nep-bec New Economics Papers
on Business Economics
Issue of 2012‒05‒29
twenty-one papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Vertical Exclusion with Endogenous Competiton Externalities By Hansen, Stephen; Motta, Massimo
  2. The effect of Stackelberg cost reductions on spatial competition with heterogeneous firms By Matthew Beacham
  3. Are firm- and country-specific governance substitutes? Evidence from financial contracts in emerging markets By Francis, Bill; Hasan, Iftekhar; Song, Liang
  4. Slow Recoveries: A Structural Interpretation By Galí, Jordi; Smets, Frank; Wouters, Rafael
  5. The Impact of Integration on Productivity and Welfare Distortions Under Monopolistic Competition By Swati Dhingra; John Morrow
  6. Skilled labor supply, IT-based technical change and job instability By Luc Behaghel; Julie Moschion
  7. The iPhone goes downstream: mandatory universal distribution By Karp, Larry; Perloff, Jeffrey
  8. Bargaining failures and merger policy By Roberto Burguet; Ramon Caminal
  9. Urban agglomeration and CEO compensation By Francis, Bill; Hasan, Iftekhar; John, Kose; Waisman , Maya
  10. Aggregate and Firm-Level Volatility in the Japanese Economy By YoungGak KIM; Hyeog Ug KWON
  11. Strategic loyalty reward in dynamic price Discrimination By Bernard Caillaud; Romain De Nijs
  12. What's News in Business Cycles By Schmitt-Grohé, Stephanie; Uribe, Martín
  13. External knowledge sourcing and innovation performance: the role of managerial practices By García Granero,Ana; Vega-Jurado,Jaider
  14. Firms' Cash Holdings and Performance: Evidence from Japanese corporate finance By SHINADA Naoki
  15. Do Oil Prices Help Forecast U.S. Real GDP? The Role of Nonlinearities and Asymmetries By Kilian, Lutz; Vigfusson, Robert J.
  16. Cartel Pricing Dynamics, Price Wars and Cartel Breakdown By Manganelli, Anton-Giulio
  17. Entrepreneurial optimism and survival By Hyytinen , Ari; Lahtonen, Jukka; Pajarinen, Mika
  18. Optimal tax threshold: the consequences on efficiency of official vs. effective enforcement By Jonathan Goyette
  19. Privatization and corporate restructuring By Paulo Bastos; Natália Pimenta Monteiro; Odd Rune Straume
  20. Authority and Soft Information Production within a Bank Organization By Masazumi Hattori; Kohei Shintani; Hirofumi Uchida
  21. Coordination with Communication under Oath By Nicolas Jacquemet; Stephane Luchini; Jason Shogren; Adam Zylbersztejn

  1. By: Hansen, Stephen; Motta, Massimo
    Abstract: In a vertical market in which downstream firms have private information about their productivity and compete for consumers, an upstream firm posts public bilateral contracts. When downstream firms are risk-neutral without wealth constraints, the upstream firm offers the input to all retailers. When they are sufficiently risk averse it sells to one, thereby eliminating externalities among downstream firms that necessitate the payment of risk premia. By similar reasoning exclusion is also optimal with downstream wealth constraints. Thus exclusion arises when contracts are fully observable and downstream firms are ex ante symmetric. The result is robust to a number of extensions.
    Keywords: Adverse selection; Exclusive contracts; Limited liability; Risk
    JEL: D82 L22 L42
    Date: 2012–05
  2. By: Matthew Beacham
    Abstract: This article extends the theory of spatial competition by allowing firms to endogenously select their operating costs within a Hotelling (1929) framework. A three-stage duopoly model is examined in which the firms compete in cost reduction, locations and finally prices. Furthermore, it is assumed that firms are identical except with respect to their cost reducing technologies and one firm has a Stackelberg leadership advantage in the cost-reduction stage. The model implies two results that are unique within the literature. First, if a firm possesses both an efficieny and investment timing advantage, it always becomes the dominant firm in the product market in all relevant respects. Second, if an ex ante inefficient firm has an investment timing advantage it can only become the ex post market leader if and only if the a priori efficiency gap is not too large. Consequently, these results suggest that a firm's ability to innovate - in terms of both efficiency and timing - play a large part in determining the composition of the final product market.
    Keywords: Location model; Asymmetric firms; Stackelberg game; Endogenous cost selection
    JEL: L13 R32
    Date: 2012–05
  3. By: Francis, Bill (Lally School of Management and Technology, Rensselaer Polytechnic Institute); Hasan, Iftekhar (Schools of Business, Fordham University, New York, NY 10019, USA and Bank of Finland,); Song, Liang (School of Business and Economics, Michigan Technological University, Houghton, MI 49931)
    Abstract: We investigate how borrowers’ corporate governance influences bank loan contracting terms in emerging markets and how this relation varies across countries with different country-level governance. We find that borrowers with stronger corporate governance obtain favorable contracting terms with respect to loan amount, maturity, collateral requirements, and spread. Firm-level and country-level corporate governance are substitutes in writing and enforcing financial contracts. We also find that the distinctiveness of borrowers’ characteristics affect the relation between firm-level corporate governance and loan contracting terms. Our findings are robust, irrespective of types of regression methods and specifications.
    Keywords: corporate governance; financial contracts; emerging markets
    JEL: G20 G30 G31 G34 G38
    Date: 2012–04–12
  4. By: Galí, Jordi; Smets, Frank; Wouters, Rafael
    Abstract: An analysis of the performance of GDP, employment and other labor market variables following the troughs in postwar U.S. business cycles points to much slower recoveries in the three most recent episodes, but does not reveal any significant change over time in the relation between GDP and employment. This leads us to characterize the last three episodes as slow recoveries, as opposed to jobless recoveries. We use the estimated New Keynesian model in Galí-Smets-Wouters (2011) to provide a structural interpretation for the slower recoveries since the early nineties.
    Keywords: estimated DSGE models; Jobless recoveries; Okun's law; U.S. business cycle
    JEL: E32
    Date: 2012–05
  5. By: Swati Dhingra; John Morrow
    Abstract: A fundamental question in monopolistic competition theory is whether the market allocates resources efficiently. This paper generalizes the Spence-Dixit-Stiglitz framework to heterogeneous firms, addressing when the market provides optimal quantities, variety and productivity. Under constant elasticity of demand, each firm prices above its average cost, yet we show market allocations are efficient. When demand elasticities vary, market allocations are not efficient and reflect the distortions of imperfect competition. After determining the nature of market distortions, we investigate how integration may serve as a remedy to imperfect competition. Both market distortions and the impact of integration depend on two demand side elasticities, and we suggest richer demand structures to pin down these elasticities. We also show that integration eliminates distortions, provided the post-integration market is sufficiently large.
    Keywords: Selection, Monopolistic competition, Efficiency, Productivity, Social welfare, Demand elasticity
    JEL: F1 L1 D6
    Date: 2012–05
  6. By: Luc Behaghel (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique); Julie Moschion (Melbourne Institute of Applied Economic and Social Research - Melbourne Institute of Applied Economic and Social Research)
    Abstract: In this paper, we provide empirical evidence on the impact of IT diffusion on the stability of employment relationships. We document the evolution of the different components of job instability over a panel of 350 local labor markets in France, from the mid 1970s to the early 2000s. Although workers in more educated local labor markets adopt IT faster, they do not experience any increase in job instability. More specifically, we find no evidence that the faster diffusion of IT is associated with any change in job-to-job transitions, and we find that it is associated with relatively less frequent transitions through unemployment. Overall, the evidence goes against the view that the diffusion of IT has spurred job instability. Combining the local labor market variations with firm data, we argue that these findings can be explained by French firms' strong reliance on training and internal promotion strategies in order to meet the new skills requirement associated with IT diffusion.
    Keywords: Technical change; labor turnover; Skill bias; Job security; Internal labor markets
    Date: 2011–11
  7. By: Karp, Larry (University of California, Berkeley. Dept of agricultural and resource economics); Perloff, Jeffrey (University of California, Berkeley. Dept of agricultural and resource economics)
    Abstract: Apple’s original decision to market iPhones using a single downstream vendor prompted calls for mandatory universal distribution (MUD), whereby all downstream vendors would sell the iPhone under the same contract terms. The upstream monopoly may want either one or more downstream vendors, and, in either case, consumer welfare may be higher with either one or more firms. If the income elasticity of demand for the new good is greater than the income elasticity of the existing generic good, the MUD requirements leads to a higher equilibrium price for both the new good and the generic, and therefore lowers consumer welfare.
    Keywords: vertical restrictions, mandatory universal distribution, new product oligopoly
    JEL: L12 L13 L42
    Date: 2011–12
  8. By: Roberto Burguet; Ramon Caminal
    Abstract: Abstract In this paper we study the optimal ex-ante merger policy in a model where merger proposals are the result of strategic bargaining among alternative candidates. We allow for firm asymmetries and, in particular, we emphasize the fact that potential synergies generated by a merger may vary substantially depending on the identity of the participating firms. The model demonstrates that, under some circumstances, relatively inefficient mergers may take place. That is, a particular merger may materialize despite the existence of an alternative merger capable of generating higher social surplus and even higher profits. Such bargaining failures have important implications for the ex-ante optimal merger policy. We show that a more stringent policy than the ex-post optimal reduces the scope of these bargaining failures and raises expected social surplus. We use a bargaining model that is flexible, in the sense that its strategic structure does not place any exogenous restriction on the endogenous likelihood of feasible mergers.
    Keywords: endogenous mergers, merger policy, bargaining, synergies
    JEL: L13 L41
    Date: 2012–05–17
  9. By: Francis, Bill (Rensselaer Polytechnic Institute); Hasan, Iftekhar (Fordham University and Bank of Finland); John, Kose (Stern School of Business, New York University); Waisman , Maya (Fordham University – Finance Area)
    Abstract: An underlying assumption in the executive compensation literature is that there is a national labor market for CEOs. The urban economics literature, however, documents higher ability among workers in large metropolitans, which results in a real and stable urban wage premium. In this paper, we investigate the link between the spatial clustering of firms in big, central cities (i.e., urban agglomeration) and the level and structure of CEO compensation. Using CEO compensation data for the period 1992–2004, we document a positive relation between the size and centrality of the city in which the firm is headquartered and the total, as well as the equity based portion of CEO pay. Our results are robust to a host of control variables, sensitivity and endogeneity tests, indicating that urban agglomeration may reflect positive externalities, such as knowledge spillovers, business connections and improved access to private information that have a positive effect on CEO pay and incentive driven compensation for good performance. We document gradual human capital gains acquired from big city work experience that are transferable to the rural area, and rewarded for, once the CEO relocates into a smaller, less central community. Our tests provide novel evidence of information spillovers and networking opportunities in big cities that can directly affect how CEOs are compensated. Such sources of information and influence represent something for which firms are willing to pay higher and more incentive driven pay, evidence in favor of a market-based explanation for CEO compensation.
    Keywords: agglomeration; CEO; compensation; incentive; geography
    JEL: D83 G30 J31 R12
    Date: 2012–04–19
  10. By: YoungGak KIM; Hyeog Ug KWON
    Abstract: In this paper, we investigate the volatility of sales at the firm and the aggregate level using the longitudinal dataset of the <i>Financial Statements Statistics of Corporations</i> (FSSC). The main findings are as follows: (1) Firm-level volatility decreased until the mid-1990s but then increased again. (2) Aggregate-level volatility steadily decreased until the mid-1990s and has remained low since. (3) Decomposing the total variance of the growth rate of aggregated sales, we find that the divergence between firm-level and aggregate-level volatility is caused by the drastic decline and subsequent low level of the covariance of sales growth between different firms and the increase in individual firms' volatility.
    Date: 2012–05
  11. By: Bernard Caillaud (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA); Romain De Nijs (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique)
    Abstract: This paper proposes a dynamic model of duopolistic competition under behaviorbased price discrimination with the following property: in equilibrium, a firm may reward its previous customers although long term contracts are not enforceable. A firm can offer a lower price to its previous customers than to its new customers as a strategic means to hamper its rival to gather precise information on the young generation of customers for subsequent profitable behavior-based pricing. The result holds both with myopic and forward-looking, impatient enough consumers.
    Keywords: Price discrimination ; Dynamic pricing ; Loyalty reward
    Date: 2011–09
  12. By: Schmitt-Grohé, Stephanie; Uribe, Martín
    Abstract: In the context of a dynamic, stochastic, general equilibrium model, we perform classical maximum-likelihood and Bayesian estimations of the contribution of anticipated shocks to business cycles in the postwar United States. Our identification approach relies on the fact that forward-looking agents react to anticipated changes in exogenous fundamentals before such changes materialize. It further allows us to distinguish changes in fundamentals by their anticipation horizon. We find that anticipated shocks account for about half of predicted aggregate fluctuations in output, consumption, investment, and employment.
    Keywords: Anticipated Shocks; Bayesian Estimation.; Sources of Aggregate Fluctuations
    JEL: C11 C51 E13 E32
    Date: 2012–05
  13. By: García Granero,Ana; Vega-Jurado,Jaider
    Abstract: In this paper, we argue that the ability of a firm to transform external knowledge into commercial success goes beyond the firms’ technological capabilities. Thus, we underscore the role played by managerial practices (related with knowledge sharing, formalization and incentives) in the leveraging and utilization of external knowledge. We further consider that the effectiveness of external knowledge exploitation can be contingent on the types of external sources (scientific and industrial partners) and on the degree of novelty in innovations (imitative and new-to-the-market innovations). The research draws on survey data from the Spanish Ceramic Tile Industry and the main results suggest that firms adopting knowledge sharing mechanisms are more likely to attain better results in exploiting external scientific knowledge. On the contrary, formalization-based mechanisms tend to exert a detrimental effect on the exploitation of external scientific knowledge. Knowledge incentives are non significant in the case of scientific agents and negative for industrial agents.
    Keywords: External knowledge sourcing, scientific and industrial partnering, managerial practices, product innovation
    JEL: M19
    Date: 2012–05–21
  14. By: SHINADA Naoki
    Abstract: This paper uses panel data from Japanese listed firms during 1980-2010 to analyze the factors that influence firms' cash holdings and determine whether cash holdings are related to corporate performance and values. It is demonstrated that firms have increased cash holdings because of the trend of higher cash flow uncertainty since the 1990s, and, especially in the 2000s, due to the continuous availability of low-cost funding. It is also shown that with large investment opportunities, the positive relationship between cash holdings and firms' returns on assets and values has weakened in recent years, although external investors have highly valued firms since 2008. It is implied that under a sudden deterioration in the economy, conservative cash holdings could temporarily increase firms' market values, but, in the long run, a highly conservative liquidity management policy would weaken firms' profitability on assets.
    Date: 2012–05
  15. By: Kilian, Lutz; Vigfusson, Robert J.
    Abstract: There is a long tradition of using oil prices to forecast U.S. real GDP. It has been suggested that the predictive relationship between the price of oil and one-quarter ahead U.S. real GDP is nonlinear in that (1) oil price increases matter only to the extent that they exceed the maximum oil price in recent years and that (2) oil price decreases do not matter at all. We examine, first, whether the evidence of in-sample predictability in support of this view extends to out-of-sample forecasts. Second, we discuss how to extend this forecasting approach to higher horizons. Third, we compare the resulting class of nonlinear models to alternative economically plausible nonlinear specifications and examine which aspect of the model is most useful for forecasting. We show that the asymmetry embodied in commonly used nonlinear transformations of the price of oil is not helpful for out-of-sample forecasting; more robust and more accurate real GDP forecasts are obtained from symmetric nonlinear models based on the three-year net oil price change. Finally, we quantify the extent to which the 2008 recession could have been forecast using the latter class of time-varying threshold models.
    Keywords: Asymmetry; Nonlinearity; Oil price; Out-of-sample forecast; Real GDP
    JEL: C32 C53 Q43
    Date: 2012–05
  16. By: Manganelli, Anton-Giulio
    Abstract: This paper gives an unified explanation of some of the most widely known facts of the cartel literature: prices gradually rise, then remain constant, there can be price wars and some cartels break down. In this model consumers are loss averse and efficiency of a competitive fringe is not publicly observable. In the best collusive equilibrium, the price expectation can be so low that loss aversion makes consumers not buy at the maximal collusive price: firms then set a lower price that rises in time with consumers’ expectations. This increasing price path is bounded from above by the presence of the fringe. If the fringe sets a low price during a sufficient number of periods, there can be price wars and collusion can eventually break down.
    Date: 2012–05
  17. By: Hyytinen , Ari (University of Jyväskylä); Lahtonen, Jukka (University of Jyväskylä); Pajarinen, Mika (The Research Institute of the Finnish Economy (ETLA))
    Abstract: This paper uses entrepreneurs’survival expectations around the time of market entry and subsequent venture exits to study entrepreneurial optimism. Using data on a large number of nascent entrepreneurs in the US and start-ups in Finland, we find that new entrepreneurs survival beliefs are on average optimistic but heterogeneous: Some are excessively optimistic, whereas a small subset holds unbiased beliefs. Entrepreneurial optimism is increasing in the relative (interpersonal) optimism and decreasing in entrepreneurs level of education and industry experience in both countries. At least in Finland, those holding optimistic views are more likely to transit into entrepreneurship.
    Keywords: entrepreneurship; survival; optimism; overestimation
    JEL: D21 L20
    Date: 2012–04–25
  18. By: Jonathan Goyette (Department of Economics and GRÉDI, Université de Sherbrooke)
    Abstract: Significant efficiency gains are available when there is a gap between official and effective enforcement of a tax threshold. Using a unique dataset on Ugandan firms, I show that audits for business-related taxes are effectively based on the number of employees rather than the official tax threshold, which is in terms of sales. Based on the empirical evidence, I build a model of firms growth with entry and exit. Entrepreneurs evade part of their tax liabilities and, when audited, bargain with tax officials to keep some of the surplus from evasion in exchange of a bribe. The model is calibrated using the Ugandan data and replicates well some features of the data that are not explicitly targeted. Based on a counterfactual analysis, I show that the efficiency loss associated with evasion and corruption is of the order of 45% in Uganda. There is also a non-negligible gain in productivity per worker of 16% from enforcing the official tax threshold based on the level of sales rather than the effective threshold based on the number of employees. This gain in efficiency is essentially due to the reallocation of labor across productive units.
    Keywords: Tax Threshold, Evasion, Corruption, Firm’s Growth, Size Distribution of Firms, Simulation
    JEL: E27 H26 H83 L11 O11 O16 O43 O47
    Date: 2012–04
  19. By: Paulo Bastos (Inter-American Development Bank); Natália Pimenta Monteiro (Universidade do Minho - NIPE); Odd Rune Straume (Department of Economics, University of Minho)
    Abstract: We examine corporate restructuring following privatization using uncommonly rich data on the population of Portuguese …firms from 1991-2009. We …find that privatization leads to sizable job losses, reflecting reductions in both the number of establishments and in the number of workers per establishment. We …find no robust evidence of impacts on the structure of the workforce. The estimated job losses following privatization are consistent with a theory in which the shift in ownership increases the degree of profi…t orientation and leads to lower job security.
    Keywords: Privatization; employment structure; panel data
    JEL: J45 D21 C23
    Date: 2012
  20. By: Masazumi Hattori (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Kohei Shintani (Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Hirofumi Uchida (Professor, Graduate School of Business Administration, Kobe University (E-mail:
    Abstract: We ask three questions to clarify the production of soft information and decision making within a bank organization: (1) In a hierarchical ladder within a bank organization, who has more soft information on borrowers (repository of soft information) and does the answer differ depending on bank- and/or firm-specific factors?; (2) In the hierarchical ladder, who makes a decision to grant loans (decision maker) and does the answer have bank- and/or firm-specificity?; (3) Does the authority distance between the repository of soft information and the decision maker reduce the benefit from the bank-firm relationship? Our empirical findings are the following: (1) Branch managers rather than loan officers have sufficient soft information on borrowers, and the repository is located at a higher level in the hierarchy for smaller banks; (2) Branch managers and executives in the headquarters have decision-making authority, but more authority is delegated at a lower level in the hierarchy for larger banks; and (3) A greater authority distance is harmful for borrowers because it invites more financial constraints.
    Keywords: Authority, Soft information, Organizational structure, Banks
    JEL: D2 D8 L2 G21
    Date: 2012–05
  21. By: Nicolas Jacquemet (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Stephane Luchini (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579); Jason Shogren (Departement of Economics and Finance, University of Wyoming - University of Wyoming); Adam Zylbersztejn (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne)
    Abstract: Herein we explore whether the social psychology theory of commitment via a truth-telling oath can reduce coordination failure. Using a classic sequential coordination game, we ask all players to sign voluntarily a truth-telling oath before playing the game with cheap-talk communication. Three results emerge with commitment-via-the-oath: (1) coordination increased by nearly 50 percent; (2) senders' messages were significantly more truthful and actions more efficient, and (3) receivers' trust of messages increased.
    Keywords: Coordination game; Cheap talk communication; Oath
    Date: 2011–10–26

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