nep-bec New Economics Papers
on Business Economics
Issue of 2011‒11‒07
fifteen papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Board of director collusion, managerial incentives and firm values By R. Andergassen
  2. Fixed-Term and Permanent Employment Contracts: Theory and Evidence By Shutao Cao; Enchuan Shao; Pedro Silos
  3. A Unified Theory of Firm Selection and Growth By Costas Arkolakis
  4. Optimal Coexistence of Long-term and Short-term contracts in Labor Markets By Inés Macho-Stadler; David Pérez-Castrillo; Nicolás Porteiro
  5. Performance Feedback, Firm Resources, and Strategic Change By Thorsten Grohsjean; Tobias Kretschmer; Nils Stieglitz
  6. Duopoly Competition, Escape Dynamics and Non-cooperative Collusion By Batlome Janjgava; Sergey Slobodyan
  7. A Dynamic Duopoly Investment Game without Commitment under Uncertain Market Expansion By Marcel Boyer; Pierre Lasserre; Michel Moreaux
  8. GOVERNANCE RISKS. How to measure them by means of the incremental cash-flow model By Rodolfo Apreda
  9. The Empirics of Firm Heterogeneity and International Trade By Andrew B. Bernard; J. Bradford Jensen; Stephen J. Redding; Peter K. Schott
  10. Efficient bargaining versus right to manage: a stability analysis with heterogeneous players in a duopoly with quantity competition and trade unions By Fanti, Luciano; Gori, Luca
  11. Gender Differences in Executive Compensation and Job Mobility By George-Levi Gayle; Limor Golan; Robert Miller
  12. Why Taxing Executives' Bonuses Fosters Risk-taking Behavior By Martin Grossmann; Markus Lang; Helmut Dietl
  13. Liquidity and the threat of fraudulent assets By Yiting Li; Guillaume Rocheteau; Pierre-Olivier Weill
  14. Productivity, Size, and the Disintegration of Industrial Production By Christensen, Jonas Gade
  15. Endogenous Merger Waves in Vertically Related Industries By Zhiyong Yao; Wen Zhou

  1. By: R. Andergassen
    Abstract: This paper investigates the effects of board of director collusion on managerial incentives and firm values. Recent academic research hints at the social network of board of directors as an important conduit for coordinating corporate governance policies, such as managerial pay, and curbing competition. We study a model where managers can exert unobservable cost-cutting effort and investigate the consequences of and the incentives for coordinating managerial pay among corporate boards.
    JEL: L1 J33 O31 M52
    Date: 2011–10
  2. By: Shutao Cao; Enchuan Shao; Pedro Silos
    Abstract: This paper constructs a theory of the coexistence of fixed-term and permanent employment contracts in an environment with ex-ante identical workers and employers. Workers under fixed-term contracts can be dismissed at no cost while permanent employees enjoy labor protection. In a labor market characterized by search and matching frictions, firms find it optimal to discriminate by offering some workers a fixedterm contract while offering other workers a permanent contract. Match-specific quality between a worker and a firm determines the type of contract offered. We analytically characterize the firm’s hiring and firing rules. Using matched employer-employee data from Canada, we estimate the model’s parameters. Increasing the level of firing costs increases wage inequality and decreases the unemployment rate. The increase in inequality results from a larger fraction of temporary workers and not from an increase in the wage premium earned by permanent workers.
    Keywords: Labour markets; Potential output; Productivity
    JEL: H29 J23 J38
    Date: 2011
  3. By: Costas Arkolakis
    Abstract: This paper studies the effects of marketing choice to firm growth. I assume that firm-level growth is the result of idiosyncratic productivity improvements with continuous arrival of new potential producers. A firm enters a market if it is profitable to incur the marginal cost to reach the first consumer and pays an increasing marketing cost to reach additional consumers. The model is calibrated using data on the cross-section of firms and their sales across markets as well as the rate of incumbent firm-exit. The calibrated model quantitatively predicts firm exit, growth, and the resulting firm size distribution in the US manufacturing data. It also predicts a distribution of firm growth rates that deviates from Gibrat's law –i.e. independence of firm size and growth– in a manner consistent with the data.
    JEL: F12 L11 L16
    Date: 2011–10
  4. By: Inés Macho-Stadler (Department of Economics, Universitat Autònoma de Barcelona); David Pérez-Castrillo (Department of Economics, Universitat Autònoma de Barcelona); Nicolás Porteiro (Department of Economics, Universidad Pablo de Olavide)
    Abstract: We consider a market where firms hire workers to run their projects and such projects differ in profitability. At any period, each firm needs two workers to successfully run its project: a junior agent, with no specific skills, and a senior worker, whose effort is not verifiable. Senior workers differ in ability and their competence is revealed after they have worked as juniors in the market. We study the length of the contractual relationships between firms and workers in an environment where the matching between firms and workers is the result of market interaction. We show that, despite in a one-firm-one-worker set-up long-term contracts are the optimal choice for firms, market forces often induce firms to use short-term contracts. Unless the market only consists of firms with very profitable projects, firms operating highly profitable projects offer short-term contracts to ensure the service of high-ability workers and those with less lucrative projects also use short-term contracts to save on the junior workers' wage. Intermediate firms may (or may not) hire workers through long-term contracts.
    Keywords: Labor contracts, short-term, long-term, matching, incentives.
    JEL: D86 C78
    Date: 2011–11
  5. By: Thorsten Grohsjean; Tobias Kretschmer; Nils Stieglitz
    Abstract: Combining insights from the behavioral theory of the firm and the resource-based view we investigate the antecedents of strategic change in fast-changing environments. We hypothesize the independent and joint effects of performance feedback and of flexible and specific resources on strategic change. Using an unbalanced panel of 493 publisher-year observations we find that negative performance feedback triggers more strategic change. Further, while flexible resources have no direct influence on strategic change they weaken the negative relationship between performance feedback and strategic change. Finally, we find that larger stocks of specific resources lead to less strategic change.
    Keywords: Performance feedback; strategic change; resource-based-view; video game industry
    JEL: L21 L82
    Date: 2011
  6. By: Batlome Janjgava; Sergey Slobodyan
    Abstract: In this paper, we study an imperfect monitoring model of duopoly under similar settings as in Green and Porter (1984), but here firms do not know the demand parameters and learn about them over time though the price signals. We investigate how a deviation from rational expectations affects the decision making process and what kind of behavior is sustainable in equilibrium. We find that the more common information firms analyze to update their beliefs, the more room is for implicit coordination. This might propagate escapes from the Cournot- Nash Equilibrium and the formation of cartels without explicit cooperative motives. In contrast to Green and Porter (1984), our results show that in a model with learning, breakdown of a cartel happens even without a demand shock. Moreover, in this model an expected price serves as an endogenous price threshold, which triggers a price war. Finally, by investigating the durations of the cooperative and price war phases, we find that in industries with a higher Nash equilibrium output and a lower volatility of firm-specific shocks, it is easier to maintain a cartel and harder to break it down.
    Keywords: beliefs; escape dynamics; implicit collusion; self-confirming equilibrium; learning;
    JEL: D83 D43 L13 L40
    Date: 2011–09
  7. By: Marcel Boyer; Pierre Lasserre; Michel Moreaux
    Abstract: We model capacity-building investments in a homogeneous product duopoly facing uncertain demand growth. Capacity building is achieved through the addition of production units that are durable and lumpy and whose cost is irreversible. While building their capacity over time, firms compete à la Cournot in the product market given their installed capacity. There is no exogenous order of moves, no commitment regarding future decisions, and no finite horizon. We investigate Markov Perfect Equilibrium (MPE) paths of the investment game, which may include episodes during which firms invest at different times, a preemption pattern, and episodes in which firms invest simultaneously, a tacit collusion pattern. These episodes may alternate and are typically several. When firms have yet to invest in capacity, the sole pattern that is MPE-compatible is a preemption episode: firms invest at different times but have equal value. The first such investment may occur earlier and therefore be riskier than socially optimal. When both firms hold capacity, tacit collusion episodes may be MPE-compatible: firms invest simultaneously at a postponed time (hence holding back production in the meantime), thereby generating an investment wave in the industry. Such investment episodes are more likely with higher demand volatility, faster market growth, and lower cost of capital (discount rate). <P>
    Keywords: Real Options; Dynamic Duopoly; Lumpy Investments; Preemption; Investment Waves; Tacit Collusion,
    JEL: C73 D43 D92 L13
    Date: 2011–10–01
  8. By: Rodolfo Apreda
    Abstract: Governance risks stem from the own governance of any organization. The paper puts forward an operational viewpoint of those risks, by mapping the most distinctive categories of governance analysis onto time-dependent governance variables. Afterwards, risks conveyed by the latter are measured against incremental cash flows. The procedure allows a joint analysis of the risky positions carried out by governance variables, tracking them down onto their natural drivers, the incremental cash flows related to assets, creditors, managers, stockholders, and the company’s portfolio of non-current financial assets
    Keywords: governance risks, corporate governance, incremental cash flows, governance variables
    JEL: G34 G32
    Date: 2011–11
  9. By: Andrew B. Bernard; J. Bradford Jensen; Stephen J. Redding; Peter K. Schott
    Abstract: This paper reviews the empirical evidence on firm heterogeneity in international trade. A first wave of empirical findings from micro data on plants and firms proposed challenges for existing models of inter- national trade and inspired the development of new theories emphasizing firm heterogeneity. Subsequent empirical research has examined additional predictions of these theories and explored other dimensions of the data not originally captured by them. These other dimensions include multi-product firms, offshoring, intra-firm trade and firm export market dynamics.
    Keywords: Heterogeneous firms, exporting, importing, productivity
    JEL: F10 F12 F14
    Date: 2011–10
  10. By: Fanti, Luciano; Gori, Luca
    Abstract: The present study considers a unionised duopoly with the two most popular labour market institutions, i.e. efficient bargaining (EB) and right to manage (RTM) unions and analyses product market stability under quantity competition. By focusing on the role played by labour market institutions on the market dynamics, we show that when the preference of unions towards wages is fairly low, (i) the stability region under RTM is higher than under EB, and (ii) a rise in the union power in the Nash bargaining monotonically increases (reduces) the parametric stability region under RTM (EB). In contrast, when the preference of unions towards wages becomes higher, an increase in the union’s bargaining power acts: (1) as an economic stabiliser when the union power is still low; (2) as an economic de-stabiliser when the union power is already high. These results shed some light on the effects of how labour market structures affect out-of equilibrium behaviours in a duopoly in addition to the many established results on how they affect equilibrium behaviours in such a context, and thus also constitute policy warnings for the design of the labour market institutions as regards the important issue of economic stability.
    Keywords: Bifurcation; Cournot; Duopoly; Efficient bargaining; Right to manage
    JEL: J51 L13 D43 C62
    Date: 2011–11–01
  11. By: George-Levi Gayle (Tepper School of Business, Carnegie Mellon University); Limor Golan (Tepper School of Business, Carnegie Mellon University); Robert Miller (Tepper School of Business, Carnegie Mellon University)
    Abstract: Fewer women than men become executive managers. They earn less over their careers, hold more junior positions, and exit the occupation at a faster rate. We compiled a large panel data set on executives and formed a career hierarchy to analyze mobility and compensation rates. We .nd that, controlling for executive rank and background, women earn higher compensation than men, experience more income uncertainty, and are promoted more quickly. Amongst survivors, being female increases the chance of becoming CEO. Hence, the unconditional gender pay gap and job-rank differences are primarily attributable to female executives exiting at higher rates than men in an occupation where survival is rewarded with promotion and higher compensation.
    Date: 2011–03
  12. By: Martin Grossmann (Institute for Strategy and Business Economics, University of Zurich); Markus Lang (Institute for Strategy and Business Economics, University of Zurich); Helmut Dietl (Institute for Strategy and Business Economics, University of Zurich)
    Abstract: Bonus taxes have been implemented to prevent managers from excessive risk-taking. This paper analyzes the effects of taxing executives' bonuses in a principal-agent model. Our model shows that unintentionally the introduction of a bonus tax intensifies the manager's risk-taking behavior and decreases the manager's effort. The principal responds to a bonus tax by offering the manager a higher fixed salary but a lower incentive-based salary.
    Keywords: Principal-agent model, bonus tax, risk-taking, executive compensation, financial regulation
    JEL: H24 J30 M52
    Date: 2011–10
  13. By: Yiting Li; Guillaume Rocheteau; Pierre-Olivier Weill
    Abstract: We study an over-the-counter (OTC) market with bilateral meetings and bargaining where the usefulness of assets, as means of payment or collateral, is limited by the threat of fraudulent practices. We assume that agents can produce fraudulent assets at a positive cost, which generates endogenous upper bounds on the quantity of each asset that can be sold, or posted as collateral in the OTC market. Each endogenous, asset-specific, resalability constraint depends on the vulnerability of the asset to fraud, on the frequency of trade, and on the current and future prices of the asset. In equilibrium, the set of assets can be partitioned into three liquidity tiers, which differ in their resalability, their prices, their sensitivity to shocks, and their responses to policy interventions. The dependence of an asset’s resalability on its price creates a pecuniary externality, which leads to the result that some policies commonly thought to improve liquidity can be welfare reducing.
    Keywords: Liquidity (Economics) ; Fraud ; Asset pricing
    Date: 2011
  14. By: Christensen, Jonas Gade (University of Bergen)
    Abstract: I develop a theoretical model of firms’sourcing decisions along the productivity dimension as in Antrás and Helpman (2004), while also incorporat- ing task trade as in Grossman and Rossi-Hansberg (2008). The combination of these two effects permits a framework for sourcing strategies along two dimensions, which generates results where firms spread the production process of the final good over several different sources simultaneously. While reproducing the results from the aforementioned models, my model contributes refined and more detailed predictions. Testing these on firm-level data for Spanish manufacturing firms, I find strong empirical support for the model's predictions.
    Keywords: Outsourcing; Productivity; Production processes
    JEL: F21 F23 L23
    Date: 2011–02–02
  15. By: Zhiyong Yao (Department of Industrial Economics, School of Management, Fudan University); Wen Zhou (School of Business, The University of Hong Kong)
    Abstract: We study merger waves in vertically related industries where firms can engage in both vertical and horizontal mergers. Even though any individual merger would have been profitable, firms may refrain from merging for fear of negative impacts from other mergers. When they do merge, however, they always merge in waves, which is either vertical or horizontal depending on the relative intensity of double markup and horizontal competitions in the two industries. Finally, merger waves may happen with or without any fundamental change in the underlying economic conditions.
    Keywords: merger wave, horizontal mergers, vertical mergers, stable market structure
    JEL: L13 L42 D43
    Date: 2011–10

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