressive with respect to the employee’s age and wage. The objective of this paper is to examine how non-wage costs affect voluntary early retirement. To this end we use a large longitudinal employer–employee matched data set with administrative records of the private sector in Sweden. We exploit the variation in collective fee costs across companies to identify employer incentives to encourage early retirement. The results from the instrumental variable estimator suggest that a 1 percentage point increase in non-wage costs in relation to wage costs increases retirement by 6 percent. Further, given the wage sum and workforce structure, large firms spend more on non-wage compensation than small firms. The share of non-wage costs in relation to the wage sum is also positively linked to net employment growth.
    Keywords: Early retirement; non-wage labor costs; pensions; labor demand; collective fees
    JEL: J21 J23 J26 J32
    Date: 2011–03–18
  7. By: Luís Francisco Aguiar (Universidade do Minho - NIPE); Yi Wen (Federal Reserve Bank of St. Louis and Tsinghua University)
    Abstract: Aguiar-Conraria and Wen (2008) argued that dependence on foreign oil raises the likelihood of equilibrium indeterminacy (economic instability) for oil importing countries. We argue that this relation is more subtle. The endogenous choices of prices and quantities by a cartel of oil exporters, such as the OPEC, can affect the directions of the changes in the likelihood of equilibrium indeterminacy. We show that fluctuations driven by self-fulfilling expectations under oil shocks are easier to occur if the cartel sets the price of oil, but the result is reversed if the cartel sets the quantity of production. These results offer a potentially interesting explanation for the decline in economic volatility (i.e., the Great Moderation) in oil importing countries since the mid-1980s when the OPEC cartel changed its market strategies from setting prices to setting quantities, despite the fact that oil prices are far more volatile today than they were 30 years ago.
    Date: 2011
  8. By: Lefter, Alexandru; Sand, Benjamin M.
    Abstract: In this paper, we review the evidence for job polarization in the U.S. and provide a description of the occupational employment changes that characterized the U.S. labor market during the 1970s, 1980s, and 1990s. We begin by replicating the existing job polarization trends, which are produced using a modified occupational coding scheme intended to make occupational categories comparable over time. Using two alternative procedures to obtain consistent occupational codes across decades, we show that the finding that jobs polarized in the 1990s relative to the 1980s no longer holds. Instead, we find that occupational employment shifts were very similar during the two decades. In addition, we demonstrate that the method used to rank occupations according to their skill content has a substantial impact on the employment growth in low-skill job categories. Finally, using an additional occupational crosswalk that allows us to obtain consistent occupational categories from 1970 to 2002, we provide evidence in favor of a long-term trend towards employment growth in high-skill jobs and employment decline in some middle-skill jobs, but no sharp contrast between the 1980s and the 1990s. Our findings suggest that the evolution of the occupational employment structure and the divergent wage growth patterns observed during the 1980s and 1990s do not easily fit within the routinization story as usually told.
    Keywords: Job Polarization, Occupational Employment, Employment Growth, Wage Inequality
    JEL: J21 J31
    Date: 2011–02
  9. By: Raassens, N. (Tilburg University)
    Abstract: Outsourcing is a fast-growing phenomenon. Despite the increasing interest in outsourcing, the consequences of this strategy remain unclear. While existing academic studies have provided valuable insights into the drivers of the outsourcing decision, this dissertation focuses on the performance implications of outsourcing and examines conditions under which outsourcing may be a successful strategy. The first essay concerns the impact of outsourcing customer support on the financial performance of the firm. It is argued that the performance implications of outsourcing customer support are dependent upon the type of customer support that is being outsourced, the institutional context surrounding the outsourcing relationship, and the mechanisms used to govern the outsourcing agreement. The second essay examines the financial performance implications of outsourcing new product development (NPD). It theorizes and tests the effectiveness of minority equity participation and prior tie selection under different levels of external and internal uncertainty, i.e. technological uncertainty and cultural distance, respectively. The third essay studies the effect of outsourcing manufacturing on firm innovation. It is argued that the relationship between outsourcing and innovation is contingent upon demand volatility, R&D intensity, and marketing intensity. Collectively, the three essays in this dissertation advance current knowledge on outsourcing by showing that the inconsistent findings regarding the effects of outsourcing on firm performance are a systematic and predictable set of contingent effects.
    Date: 2011
  10. By: Fabio Ghironi (Department of Economics, Boston College, 140 Commonwealth Avenue, Chestnut Hill, MA 02467-3859, U.S.A. (E-mail: Fabio.; Karen K. Lewis (Department of Finance, 2300 SH-DH, Wharton School, University of Pennsylvania, Philadelphia, PA 19104-6367, U.S.A. (E-mail:
    Abstract: Smaller firms sell more equity in response to expansions than do larger firms. Also, consumption is more pro-cyclical for high income groups than others. In this paper, we present a model that captures key features of both of these patterns found in recent empirical studies. Managers own firms with unique differentiated products and can sell ownership in these firms. Equity sales require paying consulting fees, but the resulting scrutiny also make firms more efficient. We find four main results: (1) Equity sales are pro-cylical since the benefits of efficient production outweigh the consulting fees during a boom. (2) Equity shares in smaller firms are more pro-cyclical because expansions make previously solely-owned firms to seek outside equity financing. (3) Households must absorb the increased equity sales by managers, thereby affecting their consumption response relative to managers. (4) Greater underlying managerial inefficiency induces more firms to seek outside advice and ownership in equilibrium. As a result, the cyclical impact on efficiency is mitigated by outside ownership.
    Keywords: Equity Sales, Managerial Efficiency, Firm Size, Business Cycles
    JEL: E25 E44 E21
    Date: 2011–03
  11. By: Francesco Furlanetto (Norges Bank (Central Bank of Norway)); Martin Seneca (Norges Bank (Central Bank of Norway))
    Abstract: In this paper we study the transmission for capital depreciation shocks. The existing literature in the Real Business Cycle tradition has concluded that these shocks are irrelevant for business cycle fluctuations. We show that these shocks are potentially important drivers of aggregate fluctuations in a New Keynesian model. Nominal rigidities and some persistence in the shock process are the key ingredients to generate co-movement across real variables.
    Keywords: Keywords: depreciation shocks, investment-specific technology shocks, consumption, nominal rigidities, co-movement.
    JEL: E32
    Date: 2011–03–25
  12. By: MIYAKAWA Daisuke; INUI Tomohiko; SHOJI Keishi
    Abstract: This paper proposes one measure for the productivity of banks and studies how it affects the sensitivity of a client firm's capital investment with respect to investment opportunity. As a direct measure for the productivity of banks, we employ the risk-adjusted profit of an individual bank, which is considered as output in a modified version of the FISIM (Financial Intermediation Services Indirectly Measured) concept, per its operating cost. We combine such productivity panel-data with bank and firm characteristics as well as the loan relationship data between Japanese listed companies and banks over the past three decades. The panel estimations for an extended investment equation based on Q-theory show, in a statistically and economically significant manner, that firms under cash flow constraints—as compared to those not—are more sensitive to capital investment opportunities, provided that these firms hold close relationships with a high performance bank. These results imply that it is necessary to relate firm performances not only to the discrete characteristics of banks, e.g., relations with the main bank, as in the extant literature, but to the continuously measured characteristics of the banks having relationships with the firms.
    Date: 2011–03
  13. By: Lawless, Martina (Central Bank of Ireland)
    Abstract: Are the costs of exporting to a market reduced if a firm has experience of exporting to a neighbouring market? If so, does this effect operate through reducing en- try barriers or by increasing sales once the firm is operating in the market? This paper examines linkages between current export destinations and entry, sales and exit for new markets. We find that measures of exporting experience in geographically nearby markets increase the probability of entry into a market and reduce the probability of exit. However, these same measures have negative effects on the firm’s export sales in the market. This negative effect on sales is particularly strong for recently entered firms. We interpret this result in the context of the Melitz heterogeneous-firm model of trade by showing that lower fixed costs reduce the entry threshold, but this lower threshold has the effect of allowing lower-sales marginal firms to be present in the market.
    Keywords: Distance; Export performance; Heterogeneous firms
    JEL: F10
    Date: 2011–03
  14. By: Fabian Herweg; Konrad Mierendorff
    Abstract: We consider a model of firm pricing and consumer choice, where consumers are loss averse and uncertain about their future demand. Possibly, consumers in our model prefer a flat rate to a measured tariff, even though this choice does not minimize their expected billing amount—a behavior in line with ample empirical evidence. We solve for the profit-maximizing two-part tariff, which is a flat rate if (a) marginal costs are not too high, (b) loss aversion is intense, and (c) there are strong variations in demand. Moreover, we analyze the optimal nonlinear tariff. This tariff has a large flat part when a flat rate is optimal among the class of two-part tariffs.
    Keywords: Consumer loss aversion, flat-rate tariffs, nonlinear pricing, uncertain demand
    JEL: D11 D43 L11
    Date: 2011–03
  15. By: Picchio, Matteo (Tilburg University); van Ours, Jan C. (Tilburg University)
    Abstract: This paper investigates whether on-the-job training has an effect on the employability of workers. Using data from the Netherlands we disentangle the true effect of training incidence from the spurious one determined by unobserved individual heterogeneity. We also take into account that there might be feedback from shocks in the employment status to future propensity of receiving firm-provided training. We find that firm-provided training significantly increases future employment prospects. This finding is robust to a number of robustness checks. It also holds for older workers, suggesting that firm-provided training may be an important instrument to retain older workers at work.
    Keywords: training, employment, human capital, older workers
    JEL: C33 C35 J21 J24 M53
    Date: 2011–03
  16. By: Ono, Arito; Sakai, Koji; Uesugi、Iichiro
    Abstract: This paper examines how collateral and personal guarantees affect firms’ ex-post performance employing a propensity score matching estimation approach. Based on a unique firm-level panel data set of more than 500 small-and-medium-sized borrower firms in Japan, we find that borrowers that provide collateral to lenders experience larger increases in profitability and reductions in riskiness than borrowers that do not. The main channel through which the borrower enhances its profitability is cost-cutting restructuring. These findings are consistent with the hypothesis that collateral reduces moral hazard by providing borrowers with an incentive to enhance their creditworthiness. We find little evidence that improvements in collateralized firms’ performance are driven by the intensified monitoring on the part of lenders, or by borrowing firms’ access to larger amounts of credit.
    Keywords: collateral, moral hazard, propensity score
    JEL: D82 G21 G30
    Date: 2011–02
  17. By: Ramana Nanda (Harvard Business School, Entrepreneurial Management Unit)
    Abstract: I confirm the finding that the propensity to start a new firm rises sharply among those in the top five percentiles of personal wealth. This pattern is more pronounced for entrants in less capital intensive sectors. Prior to entry, founders in this group earn about 6% less compared to those who stay in paid employment. Their firms are more likely to fail early and conditional on survival, less likely to be make money. This pattern is only true for the most-wealthy individuals, and is attenuated for wealthy individuals starting firms in capital intensive industries. Taken together, these findings suggest that the spike in entry at the top end of the wealth distribution is driven by low-ability individuals who can afford to start (and sometimes continue running) weaker firms because they do not face the discipline of external finance.
    Date: 2010–05
  18. By: Stephanie Rosenkranz; Utz Weitzel
    Abstract: We analyze the effect of liquidated damage rules in exclusive contracts that are negotiated in a sequential bargaining process between one seller and two buyers with endogenous outside options. We show that assumptions on the distribution of bargaining power influence the size of the payment of damages and determine which contractual party benefits from including liquidated damage rules. Furthermore, we show that the effect of the payment of damages on the efficiency of the consummated deals depends on the possibility to sign more than one contract. Only if this is not possible, damage rules may prevent the breaking and entering of contracts and thus lead to inefficient deals in the market of corporate control, or allow for `naked' exclusion in the context of supplier contracts with externalities.
    Keywords: sequential bargaining, bargaining power, outside option, liquidated damage rules, termination fees, exclusivity agreements
    JEL: G34 C78 D44 C71
    Date: 2011–03

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