nep-bec New Economics Papers
on Business Economics
Issue of 2011‒05‒24
seventeen papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Wage Adjustment and Productivity Shocks By Carlsson, Mikael; Messina, Julián; Nordström Skans, Oskar
  2. Retaining through Training: Even for OlderWorkers By Matteo PICCHIO; Jan C. van OURS
  3. Understanding Small Business Heterogeneity By Erik Hurst; Benjamin Wild Pugsley
  4. Separation of Ownership and Control: Delegation as a Commitment Device By Aristotelis Boukouras
  5. The empirical content of Cournot competition By Laurens CHERCHYE; Thomas DEMUYNCK; Bram DE ROCK
  6. Market Liberalization, Regulatory Uncertainty, and Firm Investment By Florian Baumann; Tim Friehe
  7. Team Incentives and Reference-Dependent Preferences By Kohei Daido; Takeshi Murooka
  8. Optimal Leverage and Firm Performance: An Endogenous Threshold Analysis By Fabrizio Coricelli; Nigel Driffield; Sarmistha Pali; Isabelle Roland
  9. Forced board changes: Evidence from Norway. By Nygaard, Knut
  10. Market Size, Competition, and the Product Mix of Exporters By Thierry Mayer; Marc Melitz; Gianmarco Ottaviano
  11. Endogenous Leverage: VaR and Beyond By Ana Fostel; John Geanakoplos
  12. Entrepreneurial innovations and taxation By Haufler, Andreas; Norbäck, Pehr-Johan; Persson, Lars
  13. Dynamic Assessment of Bertrand Oligopsony in the U.S. Cattle Procurement Market By Ji, In Bae; Chung, Chanjin
  14. A Model of Labeling with Horizontal Differentiation and Cost Variability By Saak, Alexander E.
  15. Private Monitoring, Collusion and the Timing of Information By Fahad Khalil; Jacques Lawarree; Troy J Scott
  16. The Effects of Personality Composition and Decision-Making Processes on Change Preferences of Self-Managing Teams By Muehlfeld K.; Van Doorn J.; Van Witteloostuijn A.
  17. Ambiguity and the historical equity premium By Frabrice Collard; Sujoy Mukerji; Kevin Sheppard; Jean-Marc Tallon

  1. By: Carlsson, Mikael (Research Department, Central Bank of Sweden); Messina, Julián (Office of the Chief Economist for Latin America and the Caribbean); Nordström Skans, Oskar (Institute for Labour Market Policy Evaluation (IFAU), UCLS, and IZA)
    Abstract: We study how workers’ wages respond to TFP-driven innovations in firms’ labor productivity. Using unique data with highly reliable firm-level output prices and quantities in the manufacturing sector in Sweden, we are able to derive measures of physical (as opposed to revenue) TFP to instrument labor productivity in the wage equations. We find that the reaction of wages to sectoral labor productivity is almost three times larger than the response to pure idiosyncratic (firm-level) shocks, a result which crucially hinges on the use of physical TFP as an instrument. These results are all robust to a number of empirical specifications, including models accounting for selection on both the demand and supply side through worker-firm (match) fixed effects. Further results suggest that technological progress at the firm level has negligible effects on the firm-level composition of employees.
    Keywords: matched employer-employee data; sorting; wage; labor productivity; TFP
    JEL: J23 J31 J33
    Date: 2011–05–01
  2. By: Matteo PICCHIO (Tilburg University, CentER, ReflecT, The Netherlands and IZA, Germany); Jan C. van OURS (Tilburg University, CentER, ReflecT, The Netherlands, University of Melbourne, Australia, CESifo, Germany, CEPR, United Kingdom and IZA, Germany)
    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: 2011–04–29
  3. By: Erik Hurst; Benjamin Wild Pugsley
    Abstract: In this paper, we show that substantial heterogeneity exists among U.S. small businesses owners with respect to their ex-ante expectations of future performance, their ex-ante desire for future growth, and their initial motives for starting a business. Specifically, using new data that samples early stage entrepreneurs just prior to business start up, we show that few small businesses intend to bring a new idea to market. Instead, most intend to provide an existing service to an existing customer base. Further, using the same data, we find that most small businesses have no desire to grow big or to innovate in any observable way. We show that such behavior is consistent with the industry characteristics of the overwhelming majority of small businesses, which are concentrated among skilled craftsmen, lawyers, real estate agents, doctors, small shopkeepers, and restaurateurs. Lastly, we show non pecuniary benefits (being one’s own boss, having flexibility of hours, etc.) play a first-order role in the business formation decision. We conclude by discussing how failing to acknowledge the ex-ante heterogeneity can lead to biased inferences of the importance of entrepreneurial talent, entrepreneurial luck, and financial frictions from the ex-post distribution of firm size.
    JEL: L21 L25 L26
    Date: 2011–05
  4. By: Aristotelis Boukouras (Georg-August-University Göttingen)
    Abstract: This paper provides a theoretical model for explaining the separation of ownership and control in firms. An entrepreneur hires a worker, whose effort is necessary for running a project. The worker\'s effort determines the probability that the project will be completed on time, but the worker receives some unobservable benefit by continuing his employment in the project. Thus, motivating the worker requires an efficiency wage which is inflated by the private benefit. The entrepreneur would pay out a smaller wage if he could commit to terminate the project if a delay occurs, but this threat is not credible, because the project has positive continuation value. We show that hiring a manager can solve this time-inconsistency issue and reduce the efficiency wage. We extend the model to include managerial moral hazard and we examine the conditions under which separation of ownership and control is more likely to happen. The model is consistent with many of the findings of the empirical literature, while it generates some new predictions too.
    Keywords: control structure; delegation; efficiency wage; entrepreneur; managerial contract; moral hazard; organizational hierarchy; private benefits; separation of owner-ship and control; time-inconsistency
    JEL: D86 G34 J31 L22 L26
    Date: 2011–05–10
  5. By: Laurens CHERCHYE; Thomas DEMUYNCK; Bram DE ROCK
    Abstract: We consider the testable implications of the Cournot model of market competition. Our approach is nonparametric in that we abstain from imposing any functional specification on market demand and firm cost functions. We derive necessary and sufficient conditions for (reduced form) equilibrium market price and quantity functions to be consistent with the Cournot model. In addition, we present identification results for the corresponding inverse market demand function and the firm cost functions. Finally, we use our approach to derive testable restrictions for the models of perfect competition, collusion and conjectural variations. This identifies the conditions under which these different models are empirically distinguishable from the Cournot model.
    Date: 2011–05
  6. By: Florian Baumann (Department of Economics, Eberhard Karls University Tübingen, Germany); Tim Friehe (Department of Economics, University of Konstanz, Germany)
    Abstract: Motivated by the German postal market, this paper analyzes the effects of regulatory uncertainty about labor costs for investment into a liberalized market. We distinguish between the external investment margin (market entry) and the internal investment margin (technology) and establish that regulatory uncertainty affects these margins differently, encouraging market entry but discouraging investment at the internal margin. As a consequence, the impact of regulatory uncertainty on competition in liberalized markets is the result of these two countervailing forces.
    Keywords: regulatory uncertainty, investment, market entry, minimum wage
    JEL: D43 J38 L13
    Date: 2011–05–05
  7. By: Kohei Daido (School of Economics, Kwansei Gakuin University); Takeshi Murooka (Department of Economics, University of California, Berkeley)
    Abstract: This paper examines a multi-agent moral hazard model in which agents have expectation-based reference-dependent preferences `a la K˝oszegi and Rabin (2006, 2007). The agents’ utilities depend not only on their realized outcomes but also on the comparisons of their realized outcomes with their reference outcomes. Due to loss aversion, the agents have a first-order aversion to wage uncertainty. Thus, reducing their expected losses by partially compensating for their failure may be beneficial for the principal. When the agent is loss averse and the project is hard to achieve, the optimal contract is based on team incentives which exhibit either joint performance evaluation or relative performance evaluation. Our results provide a new insight: team incentives serve as a loss-sharing device among agents. This model can explain the empirical puzzle of why firms often pay a bonus to low-performance employees as well as high-performance employees.
    Keywords: Moral Hazard, Team Incentives, Reference-Dependent Preferences, Loss Aversion, Joint Performance, Evaluation, Relative Performance Evaluation
    JEL: D86 M12 M52
    Date: 2011–05
  8. By: Fabrizio Coricelli; Nigel Driffield; Sarmistha Pali; Isabelle Roland
    Abstract: The paper aims to bridge the gap between the literature on optimal capital structure and the literature on finance-output-growth nexus. On the basis of the trade-off theory of capital structure, we posit a non-linear relationship between leverage and productivity growth at the firm level. We test this hypothesis using both standard and IV threshold regression models, which in contrast to conventional estimates, allows us to endogenously determine optimal leverage despite firms’ temporary deviations from the optimum. Estimates for a sample of Central and Eastern European countries confirm a non-linear hump-shaped relationship between leverage and productivity growth, thus endogenously identifying an optimal leverage ratio. We show how our paper relates to and contributes to the literature on optimal capital structure and finance-output-growth literature.
    Date: 2011–04
  9. By: Nygaard, Knut (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: The recently introduced gender quota on Norwegian corporate boards dramatically increased the share of female directors. This reform offers a natural experiment to investigate changes in corporate governance from forced increases in gender diver- sity, and whether these changes in turn impact firm performance. I find that investors anticipate the new directors to be more effective in firms with less information asymmetry between insiders of the firm and outsiders. Firms with low information asymmetry experience positive and significant cumulative abnormal returns (CAR) at the introduction of the quota, whereas firms with high information asymmetry show negative but insignificant CAR.
    Keywords: Natural experiment; Regulation; Corporate governance; Gender quota.
    JEL: G34 G38
    Date: 2011–03–09
  10. By: Thierry Mayer; Marc Melitz; Gianmarco Ottaviano
    Abstract: We build a theoretical model of multi-product firms that highlights how market size and geography (the market sizes of and bilateral economic distances to trading partners) affect both a firm’s exported product range and its exported product mix across market destinations (the distribution of sales across products for a given product range). We show how tougher competition in an export market induces a firm to skew its export sales towards its best performing products. We find very strong confirmation of this competitive effect for French exporters across export market destinations. Trade models based on exogenous markups cannot explain this strong significant link between destination market characteristics and the within-firm skewness of export sales (after controlling for bilateral trade costs). Theoretically, this within firm change in product mix driven by the trading environment has important repercussions on firm productivity and how it responds to changes in that trading environment.
    Keywords: Product mix; competition; markups; multi-product firms
    JEL: J12
    Date: 2011–05
  11. By: Ana Fostel (Dept. of Economics George Washington University); John Geanakoplos (Cowles Foundation, Yale University)
    Abstract: We study endogenous leverage in a general equilibrium model with incomplete markets. We prove that in any binary tree leverage emerges in equilibrium at the maximum level such that VaR = 0, so there is no default in equilibrium, provided that agents get no utility from holding the collateral. When the collateral does affect utility (as with housing) or when agents have sufficiently heterogenous beliefs over three or more states, VaR = 0 fails to hold in equilibrium. We study commonly used examples: an economy in which investors have heterogenous beliefs and a CAPM economy consisting of investors with different risk aversion. We find two main departures from VaR = 0. First, both examples show that with enough heterogeneity among the investors, equilibrium default is normal. Second, we find that more than one contract is actively traded in equilibrium on the same collateral, that is, the same asset is bought at different margin requirements by different agents. Finally, we study the relationship between leverage and asset prices. We provide an example that shows that as the regulatory authority gradually relaxes leverage restrictions from low levels and permits leverage to rise, asset prices start to rise, but eventually increased leverage paradoxically tends to reduce asset prices because the risky bonds become substitutes for the asset used as collateral.
    Keywords: Endogenous leverage, Collateral equilibrium, VaR, Asset prices
    JEL: D52 D53 E44 G11 G12
    Date: 2011–05
  12. By: Haufler, Andreas; Norbäck, Pehr-Johan; Persson, Lars
    Abstract: In many countries entrepreneurship is promoted through tax reductions for small businesses and by various government support schemes. We analyze the effects of such policies to subsidize small businesses in a setting where both the risk-return characteristics of the selected innovation project and the mode of commercialization chosen by entrepreneurs (market entry versus sale to an incumbent firm) are endogenous. We show that government programs to support small businesses foster market entry by entrepreneurs but, at the same time, give an incentive to choose low risk projects, due to the existence of limited loss o®set provisions. This points to a basic trade-off be- tween the goals of raising competition in technology-intensive markets and the desire of governments to foster risky `breakthrough' innovations.
    Keywords: business taxation; innovation; market entry
    JEL: H25 L13 M13 O31
    Date: 2011–05
  13. By: Ji, In Bae; Chung, Chanjin
    Abstract: The new empirical industrial organization approach with the Bertrand model is employed to measure the oligopsony market power in the U.S. cattle procurement market. The assumption of price competition (Bertrand model) based on the nature of cattle production such as cattle cycle and seasonality is used and compared to quantity competition (Cournot model). The empirical results show that the oligopsony market power exists in the U.S. cattle procurement market. The cattle cycle and seasonality affect the oligopsony market power and the cattle cycle causes the change of market power. However, concentration has a negative effect on the oligopsony market power.
    Keywords: cattle cycle, concentration, market power, NEIO, oligopsony, seasonality, Agribusiness, Demand and Price Analysis, Industrial Organization, Livestock Production/Industries, Marketing, Q13, L13, L16,
    Date: 2011–07–26
  14. By: Saak, Alexander E.
    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: Agribusiness, Agricultural and Food Policy, Food Consumption/Nutrition/Food Safety, Industrial Organization, Marketing, information, labeling, quality disclosure, product differentiation,
    Date: 2011
  15. By: Fahad Khalil; Jacques Lawarree; Troy J Scott
    Date: 2011–04
  16. By: Muehlfeld K.; Van Doorn J.; Van Witteloostuijn A.
    Abstract: Team decision-making on organizational and strategic changes is pervasive. Yet, little is known about determinants of teams’ change preferences. We analyze how composition with respect to personality traits associated with (pro-)active behavior (locus-of-control, type-A/B behavior) influences selfmanaging teams’ preferences for the likelihood and magnitude of changes, and whether participative decision-making and team monitoring as core features of group decision-making counteract or reinforce change tendencies. Results from a business simulation with 42 teams largely support predictions. Stronger type-A orientation increases the likelihood of (drastic) changes. Teams dominated by internal locus-of-control members are highly responsive performance feedback in their change preferences. Participative decision-making encourages while team monitoring restricts tendencies towards extreme magnitudes.
    Date: 2011–04
  17. By: Frabrice Collard; Sujoy Mukerji; Kevin Sheppard; Jean-Marc Tallon
    Abstract: This paper assesses the quantitative impact of ambiguity on the historically observed equity premium. We consider a Lucas-tree pure—exchange economy with a single agent where we introduce two key non-standard assumptions. First, the agent’s beliefs about the dividend/consumption process is ambiguous, i.e., she is uncertain about the exact probability distribution governing the realization of future dividends and consumption. Second, the agent’s preferences are sensitive to this ambiguity, a property formalized using the smooth ambiguity model. The consumption and dividend process is assumed to evolve according to a hidden state model, popularized by Bansal and Yaron (2004), where a persistent latent state variable describes temporary shocks to the mean of consumption growth prospects. We further extend the model to allow for uncertainty about the magnitude of the persistence of the latent state. The agent’s beliefs are ambiguous due to the uncertainty about the conditional mean of the probability distribution on consumption and dividends in the next period. We show that in this model ambiguity is endogenously dynamic, for example, increasing during recessions. This results in an endogenously volatile and (counter-)cyclical equity premium. We calibrate the level of ambiguity aversion to match only the first moment of the risk-free rate in data, and ambiguity to match the uncertainty conditional on the historical growth path, and evaluate the model using moderate levels of risk aversion. We find that this simple modification of a Lucas-tree model accounts for a large part of the historical equity premium, both in terms of its level and variation over time.
    Keywords: Ambiguity aversion, asset pricing, equity premium puzzle
    JEL: G12 E21 D81 C63
    Date: 2011

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