nep-bec New Economics Papers
on Business Economics
Issue of 2011‒06‒25
twelve papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. The Division of Labor and The Theory of the Firm By Michael T. Rauh
  2. Managerial incentives under competitive pressure: Experimental investigation By Ahmed Ennasri; Marc Willinger
  3. Does Wage Dispersion Make All Firms Productive? By Mélanie Volral; François Rycx; Benoît Mahy
  4. Job Creation and the Intra-distribution Dynamics of the Firm Size Distribution By Peter Huber; Harald Oberhofer; Michael Pfaffermayr
  5. A General Equilibrium Model of Sovereign Default and Business Cycles By Enrique G. Mendoza; Vivian Z. Yue
  6. The roles of incentives and voluntary cooperation for contractual compliance By Simon Gaechter; Esther Kessler; Manfred Koenigstein
  7. Human Capital and Career Success: Evidence from Linked Employer-Employee Data By Frederiksen, Anders; Kato, Takao
  8. Patterns of Technology, Industry Concentration, and Productivity Growth Without Scale Effects By Colin Davis; Ken-ichi Hashimoto
  9. Illiquidity and All Its Friends. By Tirole, Jean
  10. Price Setting in a Leading Swiss Online Supermarket By Martin Berka; Michael B. Devereux; Thomas Rudolph
  11. Labor Mobility and Productivity Growth By Xavier Raurich; Fernando Sanchez-Losada; Montserrat Vilalta-Bufi
  12. Macroeconomic Dynamics in a Model of Goods, Labor and Credit Market Frictions By Petrosky-Nadeau, Nicolas; Wasmer, Etienne

  1. By: Michael T. Rauh (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: We extend the classical teams framework to the case where team size is endogenous and workers can specialize within a division of labor. We consider two institutions: equal-division partnerships and the firm with a budget-breaker. In contrast with the previous literature, we show that effort and team size in partnerships can be greater or less than first best. Our results for the firm are driven by two main insights. First, the budgetbreaker can increase effort with an increase in incentives and/or specialization. Second, incentives and employment are strategic substitutes. We show that the budget-breaker offers incentives that are weaker than first best or equal-division partnership incentives, so that shirking is more prevalent in the firm. Since incentives and team size are substitutes, the budget-breaker increases employment above the first best and partnership levels, so the firm is inefficiently large. The role of the budget-breaker is therefore to reduce agents' exposure to risk and to promote and coordinate specialization and the division of labor. The comparative statics of the firm are consistent with several institutional stylized facts (e.g., the size-wage effect) and recent organizational trends.
    Keywords: budget-breaker, division of labor, endogenous team size, incentives, moral hazard, partnerships, size-wage eect, specialization, teams, theory of the rm
    JEL: D02 D21 D86 L25 M5
    Date: 2011–04
  2. By: Ahmed Ennasri; Marc Willinger
    Abstract: We investigate the effects of competition on managerial incentives and effort in a laboratory experiment. Each owner offers compensation to his manager in two different contexts: monopoly and Cournot duopoly. After accepting the compensation, the manager chooses an effort level to increase the probability of reduced costs of his firm. Theory predicts that the entry of a rival firm in a monopolistic industry affects negatively both the incentive compensation and the effort level. Our experimental findings confirm that the entry of a rival firm reduces the incentive compensation but not the manager’s effort level. However, despite the reduction of the incentive compensation, the manager continues to accept the contract offers and exert the same level of effort.
    Keywords: Managerial Incentives, Effort, Competition, Moral hazard, Experiments
    Date: 2011–06
  3. By: Mélanie Volral; François Rycx; Benoît Mahy
    Abstract: This article puts the relationship between wage dispersion and firm productivity to an updated test, taking advantage of access to detailed Belgian linked employer-employee panel data. Controlling for simultaneity issues, time-invariant workplace characteristics and dynamics in the adjustment process of productivity, empirical results reveal the existence of a positive impact from conditional intra-firm wage dispersion to firm productivity (measured by the average value added per hour worked), which however decreases for higher dispersion levels. Findings thus suggest that the incentive effect of wage dispersion, predicted for instance by the ‘tournament’ model, dominates ‘fairness’ and/or ‘sabotage’ considerations. Further results reveal that the influence of wage dispersion on firm productivity is stronger among firms with a larger proportion of highly skilled workers but does not depend on whether wages are collectively renegotiated at the firm level.
    Keywords: Wage Dispersion; Labour Productivity; Personnel Economics; Matched Employer-Employee Panel Data.
    JEL: J31 J24 M50
  4. By: Peter Huber (WIFO); Harald Oberhofer; Michael Pfaffermayr (WIFO)
    Abstract: Based on a structural model for initial firm size, survival and firm growth we estimate firm-specific transition probabilities between size classes of the firm size distribution. This allows an assessment of the impact of different (counterfactual) economic policy measures on intra-distribution dynamics of the firm size distribution. We find that policies increasing the life span of firms reduce the exit hazard of young firms, but also reduce the probability to be a Gazelle. An increase in the industry-wide entry rate increases the exit hazards of incumbent firms and has no strong impact on the likelihood of firms to become Gazelles. Increasing market growth, by contrast, decreases the exit hazards for incumbent firms and slightly increases the likelihood of firms to be Gazelles. Finally, an increase in the birth size of firms increases the probability of young firms to be Gazelles with strongest effects for the smallest firms.
    Keywords: Firm growth, survival, entry size, Gazelles, economic policy
    Date: 2011–05–31
  5. By: Enrique G. Mendoza; Vivian Z. Yue
    Abstract: Emerging markets business cycle models treat default risk as part of an exogenous interest rate on working capital, while sovereign default models treat income fluctuations as an exogenous endowment process with ad-hoc default costs. We propose instead a general equilibrium model of both sovereign default and business cycles. In the model, some imported inputs require working capital financing; default triggers an efficiency loss as these inputs are replaced by imperfect substitutes; and default on public and private obligations occurs simultaneously. The model explains several features of cyclical dynamics around defaults, countercyclical spreads, high debt ratios, and key business cycle moments.
    JEL: E32 E44 F32 F34
    Date: 2011–06
  6. By: Simon Gaechter (University of Nottingham); Esther Kessler (University College London); Manfred Koenigstein (Universitaet Erfurt)
    Abstract: Efficiency under contractual incompleteness often requires voluntary cooperation in situations where self-regarding incentives for contractual compliance are present as well. Here we provide a comprehensive experimental analysis based on the gift-exchange game of how explicit and implicit incentives affect cooperation. We first show that there is substantial cooperation under non-incentive compatible contracts. Incentive-compatible contracts induce best-reply effort and crowd out any voluntary cooperation. Further experiments show that this result is robust to two important variables: experiencing Trust contracts without any incentives and implicit incentives coming from repeated interaction. Implicit incentives have a strong positive effect on effort only under non-incentive compatible contracts.
    Keywords: principal-agent games; gift-exchange experiments; incomplete contracts, explicit incentives; implicit incentives; repeated games; separability; experiments
    JEL: C70 C90
    Date: 2011–06
  7. By: Frederiksen, Anders (Aarhus School of Business); Kato, Takao (Colgate University)
    Abstract: Denmark's registry data provide accurate and complete career history data along with detailed personal characteristics (e.g., education, gender, work experience, tenure and others) for the population of Danish workers longitudinally. By using such data from 1992 to 2002, we provide rigorous evidence for the first time for the population of workers in an entire economy (as opposed to case study evidence) on the effects of the nature and scope of human capital on career success (measured by appointments to top management). First, we confirm the beneficial effect of acquiring general human capital formally through schooling for career success, as well as the gender gap in career success rates. Second, broadening the scope of human capital by experiencing various occupations (becoming a generalist) is found to be advantageous for career success. Third, initial human capital earned through formal schooling and subsequent human capital obtained informally on the job are found to be complements in the production of career success. Fourth, though there is a large body of the literature on the relationship between firm-specific human capital and wages, the relative value of firm-specific human capital has been rarely studied in the context of career success. We find that it is more beneficial to broaden the breadth of human capital within the firm than without, pointing to the significance of firm-specific human capital for career success.
    Keywords: human capital, career development, occupations, internal promotion, external recruitment, top management
    JEL: J24 M5
    Date: 2011–06
  8. By: Colin Davis (Institute for International Education, Doshisha University); Ken-ichi Hashimoto (Graduate School of Economics, Kobe University)
    Abstract: This paper investigates the relationship between geographic patterns of industrial activity and endogenous growth in a two region model of trade that exhibits no scale effect. The in-house process innovation of manufacturing firms drives productivity growth and is closely associated with firm-level scales of production and relative levels of accessible technical knowledge. Focusing on long-run industry shares and a cross-region productivity gap, we find that dispersed equilibria with positive industry shares for both regions always produce higher growth rates than core-periphery equilibria with all industry locating in one region. Moreover, the highest growth rate arises in a symmetric steady state that features no productivity gap and equal shares of industry leading to the conclusion that the geographic concentration of industry has a negative impact on overall growth. Convergence towards a dispersed equilibrium, however, is contingent on the levels of inter-regional transport costs and knowledge dispersion. Finally, we explore the implications of greater economic integration arising from reduced transport costs and greater knowledge dispersion for patterns of industry and productivity, and for regional welfare levels within a dispersed equilibrium.
    Keywords: Industry Concentration, Industry Share, Productivity Gap, Productivity Growth, Scale Effect
    JEL: F43 O30 O40 R12
    Date: 2011–06
  9. By: Tirole, Jean
    JEL: E44 E52 G28
    Date: 2011–06
  10. By: Martin Berka; Michael B. Devereux; Thomas Rudolph
    Abstract: We study a newly released data set of scanner prices for food products in a large Swiss online supermarket. We find that average prices change about every two months, but when we exclude temporary sales, prices are extremely sticky, changing on average once every three years. Non-sale price behavior is broadly consistent with menu cost models of sticky prices. When we focus specifically on the behavior of sale prices, however, we find that the characteristics of price adjustment seems to be substantially at odds with standard theory.
    JEL: E3
    Date: 2011–06
  11. By: Xavier Raurich; Fernando Sanchez-Losada; Montserrat Vilalta-Bufi (Universitat de Barcelona)
    Abstract: Growth models of learning-by-doing assume that knowledge learned in produc- tion gets freely and instantly spread to the whole economy. As a result, the econ- omy exhibits aggregate increasing returns and the total factor productivity (TFP) growth is endogenous. However, the assumption of instant diusion of knowledge seems unrealistic. Diusion of knowledge takes time and requires some channel of transmission. In this paper we assume this transmission channel is learning-by- hiring, since knowledge is embodied in workers. We present a model where the free and instant diusion of knowledge may exist only within sectors, but not across sectors. Diusion of knowledge across sectors can only occur through the mobility of labor and, therefore, the labor market determines both the level and growth of TFP. We investigate how labor mobility costs modify the equilibrium outcome of such an economy considering two scenarios: endogenous and exogenous growth. Moreover, we show that other labor market ine ciencies, such as labor income taxes or labor search costs, may reduce labor mobility and therefore modify TFP.
    Keywords: labor mobility, economic growth, learning-by-hiring, learning-by-doing
    JEL: O41
    Date: 2011
  12. By: Petrosky-Nadeau, Nicolas (Carnegie Mellon University); Wasmer, Etienne (Sciences Po, Paris)
    Abstract: Building a model with three imperfect markets – goods, labor and credit – representing a product's life-cycle, we find that goods market frictions drastically change the qualitative and quantitative dynamics of labor market variables. The calibrated model leads to a significant reduction in the gap with the data, both in terms of persistence and volatility while search models of the labor market fail in one of the two dimensions. Two factors related to goods market frictions generate these results: i) the expected dynamics of consumers' search for goods, itself depending on the income redistributed by firms and the entry of new products; and ii) the expected dynamics of prices, which alter future profit flows.
    Keywords: search, matching, business cycle, goods market imperfection
    JEL: J6 E12 E13 E3
    Date: 2011–06

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