nep-bec New Economics Papers
on Business Economics
Issue of 2011‒04‒30
seventeen papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Dynamic Competition in Electricity Markets: Hydroelectric and Thermal Generation By Talat S. Genc; Henry Thille
  2. Shadow banking and the dynamics of aggregate leverage: An application of the Kalman filter to cyclical leverage measures By Christian Calmès; Raymond Théoret
  3. Heterogeneity matters: labour productivity differentiated by age and skills By M. ROGER; M. WASMER
  4. Oligopolistic equilibrium and financial constraints By Carmen Beviá; Luis C. Corchón; Yosuke Yasuda
  5. Labor Mobility, Social Network Effects, and Innovative Activity By Kaiser, Ulrich; Kongsted, Hans Christian; Rønde, Thomas
  6. Understanding the macroeconomic effects of working capital in the United Kingdom By Fernandez-Corugedo, Emilio; McMahon, Michael; Millard, Stephen; Rachel, Lukasz
  7. Emerging Market Business Cycles Revisited: Learning about the Trend By Emine Boz; Christian Daude; C. Bora Durdu
  8. Accounting for Japanese Business Cycles: A Quest for Labor Wedges By Keisuke Otsu
  9. Retaining through Training; Even for OlderWorkers By Picchio, M.; Ours, J.C. van
  10. Markets, Contracts, and Firms: A Unified Model of Organizational Choice By Thomas J. Miceli
  11. Evolution of behavior when duopolists choose prices and quantities By Khan Abhimanyu; Peeters Ronald
  12. Japan's Labor Market Cyclicality and the Volatility Puzzle By Julen ESTEBAN-PRETEL; NAKAJIMA Ryo; TANAKA Ryuichi
  13. Managerial ownership, entrenchment and innovation By Beyer, Mila; Czarnitzki, Dirk; Kraft, Kornelius
  14. Investment, accounting, and the salience of the corporate income tax By Jesse Edgerton
  15. Machines and machinists: Capital-Skill Complementarity from an International Trade Perspective By Mikl¢s Koren; M rton Csillag
  16. Product innovation and imitation in a duopoly with differentiation by attributes By Reynald-Alexandre Laurent
  17. A model of labeling with horizontal differentiation and cost variability: By Saak, Alexander

  1. By: Talat S. Genc (Department of Economics,University of Guelph); Henry Thille (Department of Economics, University of Guelph)
    Abstract: We study competition between hydro and thermal electricity generators that face uncertainty over demand and water flows where the hydro generator is constrained by water flows and the thermal generator by capacity. We compute the Feedback equilibrium for the in?nite horizon game and show that there can be strategic withholding of water by the hydro generator. When water inflow is relatively low, however, the hydro generator may use more water than efficient as it faces an inefficiently low shadow price of water in this case. The inefficiency of the market outcome is tempered by the capacity constraints: for a large range of possible thermal production capacities and water flow levels, welfare loss under the duopoly market structure is much less than would occur in the absence of water and capacity constraints.
    Keywords: Electricity markets; Electricity markets; Hydroelectricity; Imperfect Competition
    JEL: L13 L94 C63 C73
    Date: 2011
  2. By: Christian Calmès (Département des sciences administratives, Université du Québec (Outaouais), Chaire d'information financière et organisationnelle, ESG-UQAM, and Laboratory for Research in Statistics and Probability); Raymond Théoret (Département de stratégie des affaires, Université du Québec (Montréal), Chaire d'information financière et organisationnelle, ESG-UQAM, and Université du Québec (Outaouais))
    Abstract: During the last decades, banks off-balance sheet (OBS) activities (e.g. securitization, trading and fee-based activities) have greatly contributed to the increase in bank risk. However, the standard financial indicators such as the Value-at-Risk and the accounting leverage, exclude these non-traditional activities, and neglect the increased risk market-oriented banking generates. In this paper, we study various measures of leverage in the context of shadow banking, relying on a dynamic setting, which features Kalman filter procedures and different detrending methods. Applying this framework to Canadian data, we can detect the increase in risk associated to banks new business lines years before what the conventional risk measures predict. We also find that the elasticity measures of leverage, compared to the simple balance sheet ratios like the ratio of assets to equity or the mandatory leverage measure, are generally more forward-looking indicators of bank risk, and better capture the cyclical pattern of bank leverage. The main contribution of this paper is to show that OBS activities exert a stronger influence on these leverage measures during expansion periods.
    Keywords: Leverage, Banking, Off-balance sheet activities, Liquidity, Kalman Filter.
    JEL: C13 C22 C51 G21 G32
    Date: 2011–01–14
  3. By: M. ROGER (Insee); M. WASMER (University of Fribourg and Université Lumière Lyon 2)
    Abstract: This study aims at evaluating the actual profile of marginal productivity across age groups within the workforce. As age-productivity profiles might differ between occupations, we differentiate the workforce simultaneously by skills (low-skilled, high-skilled) and by age (young, middle-aged, old). Estimating a production function with a nested constant-elasticity-of-substitution (CES) specification in labour allows imperfect substitution between different categories of workers. We use French datasets for manufacturing, services and trade sectors. Labour productivity is found to be the lowest for the low-skilled older workers while high-skilled senior employees in manufacturing and trade are the most productive group. Throughout the sectors, wage rates vary considerably less than productivity and wage profiles are steeper for high-skilled workers. The relative productivity/wage ratio is found to be sector-specific. It is the highest for young workers in manufacturing while in services and trade it is the highest for the middle-age employees.
    Keywords: ageing, older workers, labour productivity, CES production function, endogeneity
    JEL: J24 J31 J41
    Date: 2011
  4. By: Carmen Beviá; Luis C. Corchón; Yosuke Yasuda
    Abstract: In this paper we present a model of oligopoly and financial constraints. We study allocations which are bankruptcy-free (BF) in the sense that no firm can drive another firm to bankruptcy without becoming bankrupt. We show how such allocations can be sustained as an equilibrium of a dynamic game. When there are two firms, all equilibria yield BF allocations. When there are more than two firms, allocations other than BF can be sustained as equilibria but in some cases the set of BF allocations still useful in explaining the shape of equilibrium set.
    Date: 2011–04
  5. By: Kaiser, Ulrich (University of Zurich); Kongsted, Hans Christian (University of Copenhagen); Rønde, Thomas (Copenhagen Business School)
    Abstract: We study the mapping between labor mobility and industrial innovative activity for the population of R&D active Danish firms observed between 1999 and 2004. Our study documents a positive relationship between the number of workers who join a firm and the firm's innovative activity. This relationship is stronger if workers join from innovative firms. We also find evidence for positive feedback from workers who leave for an innovative firm, presumably because the worker who left stays in contact with their former colleagues. This implies that the positive feedback ("social network effects") that has been found by other studies not only exists but even outweighs the disruption and loss of knowledge occurring to the previous employer from the worker leaving. Summing up the effects of joining and leaving workers, we find ample evidence for mobility to be associated with an increase in total innovative activity of the new and the old employer.
    Keywords: labor mobility, innovation, social network
    JEL: O33 O34 C23
    Date: 2011–04
  6. By: Fernandez-Corugedo, Emilio (Bank of England); McMahon, Michael (University of Warwick, and Centre for Economic Performance, LSE); Millard, Stephen (Bank of England); Rachel, Lukasz (Bank of England)
    Abstract: The most recent recession has been associated with a financial crisis that led to a large widening of spreads and quantitative restrictions on lending. As well as affecting investment, such a credit contraction is likely to have had a large effect on the working capital positions of UK firms and this, in turn, is likely to have affected the United Kingdom’s supply potential, at least temporarily. However, the role of such disruptions in the business cycle is not well understood. In this paper we first document the behaviour of working capital in the United Kingdom. In order to understand the effects of working capital on macroeconomic variables, we then solve and calibrate a DSGE model that introduces an explicit role for the components of working capital (net cash, inventories, and trade credit). We find that this model produces the standard responses of macroeconomic variables to productivity shocks, but we also find that financial intermediation shocks, similar to those experienced in the United Kingdom post-2007, have persistent negative effects on economic activity; these effects are reinforced by reductions in trade credit. Our model also documents a crucial role for monetary policy to offset such shocks.
    Keywords: Working capital; business cycle model; spreads; financial crisis.
    JEL: E20 E51 E52
    Date: 2011–04–18
  7. By: Emine Boz (IMF); Christian Daude (OECD); C. Bora Durdu (FRB)
    Abstract: We build an equilibrium business cycle model in which agents cannot perfectly distinguish between the permanent and transitory components of TFP shocks and learn about those components using the Kalman filter. Calibrated to Mexico, the model predicts a higher variability of consumption relative to output and a strongly negative correlation between the trade balance and output for a wide range of variability and persistence of permanent shocks vis-a-vis the transitory shocks. Moreover, our estimation for Mexico and Canada suggests more severe informational frictions in emerging markets than in developed economies.
    Keywords: emerging markets, business cycles, learning, Kalman filter
    JEL: F41 E44 D82
    Date: 2011–04
  8. By: Keisuke Otsu
    Abstract: The Japanese business cycle from 1980-2007 portrays less contemporaneous correlation of labor with output than in the U.S. and also tends to lead output by one quarter. A canonical real business cycle model cannot account for these facts. This paper uses the business cycle accounting method a la Chari, Kehoe and McGrattan (2007) and shows that efficiency and labor market distortions are important in accounting for the quarterly business cycle fluctuation patterns in Japan. Fiscal and monetary variables such as labor income tax, money growth and interest rates cannot fully account for the distortions in the Japanese labor market.
    Keywords: business cycle accounting; japanese labor market
    JEL: E13 E32
    Date: 2011–04
  9. By: Picchio, M.; Ours, J.C. van (Tilburg University, Center for Economic Research)
    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
  10. By: Thomas J. Miceli (University of Connecticut)
    Abstract: This paper examines markets, firms, and the law as alternative institutional arrangements for organizing transactions that involve transaction-specific investments and uncertain performance. The analysis is the logical extension of Coase's seminal examination of the market-firm boundary on one hand, and the market-law boundary on the other. It thus combines insights from the literature on industrial organization and law and economics. The result is a unified framework that reveals the relative advantages and disadvantages, within a fairly simple economic setting, of market exchange, court ordering (contracts), and internal governance (agency).
    Keywords: Asset specificity, contracts, firms, markets, transaction costs
    JEL: D23 K12 L14 L22
    Date: 2011–04
  11. By: Khan Abhimanyu; Peeters Ronald (METEOR)
    Abstract: We study duopolistic competition in a differentiated market with firms setting prices and quantities, without explicitly imposing market clearing. Unlike the commonly adopted assumption of profit maximizing firms, we assume firm behavior to be shaped by a Darwinian dynamic: the less fitter firm imitates the fitter firm and occasionally firms may experiment with a random price and/or quantity. Our two main findings are that: (i) a market clearing outcome always belongs to the set of feasible long run outcomes, but may co-exist with non-market clearing outcomes with as well excess supply as excess demand being possible; and (ii) there exist parameter configurations for which the only feasible outcomes imply prices above monopoly level.
    Keywords: microeconomics ;
    Date: 2011
    Abstract: The search and matching model has recently come under criticism for its inability to account for some of the cyclical properties of the U.S. labor market. Shimer (2005) has shown that the basic version of the model is incapable of reproducing the volatility of the market tightness for reasonable movements in productivity. This paper considers whether the so-called "Shimer Puzzle" also holds for the Japanese economy. We present empirical evidence on the cyclical properties of the labor market variables in Japan and compare these to their U.S. counterparts. We then build, parametrize, and simulate three different versions of the search and matching model (with exogenous job destruction, with endogenous job destruction, and embedded in a Real Business Cycle model) and compare the simulated statistics to the data. We find that the "Shimer Puzzle" does hold for Japan, since the model is unable to generate as much volatility on the market tightness as in the data.
    Date: 2011–04
  13. By: Beyer, Mila; Czarnitzki, Dirk; Kraft, Kornelius
    Abstract: Principle-agent theory suggests managers might under-invest into R&D for reasons of risk tied to project failure, such as reduced remuneration and job loss. However, managers might over-invest into innovation for reasons of growth implying higher remuneration, power and prestige. Using a sample of 1,406 Belgian firms, we find, first, that managers holding no company shares under-invest into R&D compared to owners giving rise to the risk argument. Second, we find an inverse u-shaped relationship between the degree of managerial ownership and R&D. Thus, managers become entrenched, i.e. powerful enough to pursue their own interests. When entrenched, managers do not fear detrimental effects of risky innovation projects on their career, and hence tend to over-invest into innovation. --
    Keywords: corporate governance,managerial ownership,entrenchment,innovation,R&D investments
    JEL: G32 O31 O32
    Date: 2011
  14. By: Jesse Edgerton
    Abstract: This paper develops and tests the hypothesis that accounting rules mitigate the impact of tax policy on investment decisions by obscuring the timing of tax payments. I model a firm that maximizes a discounted weighted average of after-tax cash flows and accounting profits. The cost of capital and the impact of tax incentives for investment both depend on the weight placed on accounting profits. I estimate this weight by comparing the effectiveness of tax incentives that do and do not affect accounting profits. Investment tax credits, which do affect accounting profits, have more impact on investment than accelerated depreciation, which does not. This difference in estimated impact is not obviously driven by discounting, cash flow effects, or measurement error. Results thus suggest that the tax burden on corporate capital could be lower than we would otherwise estimate, and accelerated depreciation provisions are less effective than they otherwise would be.
    Date: 2011
  15. By: Mikl¢s Koren (Institute of Economics - Hungarian Academy of Sciences, Department of Economics of Central European University); M rton Csillag (TIER - University of Maastricht)
    Abstract: We estimate the effect of imported machines on the wages of machine operators utilizing Hungarian linked employer-employee data. We infer exposure to imported machines from detailed trade statistics of the firm and the occupation description of the worker. We find that workers exposed to imported machines earn about 8 percent higher wages than other machine operators at the same firm. When we proxy for unobserved worker characteristics, we find a significant 3 percent wage premium, suggesting that the relationship is causal. The return to schooling is also higher on imported machines. We build a simple matching model consistent with these findings. Our findings suggest that machine imports can be an important channel through which skill-biased technical change reaches less developed and emerging economies.
    Keywords: imported machinery, capital-skill complementarity, wages
    JEL: F16
    Date: 2011–04
  16. By: Reynald-Alexandre Laurent (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: This paper considers a probabilistic duopoly in which products are described by their specific attributes, this form of differentiation embodying the horizontal and vertical dimensions. Consumers make discrete choices and follow a random decision rule based on these attributes. A three-stage game is studied in which firms develop new attributes for their products (innovation), then may imitate the attributes of the competing product and finally compete in price. At the equilibrium, the firm selling the less appreciated product is generally incited to imitate its rival. Confronted to a threat of imitation, the benchmark firm sometimes decreases strategically its attribute index in order to diminish its unit cost of innovation and the differentiation on the market, deterring the imitation in this way. This strategy is efficient when imitation costs are sufficiently concave. In the opposite case, it is preferable for the benchmark firm to accept the imitation. Thus, according to the shape of imitation costs, equilibria with "deterrence" or with "accommodation" "accommodation" occur, completing the current typology of strategic responses to a threat of imitation.
    Keywords: quality choices ; differentiation by attributes ; product innovation, product imitation
    Date: 2011–04–18
  17. By: Saak, Alexander
    Abstract: We study optimal disclosure of variety by a multi-product firm with random costs. In our model there are two varieties that are horizontally differentiated and differ in overall quality, but buyers cannot distinguish between them without labels. The equilibrium prices for labeled varieties are increasing functions of the absolute value of the cost differential and do not reveal which variety is cheaper to produce. Nondisclosure is most common when there is moderate uncertainty about the relative input cost, not too much idiosyncrasy in consumer valuations, and not too much difference in quality across varieties. Although mandatory disclosure of variety benefits consumers, it decreases expected welfare when relative input cost variability is large and quality asymmetry is small. The cheaper variety tends to be oversupplied (undersupplied) when disclosure is voluntary (mandatory). Competition among multi-product firms that source inputs in the same upstream market may not lead to more disclosure."
    Keywords: information, product differentiation, Labeling, quality disclosure,
    Date: 2011

This nep-bec issue is ©2011 by Christian Calmes. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.