nep-bec New Economics Papers
on Business Economics
Issue of 2012‒05‒08
twenty-one papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Job Creation and the Intra-distribution Dynamics of the Firm Size Distribution By Huber, Peter; Oberhofer, Harald; Pfaffermayr, Michael
  2. Equilibrium Labor Turnover, Firm Growth and Unemployment By Melvyn G. Coles; Dale T. Mortensen
  3. Estimating market power in homogenous product markets using a composed error model: application to the California electricity market By Orea, L.; Steinbuks, J.
  4. Women in the Boardroom: Symbols or Substance? By O'Reilly, Charles A., III; Main, Brian G. M.
  5. Buyer power from joint listing decision By Caprice, Stéphane; Rey, Patrick
  6. Why Do Firms Own Production Chains? By Enghin Atalay; Ali Hortacsu; Chad Syverson
  7. Span of Control and Span of Activity By Oriana Bandiera; Andrea Prat; Raffaella Sadun; Julie Wulf
  8. Optimal collusion with limited liability By Billette de Villemeur, Etienne; Flochel, Laurent; Versaevel, Bruno
  9. The roles of incentives and voluntary cooperation for contractual compliance By Simon Gaechter; Esther Kessler; Manfred Koenigstein
  10. Winning by Losing: Evidence on the Long-Run Effects of Mergers By Ulrike Malmendier; Enrico Moretti; Florian S. Peters
  11. Works Councils, Collective Bargaining and Apprenticeship Training By Kriechel, Ben; Mühlemann, Samuel; Pfeifer, Harald; Schuette, Miriam
  12. Dynamic Moral Hazard, Learning and Belief Manipulation By Bhaskar, Venkataraman
  13. To reward the best or to punish the worst? A comparison of two tournament mechanisms with heterogeneous agents By Loukas Balafoutas; Glenn Dutcher; Florian Lindner; Dmitry Ryvkin
  14. Mixed Oligopoly and Entry By John Bennett; Manfredi La manna
  15. The demand for, and consequences of, formalization among informal firms in Sri Lanka By Suresh De Mel; David McKenzie; Christopher Woodruff
  16. Change in the Distribution of House Prices across Spanish Cities By Nicodemo, Catia; Raya, Josep M.
  17. Does Corporate Governance Reform Necessarily Boost Firm Performance? Recent Evidence from Russia By Kuznecovs, Mihails; Pal, Sarmistha
  18. Debt Overhangs: Past and Present By Carmen M. Reinhart; Vincent R. Reinhart; Kenneth S. Rogoff
  19. Sorting and Local Wage and Skill Distributions in France By Combes, Pierre-Philippe; Duranton, Gilles; Gobillon, Laurent; Roux, Sébastien
  21. Dynamic Pricing, Advance Sales, and Aggregate Demand Learning in Airlines By Escobari, Diego

  1. By: Huber, Peter (Austrian Institute of Economic Research); Oberhofer, Harald (University of Salzburg); Pfaffermayr, Michael (University of Innsbruck)
    Abstract: Based on a three equations model for initial firm size, survival and firm growth we estimate firm-specific transition probabilities between size classes of the firm size distribution. This allows to analyze counterfactual scenarios that assess the impact of changes in exogenous variables on the intra-distribution dynamics of the firm size distribution. We find that a counterfactual decrease in average firm age increases the exit hazard of young firms, and at the same time reduces the probability to observe high growth firms. An increase in the industry-wide entry rate and an increase in market growth, by contrast, havw virtually no impact on the intra-distribution dynamics of the firm size distribution. Finally, a larger birth size increases the probability for the youngest and smallest firms to be fast growing ones.
    Keywords: Firm growth; survival; entry size; high growth firms; counterfactual scenario analysis; sample selection
    JEL: C24 D22 L11 L25 L26 M13
    Date: 2012–04–27
  2. By: Melvyn G. Coles; Dale T. Mortensen
    Abstract: This paper considers a dynamic, non-steady state environment in which wage dispersion exists and evolves in response to shocks. Workers do not observe firm productivity and firms do not commit to future wages, but there is on-the-job search for higher paying jobs. The model allows for firm turnover (new start-up firms are created, some existing firms die) and firm specific productivity shocks. In a separating equilibrium, more productive firms signal their type by paying strictly higher wages in every state of the market. Consequently, workers always quit to firms paying a higher wage and so move efficiently from less to more productive firms. As a further implication of the cost structure assumed, endogenous firm size growth is consistent with Gibrat's law. The paper provides a complete characterization and establishes existence and uniqueness of the separating (non-steady state) equilibrium in the limiting case of equally productive firms. The existence of equilibrium with any finite number of firm types is also established. Finally, the model provides a coherent explanation of Danish manufacturing data on firm wage and labor productivity dispersion as well as the cross firm relationship between them.
    JEL: D21 D49 D8 E24 J42 J64
    Date: 2012–04
  3. By: Orea, L.; Steinbuks, J.
    Abstract: This study contributes to the literature on estimating market power in homogenous product markets. We estimate a composed error model, where the stochastic part of the firm’s pricing equation is formed by two random variables: the traditional error term, capturing random shocks, and a random conduct term, which measures the degree of market power. Treating firms’ conduct as a random parameter helps solving the issue that the conduct parameter can vary between firms and within firms over time. The empirical results from the California wholesale electricity market suggest that realization of market power varies over both time and firms, and reject the assumption of a common conduct parameter for all firms. Notwithstanding these differences, the estimated firm-level values of the conduct parameter are closer to Cournot than to static collusion across all specifications. For some firms, the potential for realization of the market power unilaterally is associated with lower values of the conduct parameter.
    Keywords: market power, random conduct parameter, composed error model, asymmetric distributions, California electricity market
    JEL: C34 C51 L13 L94
    Date: 2012–04–25
  4. By: O'Reilly, Charles A., III (Stanford University); Main, Brian G. M. (University Edinburgh)
    Abstract: The central argument for increasing the number of women on corporate boards of directors has been the so-called "business case for diversity" which proposes that women and minorities add valuable new perspectives that result in enhanced corporate performance. Unfortunately, the empirical evidence for this claim is mixed, leading some researchers to suggest that women outsiders are appointed for symbolic rather than substantive reasons. Using a sample of more than 2,000 firms over the period 2001-2005, we examine the effects of women outside directors on firm performance and CEO compensation. We find no evidence that adding women outsiders to the board enhances corporate performance. We do find some evidence that male CEOs with higher levels of compensation are more likely to appoint women outsiders and that boards with more women outside members are more generous in paying the CEO. We interpret these results as consistent with the appointment of women outsiders for normative rather than profit-enhancing reasons.
    Date: 2012–03
  5. By: Caprice, Stéphane; Rey, Patrick
    Abstract: We show that collective bargaining can enhance retailers’ buying power vis-àvis their suppliers. We consider a model of vertically related markets, in which an upstream leader faces a competitive fringe of less efficient suppliers and negotiates secretly with several firms that compete in a downstream market. We allow downstream firms to join forces in negotiating with suppliers, by creating a buyer group which selects suppliers on behalf of its members: each group member can then veto the upstream leader’s offer, in which case all group members turn to the fringe suppliers. Transforming individual listing decisions into a joint listing decision makes delisting less harmful for a group member; this, in turn enhances the group members’ bargaining position at the expense of the upstream leader. We also show that this additional buyer power can have an ambiguous impact on the upstream leader’s incentives to invest.
    Keywords: Collective bargaining position, buyer group, joint listing decision
    JEL: D43 L13 L22 L42
    Date: 2012–04
  6. By: Enghin Atalay; Ali Hortacsu; Chad Syverson
    Abstract: We use broad-based yet detailed data from the economy’s goods-producing sectors to investigate firms’ ownership of production chains. It does not appear that vertical ownership is primarily used to facilitate transfers of goods along the production chain, as is often presumed: Roughly one-half of upstream plants report no shipments to their firms’ downstream units. We propose an alternative explanation for vertical ownership, namely that it promotes efficient intra-firm transfers of intangible inputs. We show evidence consistent with this hypothesis, including the fact that upon a change of ownership, an acquired plant begins to resemble the acquiring firm along multiple dimensions.
    JEL: L0 L23 L24
    Date: 2012–04
  7. By: Oriana Bandiera; Andrea Prat; Raffaella Sadun; Julie Wulf
    Abstract: For both practitioners and researchers, span of control plays an important role in defining and understanding the role of the CEO. In this paper, we combine organizational chart information for a sample of 65 companies with detailed data on how their CEOs allocate their work time, which we define as their span of activity. Span of activity provides a direct measure of the CEO's management style, including the attention devoted to specific subordinates and functions, the time devoted to individual work and outside constituencies, a preference for multilateral or bilateral interaction, the degree of planning, etc. We find that CEOs with a larger number of reports spend more time with subordinates, more time on large meetings, less time on unplanned activities. The presence of a delegate, such as the COO, allows the CEO to reduce the time spent with insiders and to focus on bilateral and unplanned activities. These results suggest that time-use information is helpful in interpreting how span of control determines management style.
    Keywords: Management, firms, CEO, productivity, firm activities
    JEL: C21 C25 L22 L23
    Date: 2012–04
  8. By: Billette de Villemeur, Etienne; Flochel, Laurent; Versaevel, Bruno
    Abstract: Collusion sustainability depends on firms' aptitude to impose sufficiently severe punishments in case of deviation from the collusive rule. We extend results from the literature on optimal collusion by investigating the role of limited liability. We examine all situations in which either structural conditions (demand and technology), financial considerations (a profitability target), or institutional circumstances (a regulation) set a lower bound, possibly negative, to firms' profits. For a large class of repeated games with discounting, we show that, absent participation and limited liability constraints, there exists a unique optimal penal code. It commands a severe single-period punishment immediately after a firm deviates from the collusive stage-game strategy. When either the participation constraint or the limited liability constraint bind, there exists an infinity of multi-period punishment paths that permit firms to implement the optimal collusive strategy. The usual front-loading scheme is only a specific case and an optimal punishment profile can take the form of a price asymmetric cycle. We characterize the situations in which a longer punishment does not perform as a perfect substitute for more immediate severity. In this case the lowest discount factor that permits collusion is strictly higher than without the limited liability constraint, which hinders collusion.
    Keywords: Collusion; Oligopoly; Limited Liability
    JEL: L13 D43 C72
    Date: 2012–04–30
  9. By: Simon Gaechter (University of Nottingham); Esther Kessler (University College London); Manfred Koenigstein (Universitaet Erfurt)
    Abstract: Efficiency under contractual incompleteness often requires voluntary cooperation in situations where self-regarding incentives for contractual compliance are present as well. Here we provide a comprehensive experimental analysis based on the gift-exchange game of how explicit and implicit incentives affect cooperation. We first show that there is substantial cooperation under non-incentive compatible contracts. Incentive-compatible contracts induce best-reply effort and crowd out any voluntary cooperation. Further experiments show that this result is robust to two important variables: experiencing Trust contracts without any incentives and implicit incentives coming from repeated interaction. Implicit incentives have a strong positive effect on effort only under non-incentive compatible contracts.
    Keywords: principal-agent games; gift-exchange experiments; incomplete contracts, explicit incentives; implicit incentives; repeated games; separability; experiments
    JEL: C70 C90
    Date: 2011–06
  10. By: Ulrike Malmendier; Enrico Moretti; Florian S. Peters
    Abstract: Do acquirors profit from acquisitions, or do acquiring CEOs overbid and destroy shareholder value? We present a novel approach to estimating the long-run abnormal returns to mergers exploiting detailed data on merger contests. In the sample of close bidding contests, we use the loser's post-merger performance to construct the counterfactual performance of the winner had he not won the contest. We find that bidder returns are closely aligned in the years before the contest, but diverge afterwards: Winners underperform losers by 50 percent over the following three years. Existing methodologies, including announcement effects, fail to capture the acquirors' underperformance.
    JEL: G14 G34
    Date: 2012–04
  11. By: Kriechel, Ben (ROA, Maastricht University); Mühlemann, Samuel (University of Bern); Pfeifer, Harald (BIBB); Schuette, Miriam (BIBB)
    Abstract: In this paper, we investigate the effects of works councils on apprenticeship training in Germany. The German law attributes works councils substantial information and co-determination rights to training-related issues. Thus, works councils may also have an impact on the cost-benefit relation of workplace training. Using detailed firm-level data containing information on the costs and benefits of apprenticeship training, we find that firms with works councils make a significantly higher net investment in training compared with firms without such an institution. We also find that the fraction of former trainees still employed with the same firm five years after training is significantly higher in the presence of works councils, thus enabling firms to recoup training investments over a longer time horizon. Furthermore, all works council effects are much more pronounced for firms covered by collective bargaining agreements.
    Keywords: works councils, collective bargaining agreement, apprenticeship training, firm-sponsored training
    JEL: J24 J50 M53
    Date: 2012–04
  12. By: Bhaskar, Venkataraman
    Abstract: We study dynamic moral hazard, with symmetric ex ante uncertainty and learning. Unlike Holmstrom's career concerns model, uncertainty pertains to the difficulty of the job rather than the general talent of the agent, so that contracts are required to provide incentives. Since effort is privately chosen, the agent can always cause a misalignment of beliefs between the principal and himself, by shirking. We show that such a misalignment is always profitable for the agent, and must be dissuaded by providing more high powered incentives. However, high powered incentives in the future only aggravate the incentive problem today, so that the problem is compounded as the interaction becomes longer. We also study the benefits of long term contracts with full commitment, and the role of random effort choice.
    Keywords: learning; moral hazard
    JEL: D83 D86
    Date: 2012–04
  13. By: Loukas Balafoutas; Glenn Dutcher; Florian Lindner; Dmitry Ryvkin
    Abstract: Tournaments are widely used in organizations, explicitly or implicitly, to reward the best-performing employees, e.g., through promotion or bonuses, and to punish the worst-performing employees, e.g., through firing or unfavorable job assignments. We use a principal-agent model to compare the efficiency of two tournament incentive schemes, reward tournament and punishment tournament, which, respectively, reward the best performer and punish the worst performer. We show that while the two schemes are equivalent when agents are symmetric in their ability, the equivalence is broken in the presence of heterogeneity. Specifically, punishment tournaments lead to higher profits of the firm. The reason is that low-ability agents are discouraged less in punishment tournaments than in reward tournaments, and hence can be compensated less to meet their participation constraints. Hence, our results predict that firms using punishment tournament contracts will perform better.
    Keywords: tournament, reward, punishment, contract, heterogeneous agents
    Date: 2012–04
  14. By: John Bennett; Manfredi La manna
    Abstract: We analyze a mixed oligopoly with free entry by private firms. It is assumed that a state-owned enterprise (SOE) maximizes an increasing function of output, subject to a break-even constraint. We first show that, because of instability, the industry cannot contain more than one SOE. Then we establish an irrelevance result: if the SOE's cost disadvantage relative to private firms is not too large, then aggregate output, aggreagte costs and welfare are the same with and without the SOE. However, for this range of cost disadvantage an SOE monopoly yields higher welfare. Implications for privatization policy are suggested.
    Date: 2012–02
  15. By: Suresh De Mel; David McKenzie; Christopher Woodruff
    Abstract: We conduct a field experiment in Sri Lanka providing informal firms incentives to formalize. Information about the registration process and reimbursement of direct costs has no effect. Payments equivalent to one-half to one month (alternatively, 2 months) of the median firm’s profits leads to registration of around one-fifth (alternatively, one-half) of firms. Land ownership issues are the most common reason for not registering. Follow-up surveys 15 to 31 months later show higher mean profits, but largely in a few firms which grew rapidly. We find little evidence for other changes in behavior, but formalized firms express more trust in the state.
    JEL: O14 O17
    Date: 2012–04
  16. By: Nicodemo, Catia (Universitat Autònoma de Barcelona); Raya, Josep M. (Universitat Pompeu Fabra)
    Abstract: This paper presents the quantile estimation of house price between two years, 2004 and 2007 (a boom house price period) in several Spanish cities. We decompose the change in house price distribution into portions: changes in the distributions of the explanatory variables and changes in coefficients over time. Our main results are three. Firstly, from 2004 to 2007, the difference in housing price in Spain is larger at lower and higher percentiles. Secondly, the most important part of the difference in the distribution of housing prices between 2004 and 2007 is explained by coefficients (with all the variables contributing similarly). Thirdly, among cities, we can find a lot of variation in change of house price distribution. With respect to Spain's cities pattern, Madrid, Valencia and Bilbao, are the cities which big difference among them.
    Keywords: housing price distribution, housing market, quantile regression, counterfactual distribution
    JEL: C1 R21 R31
    Date: 2012–04
  17. By: Kuznecovs, Mihails (University of Surrey); Pal, Sarmistha (University of Surrey)
    Abstract: This paper examines whether the introduction of corporate governance (CG) reforms in general and that of transparency and disclosure (T&D) rules in particular can necessarily boost firm performance. Existing literature suggests that CG reforms can boost performance because it can resolve the conflict of interest between the controlling and the minority owners, especially in societies with highly skewed distribution of ownership. We however argue that the success of CG reform would, in addition, depend on whether the reforms may initiate further conflict, e.g., that between the state and the controlling owners. Using recent data from Russia for 2000-2008, we find that the introduction of corporate governance codes in Russia had limited success to improve indices of firm performance in our sample. We argue that this arises from the predatory behavior of the central and local governments: greater transparency make businesses easy targets for aggressive tax enforcement policy by the central government while the decentralized local governments may increase the bribe price to protect businesses from high central taxes, which may also induce some businesses to go underground, thus harming firm performance.
    Keywords: corporate governance reform, transparency and disclosure rules, conflict between state and the controlling owner, taxation and fiscal decentralisation, firm performance, predatory state, Tobin's Q, Russia
    JEL: G3 K2 P2
    Date: 2012–04
  18. By: Carmen M. Reinhart; Vincent R. Reinhart; Kenneth S. Rogoff
    Abstract: We identify the major public debt overhang episodes in the advanced economies since the early 1800s, characterized by public debt to GDP levels exceeding 90% for at least five years. Consistent with Reinhart and Rogoff (2010) and other more recent research, we find that public debt overhang episodes are associated with growth over one percent lower than during other periods. Perhaps the most striking new finding here is the duration of the average debt overhang episode. Among the 26 episodes we identify, 20 lasted more than a decade. Five of the six shorter episodes were immediately after World Wars I and II. Across all 26 cases, the average duration in years is about 23 years. The long duration belies the view that the correlation is caused mainly by debt buildups during business cycle recessions. The long duration also implies that cumulative shortfall in output from debt overhang is potentially massive. We find that growth effects are significant even in the many episodes where debtor countries were able to secure continual access to capital markets at relatively low real interest rates. That is, growth-reducing effects of high public debt are apparently not transmitted exclusively through high real interest rates.
    JEL: E44 E62 E63 F30 F41 H6 H63 N1
    Date: 2012–04
  19. By: Combes, Pierre-Philippe (GREQAM, University of Aix-Marseille); Duranton, Gilles (University of Toronto); Gobillon, Laurent (INED, France); Roux, Sébastien (DARES French Ministry of Labour)
    Abstract: This paper provides descriptive evidence about the distribution of wages and skills in denser and less dense employment areas in France. We confirm that on average, workers in denser areas are more skilled. There is also strong over-representation of workers with particularly high and low skills in denser areas. These features are consistent with patterns of migration including negative selection of migrants to less dense areas and positive selection towards denser areas. Nonetheless migration, even in the long run, accounts for little of the skill differences between denser and less dense areas. Finally, we find marked differences across age groups and some suggestions that much of the skill differences across areas can be explained by differences between occupational groups rather than within.
    Keywords: skill distribution, wage distribution, sorting
    JEL: J31 J61 R12 R23
    Date: 2012–04
  20. By: Valérie Sabatier (MTS - Management Technologique et Strategique - Grenoble École de Management (GEM), GAEL - Economie Appliquée de Grenoble - INRA : UR1215 - Université Pierre Mendès-France - Grenoble II); Adrienne Kennard (Genostar - Genostar); Vincent Mangematin (MTS - Management Technologique et Strategique - Grenoble École de Management (GEM))
    Abstract: An industry's dominant logic is the general scheme of value creation and capture shared by its actors. In high technology fields, technological discontinuities are not enough to disrupt an industry's dominant logic. Identifying the factors that might trigger change in that logic can help companies develop strategies to enable them to capture greater value from their innovations by disrupting that logic. Based on analyzing the changes that biotechnologies and bioinformatics have brought to the drug industry, we identify and characterize three triggers of change that can create disruptive business models. We suggest that, in mature industries experiencing strong discontinuities and high technological uncertainty, entrants' business models initially tend to fit into the industry's established dominant logic and its value chains remain unchanged. But as new technologies evolve and uncertainty decreases, disruptive business models emerge, challenging dominant industry logics and reshaping established value chains.
    Keywords: dominant logic; business model; industry life cycle; drug industry; technological discontinuities.
    Date: 2012
  21. By: Escobari, Diego
    Abstract: This paper uses a unique U.S. airlines panel data set to empirically study the dynamic pricing of inventories with uncertain demand over a finite horizon. I estimate a dynamic pricing equation and a dynamic demand equation that jointly characterize the adjustment process between prices and sales as the flight date nears. I find that the price increases as the inventory decreases, and decreases as there is less time to sell. Consistent with aggregate demand learning and price adjustment, demand shocks have a positive and much larger effect on prices than the positive effect of anticipated sales.
    Keywords: pricing; demand uncertainty; demand learning; airlines
    JEL: L93 D84 C23 D83
    Date: 2011–12–17

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