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on Business Economics |
| By: | Shalini Mitra (University of Connecticut) |
| Abstract: | The period before the financial crisis was characterized by unprecedented calm in the U.S. and other developed countries. Volatility of aggregate output growth declined in the U.S. beginning in the early 1980's until the fall of 2007 (the phenomenon has been widely called the Great Moderation). Meanwhile micro level evidence suggests increasing volatility at the firm level over the last 60 years including the period of the Great Moderation. I conduct a quantitative analysis of the role played by financial development in the divergence of firm and aggregate volatilities. In a DSGE setting based on Kiyotaki and Moore (1997) type borrowing constraints I show that financial development is associated with increasing firm growth volatility and declining aggregate volatility. The reason for the divergence is a decline in correlation of the firm with the aggregate as financial development occurs. Classification-JEL: D21, D58, E27, E32 |
| Keywords: | Great Moderation, Firm-Level Volatility, Borrowing Constraints, Heterogenous Firms, Business Cycle |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2012-07&r=bec |
| By: | Carl Chiarella (Finance Discipline Group, UTS Business School, University of Technology, Sydney); Chi-Fai Lo (Institute of Theoretical Physics and Department of Physics, The Chinese University of Hong Kong); Ming Xi Huang (Finance Discipline Group, UTS Business School, University of Technology, Sydney) |
| Abstract: | This article provides a generalized two-firm model of default correlation, based on the structural approach that incorporates interest rate risk. In most structural models default is driven by the firms' asset dynamics. In this article, a two-firm model of default is instead driven by the dynamic leverage ratios, which combines the measure of risks of the firms' total liabilities and assets. This article investigates analytical methods and numerical tools to solve the two-dimensional first passage time problem with time-dependent parameters. We carry out a comparative analysis of the impact of model parameters and provide some insights of their effects on joint survival probabilities and default correlations. |
| Keywords: | credit risk; default correlations; default probabilities; first passage time |
| JEL: | C60 G13 G32 |
| Date: | 2012–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:rpaper:304&r=bec |
| By: | Ching-to Albert MA (Department of Economics, Boston University.); Ingela Alger (TSE (LERNA, CNRS) and Economics Department, Carleton University); Regis Renault (Universite de Cergy-Pontoise, THEMA, Cergy-Pontoise Cedex FRANCE, and Institut Universitaire de France;) |
| Abstract: | A principal chooses between in-house production and outsourcing. An agent will be hired when production is in-house. An agent will be contracted upon when production is outsourced. In each case, the agent earns experience benefits: future monetary returns from managing production, reputation, and enjoyment. The principal would like to extract experience benets. He can do so when production is outsourced. But the external agent earns information rent from private information about production costs. The principal cannot fully extract experience benets when production is in-house because the internal agent must receive a minimum income, although the principal has full information on production costs. Our theory proposes a new trade-off, between information rent under outsourcing, and experience rent under in-house production. The principal chooses outsourcing when experience benefits are high. The principal's organizational choice may be socially inefficient. |
| Keywords: | vertical integration, experience benets, experience rents, informational rents. |
| JEL: | D23 L22 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2012-007&r=bec |
| By: | Emanuele Gerratana (SIPA, Columbia University); Levent Kockesen (Koç University) |
| Abstract: | This paper characterizes the equilibrium outcomes of two-stage games in which the second mover has private information and can sign renegotiable contracts with a neutral third-party. Our aim is to understand whether renegotiation-proof third-party contracts can confer a strategic advantage on the second mover. We first analyze non-renegotiable contracts and show that a “folk theorem” holds: Any outcome in which the second mover best responds to the first mover’s action and the first mover obtains a payoff at least as large as his “individually rational payoff” can be supported. Renegotiation-proofness imposes some restrictions, which is most transparent in games with externalities, i.e., games in which the first mover’s payoff increases (or decreases) in the second mover’s action. In such games, a similar folk theorem holds with renegotation-proof contracts as well, but the firstmover’s individually rational payoff is in general higher. |
| Keywords: | Third-Party Contracts, Strategic Delegation, Renegotiation, Asymmetric Information, Renegotiation-Proofness, Durability. |
| JEL: | C72 D80 L13 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1208&r=bec |
| By: | Orazio Attanasio; Erik Hurst; Luigi Pistaferri |
| Abstract: | Recent research has documented that income inequality in the United States has increased dramatically over the prior three decades. There has been less of a consensus, however, on whether the increase in income inequality was matched by an equally large increase in consumption inequality. Most researchers have studied this question using data from the Consumer Expenditure Survey (CE) and some studies have suggested that the increase in consumption inequality has been modest. Unfortunately ,there is now mounting evidence that the CE is plagued by serious non-classical measurement error, which hinders the extent to which definitive conclusions can be made about the extent to which consumption inequality has evolved over the last three decades. In this paper, we use a variety of different techniques to overcome the measurement error problems with the CE. First, we use data from the diary component of the CE, focusing on categories where measurement error has been found to be less of an issue. Second, we explore inequality measures within the CE using the value of vehicles owned, a consumption component that is considered to be measured well. Third, we try to account directly for the non-classical measurement error of the CE by comparing the spending on luxuries (entertainment) relative to necessities (food). This is similar to the recent approach taken by Browning and Crossley (2009) and Aguiar and Bils (2011). Finally, we use expenditure data from the Panel Study of Income Dynamics to explore the dynamics of alternative measures of consumption inequality. All of our different methods yield similar results. We find that consumption inequality within the U.S. between 1980 and 2010 has increased by nearly the same amount as income inequality. |
| JEL: | D12 E21 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17982&r=bec |
| By: | David Crainich (CNRS-LEM and IESEG School of Management); Louis Eeckhoudt (IESEG School of Management (LEM-CNRS) and CORE (Université Catholique de Louvain)); Alain Trannoy (Aix-Marseille School of Economics, EHESS) |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:ies:wpaper:e201105&r=bec |
| By: | Acharya, Viral V; Gabarro, Marc; Volpin, Paolo |
| Abstract: | We propose a model in which better governance incentivizes managers to perform better and thus saves on the cost of providing pay for performance. However, when managerial talent is scarce, firms' competition to attract better managers reduces an individual firm's incentives to invest in corporate governance. In equilibrium, better managers end up at firms with weaker governance, and conversely, better-governed firms have lower-quality managers. Consistent with these implications, in a sample of US firms, we show that (i) better CEOs are matched to firms with weaker corporate governance and more so in industries with stronger competition for managers, and, (ii) corporate governance is more likely to change when there is CEO turnover, with governance weakening when the incoming CEO is better than the departing one. |
| Keywords: | corporate governance; executive compensation; externalities |
| JEL: | D82 G18 G21 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8936&r=bec |
| By: | Andrea Colciago (Department of Economics, University of Milano Bicocca); Lorenza Rossi (Department of Economics and Quantitative Methods, University of Pavia) |
| Abstract: | Recent U.S. evidence suggests that the response of the labor share to a productivity shock is characterized by countercyclicality and overshooting. These findings cannot be easily reconciled with existing business cycle models. We extend the standard model of search and matching in the labor market by considering strategic interactions among an endogenous number of producers. This leads to countercyclical price markups. While Nash bargaining is sufficient to capture the labor share countercyclicality, we show that countercyclical markups are key to address the overshooting. |
| Keywords: | Endogenous Market Structures, Oligopolistic Competition, Firms' Entry, Search and Matching Frictions, Labor Share Overshooting. |
| JEL: | E24 E32 L11 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:pav:wpaper:168&r=bec |
| By: | Alex Bryson; John Forth; Zhou, M. |
| Abstract: | Despite their theoretical value in tackling principal-agent problems at low cost to firms there is almost no empirical literature on the prevalence and correlates of performance bonds posted by corporate executives. Using data for China we examine their incidence and test propositions from principal-agent theory regarding their correlates. Around one-tenth of corporations deploy performance bonds. They are sizeable relative to CEO cash compensation. Ceteris paribus, CEO's posting performance bonds are more likely than other CEO's to have their compensation linked to firm performance in other ways and the elasticity of their pay with respect to firm performance is greater. They are also more likely to hold company stock. Thus bonds appear to be complements to rather than substitutes for other forms of corporate incentive. The negative association between bonds and sales volatility is consistent with principal-agent theory. Positive associations between performance bonds and firm age, the CEOs anking in the Communist Party, and city-level clustering in the use of bonds are all consistent with |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:nsr:niesrd:389&r=bec |
| By: | Kashefi, Mohammad Ali |
| Abstract: | This paper examines the effect of salvage market on strategic technology choice and capacity investment decision of two firms that compete on the amount of output they produce under demand uncertainty. A game theoretic model applies such that in the first stage firms choose their production technology between two alternatives: modular production process (flexible technology) or unified production process (inflexible technology). Then at the second stage they decide on the amount of capacity investment: flexible firm makes decision about general and specific components’ capacity and inflexible firm just about unified component (final product). One stage forward both enter the primary market in which demand is uncertain and play a duopoly Cournot game on the amount of quantity they manufacture and finally at the last stage, flexible firm will be able to sell its unsold general components in the secondary market (salvage market) with a deterministic price. Solving optimization problems of the model results in intractable equations which lead us to employ numerical studies considering a specific probability distribution to observe equilibrium behavior of competing firms. Broad range of parameters with respect to established relationships among them have been examined in order to cover all the possible economically reasonable scenarios. Findings are expressed explicitly in the form of observations where we demonstrate that with symmetric parameterization there is a unique symmetric Nash equilibrium in which both firms choose inflexible technology while applying asymmetric parameters has the potential to form two types of equilibrium when 1. Both firms choose inflexible technology or 2. Only one firm chooses flexible technology. Moreover it is shown that there is a specific unified cost threshold that could shift the equilibrium of the game. Finally we discuss on the case that there is no equilibrium and mention some managerial implications of the model. |
| Keywords: | Salvage Market; Modular and Unified Production Process; Product Postponement; Demand Uncertainty; Investment Decision; Operation Management |
| JEL: | D21 M11 L13 C88 C61 C72 |
| Date: | 2012–03–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:37836&r=bec |
| By: | Alex Bryson; Bockerman, P.; Ilmakunnas, P. |
| Abstract: | Employees exposed to high involvement management (HIM) practices have higher subjective wellbeing, fewer accidents but more short absence spells than “like” employees not exposed to HIM. These results are robust to extensive work, wage and sickness absence history controls. We present a model which highlights the possibility of higher short-term absence in the presence of HIM because it is more demanding than standard production and because multi-skilled HIM workers cover for one another’s short absences thus reducing the cost of replacement labour faced by the employer. We find direct empirical support for the assumptions in the model. Consistent with the model, because long-term absences entail replacement labour costs for HIM and non-HIM employers alike, long-term absences are independent of exposure to HIM. |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nsr:niesrd:380&r=bec |
| By: | Alex Bryson; Addison, J. T.; Teixeira, P.; Pahnke, A. |
| Abstract: | This paper depicts and examines the decline in collective bargaining coverage in Germany. Using repeat cross-section and longitudinal data from the IAB Establishment Panel, we show the overwhelming importance of behavioral as opposed to compositional change and, for the first time, document workplace transitions into and out of collective agreeements via survival analysis. We provide estimates of the median duration of coverage, and report that the factors generating entry and exit are distinct and symmetric. |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nsr:niesrd:382&r=bec |
| By: | Tsuru, Tsuyoshi; Nakajima, Kentaro |
| Abstract: | Using data from a questionnaire survey focusing on firms from Japan, China, and South Korea, this paper empirically examines the complementarity between product architecture and human resource (HR) management. The results of the analysis can be summarized as follows. First, in Japan and Korea, firms were more or less evenly divided between those employing a modular and those employing an integral architecture. On the other hand, in China, more firms employed a modular architecture. Second, with regard to HR management practices and customs, there were differences in the emphasis of internal training of new graduates and the emphasis of mid-career recruitment. Japan and China are at the two extremes, with firms in the former tending to emphasize the recruitment of new graduates and firms in the latter emphasizing mid-career recruitment, while firms from Korea were in-between, but closer to Japan. Third, we found that, in Japan, development performance was significantly higher when product architecture and HR management were appropriately combined. However, we did not find such significant effect for the case of Korea and China. And fourth, we found that when we drop the assumption that the relationship between the combination of product architecture and HR management on the one hand and development performance on the other is linear and examine the non-linear effect of the former on the latter, both in Japan and Korea, the more that firms approach the best combination, the more their development performance increases. |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hituec:563&r=bec |
| By: | Emmanuelle Augeraud-Veron; Mauro Bambi |
| Abstract: | In the literature, habit formation has been often introduced to enhance the agents' desire to smooth consumption over time. This characteristic was found particularly useful in solving the equity premium puzzle and in matching several stylized facts in growth, and business cycles theory as, for example, the high persistence in the U.S. output volatility. In this paper we propose a definition of habit formation, which is ``general'' relative to the assumptions on the intensity, persistence, and lag structure, and we unveil two mechanisms which point to the opposite direction: habits may reduce the desire of smoothing consumption over time and then may potentially decrease the power of a model in explaining the previously mentioned facts. More precisely, we propose a complete taxonomy of the rich dynamics which may emerge in an AK model with external addictive habits for all the feasible combinations of the intensity, persistence and lag structure characterizing their formation and we point out to the region in the parameters' space coherent with less smoothing in consumption. An economic explanation of these mechanisms is suggested and the robustness of our results in the case of internal habits verified. Finally and crucially habit formation always reduces the desire of consumption smoothing once the model is calibrated to match the average U.S. output and utility growth rates observed in the data. |
| Keywords: | Habit formation; endogenous fluctuations, delayed functional differential equations. |
| JEL: | E00 E30 O40 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:12/12&r=bec |
| By: | Julie Rosaz (University of Montpellier 1, LAMETA, avenue Raymond Dugrand - Site Richter C.S. 79606, F-34960 Montpellier Cedex 2, France); Robert Slonim (University of Sydney, Department of Economics, Merewether building, NSW 2006 Sydney, Australia; IZA, Bonn, Germany); Marie-Claire Villeval (University of Lyon 2, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne, Ecully, F-69130, France; IZA, Bonn, Germany. GATE: 93, Chemin des Mouilles, 69130 Ecully, France) |
| Abstract: | While peer effects have been shown to affect worker's productivity when workers are paid a fixed wage, there is little evidence on their influence on quitting decisions. This paper presents results from an experiment in which participants receive a piece-rate wage to perform a real-effort task. After completing a compulsory work period, the participants have the option at any time to continue working or quit. To study peer effects, we randomly assign participants to work alone or have one other worker in the room with them. When a peer is present, we manipulate the environment by giving either vague or precise feedback on the co-worker's output, and also vary whether the two workers can communicate. We find that allowing individuals to work with a co-worker present does not increase worker's productivity. However, the presence of a peer in all working conditions causes workers to quit at more similar times. When, and only when, communication is allowed, workers are significantly more likely to (1) stay longer if their partner is still working, and (2) work longer the more productive they are. We conclude that when workers receive a piece-rate wage, critical peer effects occur only when workers can communicate with each other. |
| Keywords: | Quits, peer effects, communication, feedback, experiment |
| JEL: | C91 D83 J63 J28 J81 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:1204&r=bec |
| By: | Monica Billio (University of Venice, GRETA Assoc. and School for Advanced Studies in Venice); Roberto Casarin (University of Venice, GRETA Assoc. and School for Advanced Studies in Venice); Francesco Ravazzolo (Norges Bank (Central Bank of Norway) and BI Norwegian Business School); Herman K. van Dijk (Econometric Institute, Erasmus University Rotterdam and VU University Amsterdam and Tinbergen Institute) |
| Abstract: | We propose new forecast combination schemes for predicting turning points of business cycles. The combination schemes deal with the forecasting performance of a given set of models and possibly providing better turning point predictions. We consider turning point predictions generated by autoregressive (AR) and Markov-Switching AR models, which are commonly used for business cycle analysis. In order to account for parameter uncertainty we consider a Bayesian approach to both estimation and prediction and compare, in terms of statistical accuracy, the individual models and the combined turning point predictions for the United States and Euro area business cycles. |
| Keywords: | Turning Points, Markov-switching, Forecast Combination, Bayesian Model Averaging |
| JEL: | C11 C15 C53 E37 |
| Date: | 2012–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2012_04&r=bec |