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on Business Economics |
| By: | John B. Donaldson; Natalia Gershun; Marc P. Giannoni |
| Abstract: | We consider a simple variant of the standard real business cycle model in which shareholders hire a self-interested executive to manage the firm on their behalf. A generic family of compensation contracts similar to those employed in practice is studied. When compensation is convex in the firm’s own dividend (or share price), a given increase in the firm’s output generated by an additional unit of physical investment results in a more than proportional increase in the manager’s income. Incentive contracts of sufficient yet modest convexity are shown to result in an indeterminate general equilibrium, one in which business cycles are driven by self-fulfilling fluctuations in the manager’s expectations that are unrelated to the economy’s fundamentals. Arbitrarily large fluctuations in macroeconomic variables may result. We also provide a theoretical justification for the proposed family of contracts by demonstrating that they yield first-best outcomes for specific parameter choices. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:531&r=bec |
| By: | Shriver, Scott K. (Stanford University); Srinivasan, V. Seenu (Stanford University) |
| Abstract: | We examine a duopoly where one of the firms does not maximize profit, but instead maximizes customer surplus subject to a profit constraint. (Customer surplus for a firm is the sum of its customers' individual consumer surpluses, i.e., the dollar value the customer attaches to the product minus its price.) For the surplus-maximizing firm, profit is constrained to be at least X percent (where X% might be, say 80-90%) of the profit it would have obtained under a profit maximization objective. The model assumes customer willingness to pay for quality is uniformly distributed and that customers follow a simple decision rule: when presented with two products of known quality and price, purchase one unit of the product which maximizes surplus, or if surplus is negative for both products, elect not to purchase any product. We further assume that firms' marginal cost of production is convex (quadratic) in quality. Competition between firms is modeled as a two-stage game, which is solvable by backward induction. In the first stage, one of the firms, whose identity is exogenously specified, moves first and decides its quality level, fully anticipating the quality response of the second firm and the subsequent price competition. The second firm observes the first firm's quality level and then decides its own quality level, anticipating the subsequent price competition. In the second stage, firms take qualities as given and choose prices simultaneously in accordance with a Nash equilibrium. Two possibilities are considered: (a) the first mover is the profit-maximizing firm, and (b) the first mover is the customer surplus-maximizing firm. We compare the results to the corresponding base case of Moorthy (1988) where both firms are profit-maximizing. We find that firms can deliver significant additional value to their customers by forgoing small amounts of profit. However, the effectiveness of this strategy depends upon which firm is the first mover. When the surplus-maximizing firm moves first, a 1% increase in its customers' surplus "costs" the firm approximately 2% of its potential profits. By contrast, when the profit-maximizing firm chooses quality first, we find that sacrificing 20% of profits is sufficient for the surplus-maximizing firm to more than quadruple the customer surplus it would have provided under a profit-maximizing objective. This outcome results from the surplus-maximizing firm leap-frogging its competitor to become the high quality producer. |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:2091&r=bec |
| By: | Peter Rousseau (Department of Economics, Vanderbilt University); Caleb Stroup (Department of Economics, Vanderbilt University) |
| Abstract: | We trace directors through time and across firms to study whether acquirers' exposure to non-public information about potential targets through board service histories affects the market for corporate control. In a sample of publicly-traded U.S. firms from 1996 through 2006, we find that acquirers are about five times more likely to buy firms at which their directors once served. These effects are stronger when the acquirer has better corporate governance, the director has a larger ownership stake at the acquirer, or the director played an important role during past service at the target. The findings are robust to endogeneity of board composition and to controls for network connectivity and conventional inter-firm interlocks. |
| Keywords: | Interlocking directorates, board networks, mergers, social networks, corporate governance |
| JEL: | G34 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:1124&r=bec |
| By: | Bruno Biais (Toulouse School of Economics (CNRS-CRM, IDEI), 21 Allée de Brienne, 31000 Toulouse, France.); Florian Heider (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Marie Hoerova (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | We analyze optimal hedging contracts and show that although hedging aims at sharing risk, it can lead to more risk-taking. News implying that a hedge is likely to be loss-making undermines the risk-prevention incentives of the protection seller. This incentive problem limits the capacity to share risks and generates endogenous counterparty risk. Optimal hedging can therefore lead to contagion from news about insured risks to the balance sheet of insurers. Such endogenous risk is more likely to materialize ex post when the ex ante probability of counterparty default is low. Variation margins emerge as an optimal mechanism to enhance risk-sharing capacity. Paradoxically, they can also induce more risk-taking. Initial margins address the market failure caused by unregulated trading of hedging contracts among protection sellers. JEL Classification: G21, G22, D82. |
| Keywords: | Insurance, moral hazard, counterparty risk, margin requirements, derivatives. |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111413&r=bec |
| By: | M. Kopel; L. Lambertini |
| Abstract: | We show that Miller and Pazgal.s (2001) model of strategic delegation, in which managerial incentives are based upon relative performance, is affected by a non-existence problem which has impact on the price equilibrium. The undercutting incentives generating this result are indeed similar to those affecting the stability of price cartels. |
| JEL: | C73 L13 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp807&r=bec |
| By: | Lee E. Ohanian; Andrea Raffo |
| Abstract: | We build a dataset of quarterly hours worked for 14 OECD countries. We document that hours are as volatile as output, that a large fraction of labor adjustment takes place along the intensive margin, and that the volatility of hours relative to output has increased over time. We use these data to reassess the Great Recession and prior recessions. The Great Recession in many countries is a puzzle in that labor wedges are small, while those in the U.S. Great Recession - and those in previous European recessions - are much larger. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1039&r=bec |
| By: | McCahery, J.A.; Sautner, Z. (Tilburg University, Center for Economic Research) |
| Abstract: | Abstract: In this paper, we investigate the attitudes of institutional investors, such as hedge funds, insurance companies, mutual funds and pension funds, towards a key corporate governance mechanism, namely executive compensation. We document the preferences they have about both the level and structure of executive compensation. Our analysis takes a comparative approach as we ask investors to reveal their preferences both for firms in the U.S. and in The Netherlands. Our analysis further sheds light on who should decide on executive pay, thereby contributing to the recent debate on shareholder involvement in executive pay. Finally, we examine their views on the most important and largest component of executive pay, executive stock options, and investigate what preferences they have when it comes to the design of such options. |
| Keywords: | Executive Compensation;Institutional Investors;Corporate Governance. |
| JEL: | G34 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2012004&r=bec |
| By: | Tor Eriksson (Department of economics - University of Aarhus); Marie-Claire Villeval (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure de Lyon) |
| Abstract: | Assuming that people care not only about what others do but also on what others think, we study respect in a labor market context where the length of the employment relationship is endogenous. In our three-stage gift-exchange experiment, the employer can express respect by giving the employee costly symbolic rewards after observing his level of effort. We study whether symbolic rewards are used by the employers mainly to praise employees or as a coordination device to build relational contracts by manipulating the balance between labor demand and supply in the market. We find that a high proportion of long-term relationships have been initiated by the assignment of symbolic rewards. However, the assignment of symbolic rewards decreases when it becomes clear that the relationship is durable, suggesting that employers mainly use symbolic rewards as a coordination device to initiate relational contracts. Compared to the balanced market condition, assigning symbolic rewards in initial relationships is less likely when there is excess demand in the market and more likely when there is excess supply, i.e. when the relationship is more valuable. Receiving symbolic rewards increases the employees' likelihood of accepting to continue the relationship with the same employer. It also motivates them to increase their effort further but only when the market is balanced. Overall, the ability to assign symbolic rewards does not give rise to higher profits because it is associated with lower rents offered to the employees on average, leading to lower effort levels. |
| Keywords: | Respect; Symbolic rewards; Coordination; Signaling; Labor market; Experiment |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00642527&r=bec |
| By: | Charles F. Mason (H.A. True Chair in Petroleum and Natural Gas Economics, Department of Economics & Finance, University of Wyoming) |
| Abstract: | Persistent and significant privately-held stockpiles of crude oil have long been an important empirical regularity in the United States. Such stockpiles would not rationally be held in a traditional Hotelling-style model. How then can the existence of these inventories be explained? In the presence of sufficiently stochastic prices, oil extracting firms have an incentive to hold inventories to smooth production over time. An alternative explanation is related to a speculative motive - firms hold stockpiles intending to cash in on periods of particularly high prices. I argue that empirical evidence supports the former but not the latter explanation. |
| Keywords: | Petroleum Economics, Stochastic Dynamic Optimization |
| JEL: | Q2 D8 L15 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2011.100&r=bec |
| By: | Miguel Flores |
| Abstract: | This paper studies entry in a market where firms compete in shopping hours and prices. I show that an incumbent firm is able to choose its opening hours strategically to deter entry of a new firm. The potential effects of entry deterrence on social welfare depends on the degree of product differentiation. Entry deterrence increases social welfare when product differentiation is low, while it reduces social welfare when product differentiation is high. In terms of policy, the result of this model suggests that shopping hours deregulation is not always welfare enhancing. |
| Keywords: | Entry; Product Differentiation; Shopping Hours |
| JEL: | D21 L51 L22 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:11/51&r=bec |
| By: | Orens, Raf (Lessius (K.U.Leuven) - Department of Business Studies); Reheul, Anne-Mie (Hogeschool-Universiteit Brussel (HUB), Belgium) |
| Abstract: | This study examines the idiosyncratic manager-specific influence on a corporate cash policy. Although traditional economic theories such as trade-off theory and agency theory have already contributed to a deeper understanding of corporate cash policy, we examine whether the integration of Hambrick and Mason’s (1984) upper echelons theory (UET) into these traditional theories provides additional power in explaining corporate cash holdings. We contend that social, psychological and cognitive characteristics of CEOs, proxied by a number of CEO demographics, affect the level of importance that CEOs (and shareholders) attach to the economic arguments provided by the traditional theories, in turn affecting cash policy. We test our hypotheses using a sample of Belgian privately held SMEs. Controlling for a number of operational and financial variables, our results illustrate that CEOs have a considerable influence on corporate cash holdings. In line with most of the hypotheses our principal findings suggest that longer tenured CEOs, older CEOs and CEOs with experience in a single industry are more concerned with the precautionary motive of cash and less concerned with the opportunity cost of cash, giving rise to higher cash levels compared to shorter tenured CEOs, younger CEOs and CEOs with experiences outside the current industry. We thus reveal that cash policy in Belgian privately held SMEs reflects the natural tendencies of CEOs. Since cash policy affects shareholder value, it is important for shareholders to consider the demographics of present or new CEOs, and to understand their associated inclinations concerning cash policy. |
| Keywords: | agency theory; cash policy; SME; trade-off theory; upper echelons theory |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:hub:wpecon:201135&r=bec |
| By: | Flavia Barsotti (Dipartimento di Matematica per le Decisioni, Universita' degli Studi di Firenze) |
| Abstract: | This paper analyzes the capital structure of a firm in an infinite time horizon following Leland (1994) under the more general hypothesis that the firm’s assets value process belongs to a fairly large class of stochastic volatility models. By applying singular perturbation theory, we fully describe the (approximate) capital structure of the firm in closed form as a corrected version of Leland (1994) and analyze the stochastic volatility effect on all financial variables. We propose a corrected version of the smooth-fit principle under volatility risk useful to determine the optimal stopping problem solution (i.e. endogenous failure level) and a corrected version for the Laplace transform of the stopping failure time. The numerical analysis obtained from exploiting optimal capital structure shows enhanced spreads and lower leverage ratios w.r.t. Leland (1994), improving results in a robust model-independent way. |
| Keywords: | structural model, stochastic volatility, volatility time scales, endogenous default, optimal stopping |
| JEL: | G12 G13 G33 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:flo:wpaper:2012-02&r=bec |
| By: | Gary B. Gorton; Stefan Lewellen; Andrew Metrick |
| Abstract: | We document that the percentage of all U.S. assets that are “safe” has remained stable at about 33 percent since 1952. This stable ratio is a rare example of calm in a rapidly changing financial world. Over the same time period, the ratio of U.S. assets to GDP has increased by a factor of 2.5, and the main supplier of safe financial debt has shifted from commercial banks to the “shadow banking system.” We analyze this pattern of stylized facts and offer some tentative conclusions about the composition of the safe-asset share and its role within the overall economy. |
| JEL: | E02 E41 E44 E52 G2 G21 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17777&r=bec |
| By: | Jimenez Porras, G.; Ongena, S.; Peydro, J.L.; Saurina, J. (Tilburg University, Center for Economic Research) |
| Abstract: | Abstract: Banking crises involve periods of persistently low credit and economic growth. Banks’ balance sheets are then weak but so are those of non-financial corporate borrowers. Hence, a crucial question is whether credit growth is low due to supply or to demand factors. However convincing identification has been elusive due to a lack of detailed loan application-, bank-, and firm-level data. Access to a dataset of loan applications in Spain that is matched with complete bank and firm balance-sheet data covering the period from 2002 to 2010 allows us to identify bank and firm balancesheet channels. We find robust evidence showing that bank balance-sheet strength determines the success of loan applications and the granting of loans in crisis times. The heterogeneity in firm balance-sheet strength determines loan granting in both good and crisis times, although the potency of this firm balance-sheet channel is the largest in the latter period. Our findings therefore hold important implications for both theory and policy. |
| Keywords: | bank lending channel;credit supply;business cycle;credit crunch;capital;liquidity. |
| JEL: | E32 E44 E5 G21 G28 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2012005&r=bec |
| By: | Hochguertel, Stefan (Uppsala Center for Fiscal Studies); Ohlsson, Henry (Uppsala Center for Fiscal Studies) |
| Abstract: | Who is wealthy? This paper presents empirical estimates of household movements into and out of the top percents of the wealth distribution over individual life cycles. There are life-cycle motives and precautionary motives for wealth accumulation. The opportunities to accumulate wealth create incentives for education, work effort, and entrepreneurship. We would expect considerable wealth mobility over the life cycle if the life-cycle motives and incentives to accumulate are strong and affect behavior. The data are from an administrative Swedish source that retains wealth information from tax registers. The data are unique, they follow a large sample of households over almost 40 years. There is substantial mobility when we follow individual households over long enough time spans. We find that wealth mobility increased until the end of the 1980s and then started to decrease. Age-wealth probability profiles are consistent with life-cycle motives for wealth accumulation. There are also limited precautionary motives for wealth accumulation when households experience income uncertainty. |
| Keywords: | intragenerational wealth mobility; wealth durations; life-cycle motives; precautionary motives; panel data |
| JEL: | D14 D31 D91 H24 |
| Date: | 2012–01–16 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:uufswp:2012_001&r=bec |
| By: | Raghuram Rajan |
| Abstract: | The nature of the firm and its financing are closely interlinked. To produce significant net present value, an entrepreneur has to transform her enterprise into one that is differentiated from the ordinary. To achieve the control that will allow her to execute this strategy, she needs to have substantial ownership, and thus financing. But it is hard to raise finance against differentiated assets. So an entrepreneur has to commit to undertake a second transformation, standardization, that will make the human capital in the firm, including her own, replaceable, so that outside financiers obtain rights over going-concern surplus. I argue that the availability of a vibrant stock market helps the entrepreneur commit to these two transformations in a way that a debt market would not. This helps explain why the nature of firms and the extent of innovation differ so much in different financing environments. |
| JEL: | G32 L22 L26 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17760&r=bec |
| By: | Bester, Helmut; Demuth, Juri |
| Abstract: | This paper considers a market in which only the incumbent's quality is publicly known. The entrant's quality is observed by the incumbent and some fraction of informed consumers. This leads to price signalling rivalry between the duopolists, because the incumbent gains and the entrant loses when observed prices make the uninformed consumers more pessimistic about the entrant's quality. When the uninformed consumers' beliefs satisfy the intuitive criterion and the unprejudiced belief refinement, only a two-sided separating equilibrium can exist and prices are identical to the full information outcome. -- |
| Keywords: | quality uncertainty,signalling,oligopoly |
| JEL: | D43 D82 L15 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fubsbe:201120&r=bec |
| By: | M. Kopel; L. Lambertini |
| Abstract: | We identify a mistake in the specification of the demand system used in the strategic delegation model based on market shares by Jansen et al. (2007), whereby the price remains above marginal cost when goods are homogeneous. After amending this aspect, we perform a profit comparison with the alternative delegation scheme à la Fershtman and Judd (1987). |
| JEL: | L13 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp806&r=bec |
| By: | Tobias Adrian; Brian Begalle; Adam Copeland; Antoine Martin |
| Abstract: | We provide an overview of data requirements necessary to monitor repurchase agreements (repos) and securities lending (sec lending) markets for the purposes of informing policymakers and researchers about firm-level and systemic risk. We start by explaining the functioning of these markets, and argue that it is crucial to understand the institutional arrangements. Data collection is currently incomplete. A comprehensive collection should include six characteristics of repo and sec lending trades at the firm level: principal amount, interest rate, collateral type, haircut, tenor, and counterparty. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:529&r=bec |
| By: | Guido Ascari (Department of Economics and Quantitative Methods, University of Pavia); Giorgio Fagiolo (Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa); Andrea Roventini (University Paris Ouest Nanterre La Defense, Department of Economic Sciences (University of Verona) and Laboratory of Economics and Management (LEM) (Sant'Anna School of Advanced Studies, Pisa)) |
| Abstract: | Recent empirical findings suggest that macroeconomic variables are seldom normally dis- tributed. For example, the distributions of aggregate output growth-rate time series of many OECD countries are well approximated by symmetric exponential-power (EP) den- sities, with Laplace fat tails. In this work, we assess whether Real Business Cycle (RBC) and standard medium-scale New-Keynesian (NK) models are able to replicate this sta- tistical regularity. We simulate both models drawing Gaussian- vs Laplace-distributed shocks and we explore the statistical properties of simulated time series. Our results cast doubts on whether RBC and NK models are able to provide a satisfactory representation of the transmission mechanisms linking exogenous shocks to macroeconomic dynamics. |
| Keywords: | Growth-Rate Distributions, Normality, Fat Tails, Time Series, Exponential- Power Distributions, Laplace Distributions, DSGE Models, RBC Models. |
| JEL: | C1 E3 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:pav:wpaper:280&r=bec |
| By: | Martin Berka (Victoria University of Wellington); Mario J. Crucini (Department of Economics, Vanderbilt University); Chih-Wei Wang (Department of Economics, Pacific Lutheran University) |
| Abstract: | Cole and Obstfeld (1991) exposited a classic result where equilibrium movements in the terms of trade could make ex ante risk-sharing arrangements unnecessary: a unity elasticity of substitution across goods and production specialization. This paper extends their model to N countries and M commodities (N > M). Here the terms of trade provides insurance against commodity-specific shocks, not country-specific shocks. Using commodity-level production data at the national level and world commodity prices we document significant terms of trade variability and positive responses of nation-specific production to terms of trade improvements. The endogenous terms of trade insurance mechanism highlighted in CO is virtually non-existent. |
| Keywords: | Risk-sharing; developing countries; terms of trade |
| JEL: | F3 F4 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:1121&r=bec |
| By: | Donald A. R. George (University of Edinburgh) |
| Abstract: | Technical progress lowers costs and prices but appears to have an ambiguous effect on product reliabilty. This paper presents a simple model which explains this observation. |
| Date: | 2011–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:edn:esedps:211&r=bec |