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on Business Economics |
| By: | Michael D. Bordo; Angela Redish; Hugh Rockoff |
| Abstract: | The financial crisis of 2008 engulfed the banking system of the United States and many large European countries. Canada was a notable exception. In this paper we argue that the structure of financial systems is path dependent. The relative stability of the Canadian banks in the recent crisis compared to the United States in our view reflected the original institutional foundations laid in place in the early 19th century in the two countries. The Canadian concentrated banking system that had evolved by the end of the twentieth century had absorbed the key sources of systemic risk—the mortgage market and investment banking—and was tightly regulated by one overarching regulator. In contrast the relatively weak, fragmented, and crisis prone U.S. banking system that had evolved since the early nineteenth century, led to the rise of securities markets, investment banks and money market mutual funds (the shadow banking system) combined with multiple competing regulatory authorities. The consequence was that the systemic risk that led to the crisis of 2008 was not contained. |
| JEL: | N20 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17312&r=bec |
| By: | Hart, Robert A. (University of Stirling); Roberts, J. Elizabeth (University of Stirling) |
| Abstract: | This paper makes use of the British New Earnings Survey Panel Dataset between 1976 and 2010. It consists of individual-level payroll data and comprises a random sample of 1% of the entire male and female labor force. About two-thirds of within- and between-company moves involve job re-grading (measured at 3-digit occupation level) while one-third of movers retain their job titles. We find that the real wages of both male and female workers who change job titles within companies are significantly more procyclical than job stayers. This lends support to the predicted procyclical real wage effects of the Reynolds-Reder-Hall job re-grading hypothesis. On the extensive margin, title changers and title retainers who move jobs between companies exhibit the same degrees of wage cyclicality and these are considerably greater than for job stayers. |
| Keywords: | real wage cyclicality, spot wages, job moves, job re-grading |
| JEL: | E32 J31 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5912&r=bec |
| By: | Stephen A. Ross |
| Abstract: | We can only estimate the distribution of stock returns but we observe the distribution of risk neutral state prices. Risk neutral state prices are the product of risk aversion – the pricing kernel – and the natural probability distribution. The Recovery Theorem enables us to separate these and to determine the market’s forecast of returns and the market’s risk aversion from state prices alone. Among other things, this allows us to determine the pricing kernel, the market risk premium, the probability of a catastrophe, and to construct model free tests of the efficient market hypothesis. |
| JEL: | E1 G0 G11 G12 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17323&r=bec |
| By: | Oliver D. Hart; Luigi Zingales |
| Abstract: | We study an economy where the lack of a simultaneous double coincidence of wants creates the need for a relatively safe asset (money). We show that, even in the absence of asymmetric information or an agency problem, the private provision of liquidity is inefficient. The reason is that liquidity affects prices and the welfare of others, and creators do not internalize this. This distortion is present even if we introduce lending and government money. To eliminate the inefficiency the government must restrict the creation of liquidity by the private sector. |
| JEL: | E41 E51 G21 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17299&r=bec |
| By: | Jesús Fernández-Villaverde; Pablo A. Guerrón-Quintana; Keith Kuester; Juan Rubio-Ramírez |
| Abstract: | We study the effects of changes in uncertainty about future fiscal policy on aggregate economic activity. Fiscal deficits and public debt have risen sharply in the wake of the financial crisis. While these developments make fiscal consolidation inevitable, there is considerable uncertainty about the policy mix and timing of such budgetary adjustment. To evaluate the consequences of this increased uncertainty, we first estimate tax and spending processes for the U.S. that allow for time-varying volatility. We then feed these processes into an otherwise standard New Keynesian business cycle model calibrated to the U.S. economy. We find that fiscal volatility shocks have an adverse effect on economic activity that is comparable to the effects of a 25-basis-point innovation in the federal funds rate. |
| JEL: | C11 E10 E30 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17317&r=bec |
| By: | Ana Fostel (Dept. of Economics, George Washington University); John Geanakoplos (Cowles Foundation, Yale University) |
| Abstract: | We show how the timing of financial innovation might have contributed to the mortgage bubble and then to the crash of 2007-2009. We show why tranching and leverage first raised asset prices and why CDS lowered them afterwards. This may seem puzzling, since it implies that creating a derivative tranche in the securitization whose payoffs are identical to the CDS will raise the underlying asset price while the CDS outside the securitization lowers it. The resolution of the puzzle is that the CDS lowers the value of the underlying asset since it is equivalent to tranching cash. |
| Keywords: | Financial innovation, Endogenous leverage, Collateral equilibrium, CDS, Tranching and asset prices |
| JEL: | D52 D53 E44 G10 G12 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1809r&r=bec |
| By: | Jessica A. Wachter; Missaka Warusawitharana |
| Abstract: | We examine the evidence on excess stock return predictability in a Bayesian setting in which the investor faces uncertainty about both the existence and strength of predictability. Departing from previous studies, we do not assume that the regressor is strictly exogenous. When we apply our methods to the dividend-price ratio, we find that even investors who are quite skeptical about the existence of predictability sharply modify their views in favor of predictability when confronted by the historical time series of returns and predictor variables. We find that taking into account the stochastic properties of the regressor has a substantial impact on the investor's inference about returns. |
| JEL: | C11 C22 G11 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17334&r=bec |
| By: | Georges Dionne; Kili C. Wang |
| Abstract: | We analyze the empirical relationship between opportunistic fraud and business cycle. We find that residual opportunistic fraud exists both in the contract with replacement cost endorsement and the contract with no-deductible endorsement in the Taiwan automobile theft insurance market. These results are consistent with previous literature on the relationship between fraud activity and insurance contracting. We also show that the severity of opportunistic fraud fluctuates in the opposite direction to the business cycle. Opportunistic fraud is stimulated during periods of recession and mitigated during periods of expansion. |
| Keywords: | Opportunistic fraud, replacement cost endorsement, no-deductible endorsement, automobile theft insurance, business cycle |
| JEL: | G22 G20 D80 D81 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:1121&r=bec |
| By: | Elias Albagli; Christian Hellwig; Aleh Tsyvinski |
| Abstract: | We study the interplay of share prices and firm decisions when share prices aggregate and convey noisy information about fundamentals to investors and managers. First, we show that the informational feedback between the firm's share price and its investment decisions leads to a systematic premium in the firm's share price relative to expected dividends. Noisy information aggregation leads to excess price volatility, over-valuation of shares in response to good news, and undervaluation in response to bad news. By optimally increasing its exposure to fundamental risks when the market price conveys good news, the firm shifts its dividend risk to the upside, which amplifies the overvaluation and explains the premium. Second, we argue that explicitly linking managerial compensation to share prices gives managers an incentive to manipulate the firm's decisions to their own benefit. The managers take advantage of shareholders by taking excessive investment risks when the market is optimistic, and investing too little when the market is pessimistic. The amplified upside exposure is rewarded by the market through a higher share price, but is inefficient from the perspective of dividend value. |
| JEL: | G10 G12 G30 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17330&r=bec |
| By: | Baldwin, John R.; Lafrance, Amélie |
| Abstract: | The nature of the competitive process that causes a reallocation of market shares within an industry contributes to aggregate productivity growth. This paper extends our understanding of industry differences in the competitive process by examining firm turnover and productivity growth in various services industries in Canada and situating them relative to retailing and manufacturing, two industries which have been the focus of these studies in the past. Seven industries in the services sector, namely wholesale trade, transportation and warehousing, air transportation, truck transportation, broadcasting and telecommunications, business services and financial services, are examined. |
| Keywords: | Transportation, Retail and wholesale, Information and communications technology, Business performance and ownership, Economic accounts, Business, consumer and property services, Telecommunications industries, Entry, exit, mergers and growth, Television and radio industries, Productivity accounts, Professional, scientific and technical services |
| Date: | 2011–08–19 |
| URL: | http://d.repec.org/n?u=RePEc:stc:stcp5e:2011072e&r=bec |
| By: | Driffill, John; Miller, Marcus |
| Abstract: | How and why do financial conditions matter for real outcomes? The ‘workhorse model of money and liquidity’ of Kiyotaki and Moore (2008) shows how--with full employment maintained by flexible prices--shifting credit constraints can affect investment and future aggregate supply. We show that, when the flex-price assumption is dropped, an adverse but temporary liquidity shock can rapidly lead to Keynesian-style demand failure. Optimistic expectations may speed recovery, but simulation results suggest that prompt liquidity infusion by the central bank--i.e. Quantitative Easing--is needed to check prolonged recession. |
| Keywords: | Credit Constraints; Liquidity Shocks; Temporary Equilibrium |
| JEL: | B22 E12 E20 E30 E44 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8511&r=bec |
| By: | Malcolm Baker; Jeffrey Wurgler |
| Abstract: | We survey the theory and evidence of behavioral corporate finance, which generally takes one of two approaches. The market timing and catering approach views managerial financing and investment decisions as rational managerial responses to securities mispricing. The managerial biases approach studies the direct effects of managers’ biases and nonstandard preferences on their decisions. We review relevant psychology, economic theory and predictions, empirical challenges, empirical evidence, new directions such as behavioral signaling, and open questions. |
| JEL: | G3 G30 G31 G32 G34 G35 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17333&r=bec |
| By: | Ana Fostel (George Washington University); John Geanakoplos (Cowles Foundation, Yale University) |
| Abstract: | A recent literature shows how an increase in volatility reduces leverage. However, in order to explain pro-cyclical leverage it assumes that bad news increases volatility, that is, it assumes an inverse relationship between first and second moments of asset returns. This paper suggests a reason why bad news is more often than not associated with higher future volatility. We show that, in a model with endogenous leverage and heterogeneous beliefs, agents have the incentive to invest mostly in technologies that become more volatile in bad times. Agents choose these technologies because they can be leveraged more during normal times. Together with the existing literature this explains pro-cyclical leverage. The result also gives a rationale to the pattern of volatility smiles observed in stock options since 1987. Finally, the paper presents for the first time a dynamic model in which an asset is endogenously traded simultaneously at different margin requirements in equilibrium. |
| Keywords: | Collateral, Endogenous leverage, VaR, Volatility, Volatility smile |
| JEL: | D52 D53 E44 G11 G12 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1762rr&r=bec |
| By: | John P. Weche Geluebcke (Institute of Economics, Leuphana University Lueneburg, Germany) |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:lue:wpaper:212&r=bec |
| By: | Hirose, Yasuo; Kurozumi, Takushi |
| Abstract: | The observed decline in the relative price of investment goods to consumption goods in Japan suggests the existence of investment-specific technological (IST) changes. We examine whether IST changes are a major source of business fluctuations in Japan, by estimating a dynamic stochastic general equilibrium model with Bayesian methods. We show that IST changes are less important than neutral technological changes in explaining output fluctuations. We also demonstrate that investment fluctuations are mainly driven by shocks to investment adjustment costs. Such shocks represent variations of costs involved in changing investment spending, such as financial intermediation costs. We then find that the estimated series of the investment adjustment cost shock correlates strongly with the diffusion index of firms' financial position in the Tankan (Short-term Economic Survey of Enterprises in Japan). We thus argue that the large decline in investment growth in the early 1990s is due to an increase in investment adjustment costs stemming from firms' tight financial constraint after the collapse of Japan's asset price bubble. |
| Keywords: | Business fluctuation; Investment-specific technology; Investment adjustment cost shock; Financial intermediation cost; Firms' financial constraint |
| JEL: | E32 E31 E22 |
| Date: | 2011–03–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:32944&r=bec |
| By: | Daniel S. Hamermesh; Jason Abrevaya |
| Abstract: | We measure the impact of individuals’ looks on life satisfaction/happiness. Using five data sets, from the U.S., Canada, the U.K., and Germany, we construct beauty measures in different ways that allow placing lower bounds on the effects of beauty. Beauty raises happiness: A one standard-deviation change in beauty generates about 0.10 standard deviations of additional satisfaction/happiness among men, 0.12 among women. Accounting for a wide variety of covariates, particularly effects in the labor and marriage markets, including those that might be affected by differences in beauty, the impact among men is more than halved, among women slightly less than halved. |
| JEL: | C20 I30 J10 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17327&r=bec |
| By: | Trevor A. Reeve; Robert J. Vigfusson |
| Abstract: | Commodity futures prices are frequently criticized as being uninformative for forecasting purposes because (1) they seem to do no better than a random walk or an extrapolation of recent trends and (2) futures prices for commodities often trace out a relatively flat trajectory even though global demand is steadily increasing. In this paper, we attempt to shed light on these concerns by discussing the theoretical relationship between spot and futures prices for commodities and by evaluating the empirical forecasting performance of futures prices relative to some alternative benchmarks. The key results of our analysis are that futures prices have generally outperformed a random walk forecast, but not by a large margin, while both futures and a random walk noticeably outperform a simple extrapolation of recent trends (a random walk with drift). Importantly, however, futures prices, on average, outperform a random walk by a considerable margin when there is a sizeable difference between spot and futures prices. |
| Keywords: | Commodity futures ; Futures market ; Prices ; Economic forecasting |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1025&r=bec |
| By: | David J. Cooper; Matthias Sutter |
| Abstract: | Team success relies on assigning team members to the right tasks. We use controlled experiments to study how roles are assigned within teams and how this affects team performance. Subjects play the takeover game in pairs consisting of a buyer and a seller. Understanding optimal play is very demanding for buyers and trivial for sellers. Teams perform better when roles are assigned endogenously or teammates are allowed to chat about their decisions, but the interaction effect between endogenous role assignment and chat unexpectedly worsens team performance. We argue that ego depletion provides a likely explanation for this surprising result. |
| Keywords: | Role selection in teams, team performance, takeover game, winner’s curse, communication, experiment |
| JEL: | C91 C92 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2011-14&r=bec |
| By: | Aubhik Khan; Julia K. Thomas |
| Abstract: | We study the cyclical implications of credit market imperfections in a calibrated dynamic, stochastic general equilibrium model wherein firms face persistent shocks to aggregate and individual productivity. In our model economy, optimal capital reallocation is distorted by two frictions: collateralized borrowing and partial capital irreversibility yielding (S,s) firm-level investment policies. In the presence of persistent heterogeneity in capital, debt and total factor productivity, the effects of a financial shock are amplified and propagated through large and long-lived disruptions to the distribution of capital that, in turn, imply large and persistent reductions in aggregate total factor productivity. We find that an unanticipated tightening in borrowing conditions can, on its own, generate a large recession far more persistent than the financial shock itself. This recession, and the subsequent recovery, is distinguished both quantitatively and qualitatively from that driven by exogenous shocks to total factor productivity. |
| JEL: | E22 E32 E44 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17311&r=bec |
| By: | Massimo Del Gatto; Filippo di Mauro; Joseph Gruber; Benjamin R. Mandel |
| Abstract: | The U.S. share of world merchandise exports has declined sharply over the last decade. Using data at the level of detailed industries, this paper analyzes the decline in U.S. share against the backdrop of alternative measures of the competitiveness of the U.S. economy. We document the following facts: (i) only a few industries contributed to the decline in any meaningful way, (ii) a large part of the drop was driven by the changing size of U.S. export industries and not the size of U.S. sales within those industries, (iii) in a gravity framework, the majority of the decline in the U.S. export share within industries was due to the declining U.S. share of world income, and (iv) in a computed structural measure of firm productivity, average U.S. export productivity has generally maintained its high level versus other countries over time. Overall, our analysis suggests that the dismal performance of the U.S. market share is not a sufficient statistic for competitiveness. |
| Keywords: | Exports - United States ; Industrial Productivity - United States ; Competition |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1026&r=bec |
| By: | Alessandra Cataldi; Stephan K. S. Kampelmann; François Rycx |
| Abstract: | Using longitudinal matched employer-employee data for the period 1999-2006, we investigate the relationship between age, wage and productivity in the Belgian private sector. More precisely, we examine how changes in the proportions of young (16-29 years), middle-aged (30-49 years) and older (more than 49 years) workers affect the productivity of firms and test for the presence of productivity-wage gaps. Results (robust to various potential econometric issues, including unobserved firm heterogeneity, endogeneity and state dependence) suggest that workers older than 49 are significantly less productive than prime age and young workers. In contrast, the productivity of middle-age workers is not found to be significantly different compared to young workers. Findings further indicate that average hourly wages within firms increase significantly and monotonically with age. Overall, this leads to the conclusion that young workers are paid below their marginal productivity while older workers appear to be “overpaid” and lends empirical support to theories of deferred compensation over the life-cycle (Lazear, 1979). |
| Keywords: | Wages; productivity; aging; matched panel data |
| JEL: | J14 J24 J31 |
| Date: | 2011–08–18 |
| URL: | http://d.repec.org/n?u=RePEc:dul:wpaper:2013/95816&r=bec |
| By: | Wennberg, Karl (The Ratio Institute and Stockholm School of Economics); Wiklund, Johan (Whitman School of Management); Hellerstedt, Karin (Jönköping International Business School); Nordqvist, Mattias (Jönköping International Business School) |
| Abstract: | We contrast the performance consequences of intra-family vs. external ownership transfers. Investigating a sample of all private family firms in Sweden that went through ownership transfers during ten years, we find family firms transferred to external owners outperforming those transferred within the family, but that survival is higher among intra-family transfers. We attribute these performance differences to the long-term orientation of family firms passed on to the next generation and to the entrepreneurial willingness of acquirers to bear uncertainty. Based on distinct ownership transition routes and theoretical mechanisms explaining performance differences, we outline implications for family business and entrepreneurship research. |
| Keywords: | long-term orientation; succession; ownership transfer; family firms; performance |
| JEL: | L26 M13 |
| Date: | 2011–08–17 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:ratioi:0172&r=bec |
| By: | Carlos Carrillo-Tudela (Department of Economics, University of Essex, United Kingdom); Leo Kaas (Department of Economics, University of Konstanz, Germany) |
| Abstract: | We consider a model of on-the-job search where firms offer long-term wage contracts to workers of different ability. Firms do not observe worker ability upon hiring but learn it gradually over time. With sufficiently strong information frictions, low-wage firms offer separating contracts and hire all types of workers in equilibrium, whereas high-wage firms offer pooling contracts designed to retain high-ability workers only. Low-ability workers have higher turnover rates, they are more often employed in low-wage firms and face an earnings distribution with a higher frictional component. Furthermore, positive sorting obtains in equilibrium. |
| Keywords: | Adverse Selection, On-the-job Search, Wage Dispersion, Sorting |
| JEL: | D82 J63 J64 |
| Date: | 2011–08–16 |
| URL: | http://d.repec.org/n?u=RePEc:knz:dpteco:1129&r=bec |
| By: | Ferguson, Shon (Research Institute of Industrial Economics (IFN)) |
| Abstract: | Recent empirical evidence suggests that prices for some goods and services are higher in larger markets. This paper provides a demand-side explanation for this phenomenon when firms can choose how much to differentiate their products in a model of monopolistic competition with horizontal product differentiation. The model proposes that consumers’ love of variety makes them more sensitive to product differentiation efforts by firms, which leads to higher prices in larger markets. At the same time, endogenous product differentiation modeled in this way can lead to a positive and concave relationship between market size and entry. |
| Keywords: | Endogenous Technology; Entry; Market Size Effect; International Trade; Monopolistic Competition |
| JEL: | D43 F12 L13 |
| Date: | 2011–08–12 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:0878&r=bec |
| By: | Silvana Krasteva; Huseyin Yildirim |
| Abstract: | This paper investigates the sequencing choice of a buyer who negotiates with the sellers of two complementary objects with uncertain payoffs. We show that the sequencing matters to the buyer only when equilibrium trade can be inefficient. In this case, the buyer begins with the less powerful seller if the sellers have sufficiently diverse bargaining powers. If, however, both sellers are strong bargainers, then the buyer begins with the stronger of the two. For either choice, the buyer’s sequencing (weakly) increases the social surplus. Our analysis further reveals that it is sometimes optimal for the buyer to raise her own cost of acquisition to better manage the supplier competition. As such, we find that the buyer may commit to paying the sellers a minimum price strictly above the marginal cost; and that the buyer may outsource an input even though it can be made in-house. Finally, we identify the first - and second - mover advantages in negotiations for the sellers. |
| Keywords: | negotiation, sequencing, bargaining power, coordination |
| JEL: | C70 L23 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:duk:dukeec:11-17&r=bec |