nep-bec New Economics Papers
on Business Economics
Issue of 2012‒05‒02
twenty-two papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Do corporate boards affect firm performance? New evidence from the financial crisis By Francis, Bill; Hasan , Iftekhar; Wu , Qiang
  2. Intra-Firm Trade and Employment in US Manufacturing By Sotiris Blanas
  3. Capital Structure, Corporate Taxation and Firm Age By Michael Pfaffermayr; Matthias Stöckl; Hannes Winner
  4. Small Business Redefined: A Quasi-Linear Fuzzy Classification of Firm Size By Sasan Bakhtiari
  5. Liberalized Trade and Worker-Firm Matching By Davidson, Carl; Heyman, Fredrik; Matusz, Steven; Sjöholm, Fredrik; Chun Zhu, Susan
  6. Horizontal Transfer and Promotion: New Evidence and an Interpretation from the Perspective of Task-Specific Human Capital By Sasaki, Masaru; Takii, Katsuya; Wan, Junmin
  7. Optimal Damages Multipliers in Oligopolistic Markets By Florian Baumann; Tim Friehe
  8. Gender differences and dynamics in competition: the role of luck By Gill, David; Prowse, Victoria
  9. Executives' "Off-The-Job" Behavior, Corporate Culture, and Financial Reporting Risk By Robert Davidson; Aiyesha Dey; Abbie J. Smith
  10. Reproducing Business Cycle Features: Are Nonlinear Dynamics a Proxy for Multivariate Information? By James Morley; Jeremy Pigger; Pao-Lin Tien
  11. Shadow of the contract: how contract structure shapes inter-firm dispute resolution By Lumineau, Fabrice; Malhotra, Deepak
  12. Product and Labor Market Imperfections and Scale Economies: Micro-evidence on France, Japan and the Netherlands By Sabien DOBBELAERE; KIYOTA Kozo; Jacques MAIRESSE
  13. Would You Buy a Honda Made in the U.S.? The Impact of Production Location on Manufacturing Quality By Nicola Lacetera; Justin R. Sydnor
  14. The Effects of a Megabank Merger on Firm-Bank Relationships and Borrowing Costs By UCHINO Taisuke; UESUGI Iichiro
  15. Estimating a Model of Strategic Network Choice: The Convenience-Store Industry in Okinawa By Mitsukuni Nishida
  16. Outsourcing, occupational restructuring, and employee well-being: Is there a silver lining? By Petri, Böckerman; Mika, Maliranta
  17. The strategic interplay between bundling and merging in complementary markets By Andrea Mantovani; Jan Vandekerckhove
  18. Corporate culture and satisfaction at work By Jocelyne Robert; Aigul Asfarova
  19. Alternative Methodology for Turning-Point Detection in Business Cycle : A Wavelet Approach. By Peter Martey Addo; Monica Billio; Dominique Guegan
  20. The transformative impact of business models By Ghafele, Roya; Gibert, Benjamin
  21. La réputation de votre entreprise : est-ce que votre actif le plus stratégique est en danger? By Nathalie de Marcellis-Warin; Serban Teodoresco
  22. The Effect of Mortgage Broker Licensing On Loan Origination Standards and Defaults: Evidence from U.S. Mortgage Market 2000-2007 By Lan Shi

  1. By: Francis, Bill (Lally School of Management and Technology, Rensselaer Polytechnic Institute); Hasan , Iftekhar (Schools of Business, Fordham University, Bank of Finland); Wu , Qiang (Lally School of Management and Technology, Rensselaer Polytechnic Institute)
    Abstract: This study uses the current financial crisis as a quasi-experiment to examine whether and to what extent corporate boards affect the performance of firms. Using cumulative stock returns over the crisis to measure of firm performance, we find that board independence, as traditionally defined, does not significantly affect firm performance. However, when we re-define independent directors as outside directors who are less connected with current CEOs, a measure we call true independence, there is a positive and significant relationship between this measure and firm performance. Second, outside financial experts are important for firm performance. Third, board meeting frequencies, director attendance behaviors, and director age also affect firm performance during the crisis. Overall, our results suggest that firm performance during a crisis is a function of firm-level differences in corporate boards.
    Keywords: financial crisis; boards of directors; firm performance; true independence
    JEL: G01 G30 G34
    Date: 2012–04–12
  2. By: Sotiris Blanas
    Abstract: This paper studies the impact of trade within US-headquartered multinational companies (MNCs) on labour demand for all employees, as well as, for those of high and low skill in US manufacturing for the period 1995 – 2005. We find strong evidence on the positive and negative effect of intra-firm exports and imports respectively, on aggregate employment. The former effect is stronger than the latter. Moreover, we find that demand for low-skilled labour is negatively associated with intra-firm imports, while unaffected by intra-firm exports. In contrast, high-skilled labour demand is positively linked to intra-firm exports but unaffected by intra-firm imports. The last two findings put together, suggest that low-skill intensive stages of the value-added chain are mostly transferred to the US affiliates abroad, while highskill intensive ones are mostly kept within the US parents.
    Keywords: Multinational Companies (MNCs), intra-firm imports, intra-firm exports, employment, low-skilled workers, high-skilled workers
    JEL: F16 F23 J21 J23
    Date: 2012–04
  3. By: Michael Pfaffermayr (WIFO); Matthias Stöckl; Hannes Winner (WIFO)
    Abstract: This paper analyses the relationship between corporate taxation, firm age and debt. We adapt a standard model of capital structure choice under corporate taxation, focusing on the financing and investment decisions a firm is typically faced with. Our model suggests that the debt ratio is positively associated with the corporate tax rate, and negatively with firm age. Further, we predict that the tax-induced advantage of debt is more important for older than for younger firms. To test these hypotheses empirically, we use a cross-section of 405,000 firms from 35 European countries and 126 NACE 3-digit industries. In line with previous research, we find that a firm's debt ratio increases with the corporate tax rate. Further, we observe that older firms exhibit smaller debt ratios than their younger counterparts. Finally, consistent with our theoretical model, we find a positive interaction between corporate taxation and firm age, indicating that the impact of corporate taxation on debt is increasing over a firm's life-time.
    Keywords: Corporate taxation, Capital structure, Firm age
    Date: 2012–04–20
  4. By: Sasan Bakhtiari (School of Economics, The University of New South Wales)
    Abstract: The quasi-linear fuzzy modelling of Filev (1991) is used to estimate the relationship between the number of managers and employees in a firm. The results form the basis for the classification of firms into small and large businesses. Application to a data of Australian firms shows an evolution episode during which firms are driven by various transitional forces. The composition of the transition region suggests that the 2011 small business tax-break cap set by Australian Taxation Office falls short of fully supporting growth as intended. The implications pave the way for improvement to the business tax code aiming at growth and job creation.
    Keywords: fuzzy logic, small business, job creation, business taxation.
    JEL: C38 C61 D23 H25
    Date: 2012–04
  5. By: Davidson, Carl (Michigan State University); Heyman, Fredrik (Research Institute of Industrial Economics (IFN)); Matusz, Steven (Michigan State University); Sjöholm, Fredrik (Research Institute of Industrial Economics (IFN)); Chun Zhu, Susan (Michigan State University)
    Abstract: Recent theoretical analysis suggests that a reduction in the cost of exporting increases the degree of assortative matching between workers and firms in export-oriented industries. Changes that reduce the cost of imports have an ambiguous impact on matching. We combine detailed Swedish matched worker-firm data from 1995 – 2005 with tariff data to test these hypotheses. The data cover 94 sectors subject to international competition and includes all firms with at least 20 employees. Our findings strongly support the theoretical predictions.
    Keywords: Matching; Globalization; Firms; Workers; Multinational Enterprises; International Trade
    JEL: F14 F16 J20
    Date: 2012–04–03
  6. By: Sasaki, Masaru (Osaka University); Takii, Katsuya (Osaka University); Wan, Junmin (Fukuoka University)
    Abstract: This paper provides new evidence about horizontal transfer and promotion using the largest available personnel panel data in Japan and interprets them from the perspective of task-specific human capital. We find that firms synchronize their employees’ promotion and horizontal transfers. Then, we show theoretically that task-specific human capital can naturally generate such synchronization. We also find that the directors in an accounting department have the highest probability of being promoted to become board members, while those in a research department have the lowest. This suggests that top managers need a balanced skill set, in which allocative skill is relatively important.
    Keywords: rotation, promotion, task-specific human capital
    JEL: J62 M51
    Date: 2012–04
  7. By: Florian Baumann (Faculty of Economics and Social Sciences, University of Tübingen, Germany); Tim Friehe (Department of Economics, University of Konstanz, Germany)
    Abstract: This paper establishes that tort damages multipliers higher than one can be an instrument to induce imperfectly competitive producers to invest in product safety at socially optimal levels. In their selection of product safety levels, producers seek to maximize profits, neglecting the fact that higher investment in product safety increases consumer welfare; the discrepancy between private and social safety incentives can be remedied by setting damages multipliers to values greater than one. We show that the optimal damages multiplier depends on the characteristics of competition, such as the number of firms, the degree of substitutability / complementarity when products are heterogeneous, firms' cost structures, and the mode of competition.
    Keywords: product liability; product safety; market power; level of damages; punitive damages
    JEL: K13 H23
    Date: 2012–04–25
  8. By: Gill, David; Prowse, Victoria
    Abstract: In a real effort experiment with repeated competition we find striking differences in how the work effort of men and women responds to previous wins and losses. For women losing per se is detrimental to productivity, but for men a loss impacts negatively on productivity only when the prize at stake is big enough. Responses to luck are more persistent and explain more of the variation in behavior for women, and account for about half of the gender performance gap in our experiment. Our findings shed new light on why women may be less inclined to pursue competition-intensive careers.
    Keywords: Real effort experiment; Gender differences; Gender gap; Competition aversion; Tournament; Luck; Win; Loss; Competitive outcomes
    JEL: J33 C91 J16
    Date: 2012–01–24
  9. By: Robert Davidson; Aiyesha Dey; Abbie J. Smith
    Abstract: We examine how executives’ behavior outside the workplace, as measured by their ownership of luxury goods (low “frugality”) and prior legal infractions, is related to financial reporting risk. We predict and find that CEOs and CFOs with a legal record are more likely to perpetrate fraud. In contrast, we do not find a relation between executives’ frugality and the propensity to perpetrate fraud. However, as predicted, we find that unfrugal CEOs oversee a relatively loose control environment characterized by relatively high probabilities of other insiders perpetrating fraud and unintentional material reporting errors. Further, cultural changes associated with an increase in fraud risk are more likely during unfrugal (vs. frugal) CEOs’ reign, including the appointment of an unfrugal CFO, an increase in executives’ equity-based incentives to misreport, and a decline in measures of board monitoring intensity.
    JEL: G30 G34 G38
    Date: 2012–04
  10. By: James Morley (School of Economics, The University of New South Wales); Jeremy Pigger (University of Oregon); Pao-Lin Tien (Wesleyan University)
    Abstract: We consider the extent to which different time-series models can generate simulated data with the same business cycle features that are evident in U.S. real GDP. We focus our analysis on whether multivariate linear models can improve on the previously documented failure of univariate linear models to replicate certain key business cycle features. We find that a particular nonlinear Markov-switching specification with an explicit “bounceback” effect continues to outperform linear models, even when the models incorporate variables such as the unemployment rate, inflation, interest rates, and the components of GDP. These results are robust to simulated data generated either using Normal disturbances or bootstrapped disturbances, as well as to allowing for a one-time structural break in the variance of shocks to real GDP growth.
    Keywords: Business cycle features, nonlinear dynamics, multivariate models.
    JEL: C52 E30
    Date: 2012–03
  11. By: Lumineau, Fabrice; Malhotra, Deepak
    Abstract: This paper investigates how contract structure influences inter-firm dispute resolution processes and outcomes by examining a unique dataset consisting of over 150,000 pages of documents relating to 102 business disputes. We find that the level of contract detail affects the type of dispute resolution approach that is adopted when conflict arises, and that different approaches are associated with different costs for resolving the dispute. We also find that the effect of contract choice on dispute resolution approach is moderated by the degree of coordination required in the relationship, and that the effect of dispute approach on costs is moderated by the degree of power asymmetry between the parties. Thus, even after controlling for various attributes of the exchange relationship and the dispute, the choice of contracting structure has important strategic implications.
    Keywords: Contractual Governance; Disputes; Framing; Interest-Based Negotiation and Rights-Based Negotiation; Control and Coordination; Power
    JEL: L14 K40 K42 L22 K41 M10
    Date: 2011
  12. By: Sabien DOBBELAERE; KIYOTA Kozo; Jacques MAIRESSE
    Abstract: Allowing for three labor market settings, this paper relies on an extension of Hall's econometric framework for simultaneously estimating price-cost mark-ups and scale economies. Using an unbalanced panel of 17,653 firms over the period 1986-2001 in France, 8,725 firms over the period 1994-2006 in Japan, and 7,828 firms over the period 1993-2008 in the Netherlands, we first classify 30 comparable manufacturing industries in six distinct regimes that differ in terms of the type of competition prevailing in product and labor markets. For each of the three predominant regimes in each country, we then investigate industry differences in the estimated product and labor market imperfections and scale economies. We not only find important regime differences across the three countries, but also observe cross-country differences in the levels of product and labor market imperfections and scale economies within a particular regime.
    Date: 2012–04
  13. By: Nicola Lacetera; Justin R. Sydnor
    Abstract: Are location-specific factors—such as the education and attitude of the local workforce, supplier networks, institutional infrastructure, and local “culture”—important for understanding persistent heterogeneities among firms? We address this question in the context of the automobile industry. Using a unique data set of over 565,000 used-car transactions at wholesale auctions, we test whether the long-run value and quality of otherwise identical cars depends on the country of assembly. We exploit the natural experiment provided by the establishment of assembly plants in the U.S. by Japanese auto manufacturers, and the fact that some of the most popular Japanese car models are assembled both in Japan and the U.S. We find evidence that the Japan-assembled cars on average sell for more than those built in the U.S., but the estimated difference is only $62. The average differences are driven almost entirely by older-model Toyotas, for which we find a more meaningful difference between the Japanese and U.S. built cars. For Hondas and more recent models of Toyotas, the Japan-built cars are no more valuable than those built in the U.S. These results suggest that Japanese automakers have been successful, though perhaps with some lag, at transferring their high-quality practices to their U.S. transplants. Our findings also suggest that there is not an inherent limitation to the U.S. manufacturing environment that prevents the production of high-quality cars in America.
    JEL: D24 F23 L62 M11
    Date: 2012–04
  14. By: UCHINO Taisuke; UESUGI Iichiro
    Abstract: Using a unique dataset of non-listed firms that identifies the banks with which firms transact, we examine the effects of the largest-ever bank merger in Japan—that between Bank of Tokyo-Mitsubishi (BTM) and UFJ Bank (UFJ) in 2005. We focus on how the merger affected firms through their firm-bank relationships. Specifically, we examine whether there are any differences in how the availability of loans evolved over time for firms that, prior to the merger, either transacted with both of the merged banks, with one of them, or with none. We find the following: (1) Firms that had transacted with both BTM and UFJ saw their borrowing costs increase by 40bp relative to those that had transacted with neither. (2) Firms that transacted with one of the two banks saw their borrowing costs increase by a smaller but still significant margin of 20bp relative to those that had transacted with neither. And (3) we do not find a significant difference in the extent that borrowing costs increased between firms that transacted with the acquiring bank (BTM) and those that transacted with the acquired bank (UFJ). These results suggest that the bank merger increased firms' borrowing costs partly through an exogenous decrease in the number of firm-bank relationships and partly through changes in the organizational structure of the merged bank, including a consolidation of the branch network.
    Date: 2012–04
  15. By: Mitsukuni Nishida
    Abstract: Spatial competition among multi-store firms is ubiquitous in a wide range of retail industries. However, little is known about how those firms optimize their networks of stores after a merger due to the computational burden of solving for an equilibrium in store networks. This paper proposes an empirical framework for estimating a game of network choice by two multi-store firms, which allows us to examine the impact of a hypothetical merger on store configurations, costs, and profits. The model explicitly incorporates a fundamental determinant of location choice for multi-store firms: the trade-off between the business-stealing effect and the cost- saving effect from clustering their own stores. The method integrates the static entry game of complete information with post-entry outcome data while using simulations to correct for the selection of entrants. I use lattice-theoretical results to deal with the huge number of possible network choices. Using unique cross-sectional data on store networks and revenues from the convenience-store industry in the Okinawa Island, Japan, I estimate the firms. revenue and cost functions. Parameter estimates suggest a retailer's trade-off between cost savings and lost revenues from clustering its stores is positive across markets and negative within a market. I find an acquirer of a hypothetical horizontal merger of two multi-store firms would decrease its number of stores in suburbs but increase its number in the city center, affecting consumers in different locations differently. The trade-off from clustering plays a central role in explaining this result.
    Date: 2012–04
  16. By: Petri, Böckerman; Mika, Maliranta
    Abstract: This paper explores the effects of outsourcing on employee well-being through the use of the Finnish linked employer-employee data. The direct negative effect of outsourcing is attributable to greater job destruction and worker outflow. In terms of perceived well-being, the winners in international outsourcing are those who are capable of performing interactive tasks (i.e., managers, professionals and experts), especially when offshoring involves closer connections to other developed countries.
    Keywords: globalization; outsourcing; offshoring; working conditions; job satisfaction; subjective well-being
    JEL: F23 J28
    Date: 2012–04–20
  17. By: Andrea Mantovani (University of Bologna & IEB); Jan Vandekerckhove (Maastricht University)
    Abstract: In this paper, two pairs of complementors have to decide whether to merge and eventually bundle their products. Depending on the degree of competitive pressure in the market, either both pairs decide to merge (with or without bundling), or only one pair merges and bundles, while rivals remain independent. The latter case can very harmful for consumers as it brings surge in prices. We also consider the case in which one pair moves first. Interestingly, we find a parametric region where first movers merge but refrain from bundling, to not induce rivals to merge as well.
    Keywords: Bundling, merger, strategic interaction, antitrust
    JEL: D43 L13 L41
    Date: 2012
  18. By: Jocelyne Robert (management et leadership - Université de Liège); Aigul Asfarova (management et leadership - Université de Liège)
    Abstract: This study present in the first part different statistics about employment and satisfaction at work in Belgium : working conditions, relationship with colleagues, quality of management and implication as well as everyday life within the organisation. Dissatisfaction factors as well as stress, work accidents and "male-female" inequalities are also be mentioned. In the secound part, we present the result of interviews of human rfesource managers about coporate culture, satisfaction at work, social responsibility
    Keywords: Corporate culture, satisfaction at work, human resource, social responsibility
    Date: 2012–01
  19. By: Peter Martey Addo (Centre d'Economie de la Sorbonne); Monica Billio (Ca' Foscari university - Department of Economics); Dominique Guegan (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: We provide a signal modality analysis to characterize and detect nonlinearity schemes in the US Industrial Production Index time series. The analysis is achieved by using the recently proposed "delay vector variance" (DVV) method, which examines local predictability of a signal in the phase space to detect the presence of determinism and nonlinearity in a time series. Optimal embedding parameters used in the DVV analysis are obtained via a differential entropy based method using wavelet-based surrogates. A complex Morlet wavelet is employed to detect and characterize the US business cycle. A comprehensive analysis of the feasibility of this approach is provided. Our results coincide with the business cycles peaks and troughs dates published by the National Bureau of Economic Research (NBER).
    Keywords: Nonlinearity analysis, surrogates, Delay Vector Variance (DVV) method, wavelets, business cycle, embedding parameters.
    JEL: C14 C22 C40 E32
    Date: 2012–04
  20. By: Ghafele, Roya; Gibert, Benjamin
    Abstract: The macroeconomic impact of advances in information and communications technologies is significant but problematic to assess. Research on these developments has been isolated to specific disciplines, easily outpaced by new innovations and few studies describe the multiple changes and their macroeconomic consequences in a holistic way. The increasing ability to organize, price and transmit information to the market is ushering in an era where economic actors are highly responsive to the market. Technological advance alone does not capture the benefits of these developments. It is the innovative business model that lies at the heart of this revolution in responsiveness. We outline four major economic shifts in this study by reference to some paradigmatic business models. These shifts include pricing strategy innovations and their effect on the creation and expansion of market spaces, structural shifts in electronic markets and the effects on transaction costs, the deeper interaction between firms and consumers and the effects on more efficient matching of supply and demand, and finally the economic impact of elasticity and infinite scalability in computing resources when delivered as a utility by cloud computing providers. These advances do not only increase the commercial possibilities, they actively alter the competitive landscape and the role of the firm and consumer. This paper establishes some key areas where the increased responsiveness of economic actors is increasingly stimulating innovation, efficiency and productivity.
    Keywords: pricing strategies; expansion of market spaces; economic impact of elasticity and infinite scalability; cloud computing
    JEL: E02 M00 L22
    Date: 2011
  21. By: Nathalie de Marcellis-Warin; Serban Teodoresco
    Abstract: <P>La réputation de l’entreprise est de plus en plus reconnue comme l’actif stratégique le plus important sur le plan de la création de valeur. L’intérêt des scientifiques à l’égard du concept de réputation de l’entreprise a contribué à faire quintupler le nombre d’articles scientifiques et d’études publiés au cours de la dernière décennie (Barnett et al., 2006). Pourtant, aucune définition de ce concept n’est généralement acceptée. <p> Nous proposons une définition de la réputation de l’entreprise fondée sur des recherches universitaires et des travaux d’experts. La réputation de l’entreprise est un actif incorporel bâti avec le temps et représente la valeur et la confiance accordées à l’entreprise par les parties prenantes. C’est un élément-clé qui favorise l’atteinte d’objectifs stratégiques, dont la création de valeur, la croissance profitable et un avantage concurrentiel durable. <p> La réputation de l’entreprise est plus vulnérable que jamais avec la mondialisation, la complexité croissante des entreprises, les turbulences économiques et financières, la croissance exponentielle des médias sociaux et la vitesse de la couverture médiatique. Ces facteurs peuvent provoquer des crises difficiles à prévoir et susceptibles de détruire une réputation acquise avec le plus grand soin. Récemment, des administrateurs de sociétés et des professionnels de la gestion des risques ont établi que le risque lié à la réputation était le principal danger auquel les entreprises auraient à faire face (Eisner Amper, 2011; Economist Intelligence Unit, 2005). Certaines crises très médiatisées ont causé un grave préjudice à la réputation d’entreprises bien établies, entraînant ainsi une perte spectaculaire de valeur sur le marché boursier. Research In Motion, la plus importante et la plus prestigieuse société canadienne de haute technologie, en est un exemple. <p> Au début de 2011, RIM se positionnait parmi les cinq entreprises les plus admirées au Canada, selon les classements du magazine Canadian Business et du Reputation Institute (Canadian Business, 19 mai 2011). Puis l’échec du lancement de produit et l’interruption désastreuse des services aux millions d’utilisateurs de BlackBerry ont contribué à faire dégringoler la valeur de la société. Les dirigeants de l’entreprise ont attendu trois jours avant d’expliquer publiquement l’interruption des services et de présenter des excuses, et la perte de confiance envers RIM s’est alors intensifiée. La valeur des actions de RIM a chuté de 75 pour cent entre mars et décembre 2011 (Canadian Business, 19 janvier 2012). Plus récemment, en février 2012, la très respectée firme d’ingénierie SNC-Lavalin a vu la valeur de ses actions chuter de plus de 20 pour cent en raison de dépenses discutables. Le présent rapport combine l’étude exploratoire de grandes entreprises au Québec menée par les auteurs et la revue des principales études et des articles publiés au cours des 12 dernières années sur le thème de la réputation de l’entreprise. <p> Notre étude exploratoire menée au Québec montre que seulement la moitié des entreprises interrogées reconnaissent l’importance de la réputation. Aucune ne semble gérer la réputation de façon proactive. <p> Le CIRANO et Preventa présenteront une démarche et une méthodologie en vue d’améliorer la façon dont les organisations gèrent leur plus précieux actif. Le présent rapport propose un plan d’action à l’intention des sociétés désireuses d’effectuer la transition de la gestion réactive à la gestion proactive de la réputation.
    Date: 2012–04–01
  22. By: Lan Shi
    Abstract: We study the U.S. origination-to-distribution mortgage financing market from the mid 1990s to the late 2000s. Mortgage loan brokers originated close to two thirds of the mortgage loans in this period. We examine whether stricter licensing requirements of loan brokers raise lending standards by i) admitting only higher quality brokers who benefit more from a long-term career and thus have greater incentives to protect borrowers and lenders' long-term interests, ii) raising entry costs and thus generating higher future rents that reduce brokers' incentives to chase short-term profits, e.g., by lowering loan origination standards, that jeopardize their likelihood of winning future business from borrowers and lenders. We exploit the cross-state and over time variations in licensing requirements and find that originated loans in states with more stringent requirements had higher standards: FICO score were higher, and LTV and DTI were lower and there were fewer negative amortization, interest only, balloon, ARM, Low Doc, and subprime loans. The requirements on surety bonds and net worth, education, and office in state have the greatest impact on loan origination standards. The education (and exam) requirements for employees are more effective than those for licensees. The effect of licensing on loan origination standards is greater for neighborhoods with greater minority percentages and lower income, and for lenders that specialize in sub-prime lending. Corroborating findings on loan origination standards, states with more stringent licensing requirements had lower default rates: Moving from the 25th to the 75th percentile in licensing requirements is associated with close to 20 percent reduction from the mean of the 90 days or more delinquency rate. These findings point to the value of broker licensing when lenders' incentives to screen are compromised with the securitization of mortgages. Key words: Mortgage; brokers; securitization; information asymmetry; moral hazard; incentives; occupational licensing JEL codes: D82; G21; G28; J44; L1
    Date: 2012–04

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