nep-bec New Economics Papers
on Business Economics
Issue of 2012‒11‒03
23 papers chosen by
Vasileios Bougioukos
Bangor University

  1. Managerial delegation schemes in a duopoly with endogenous production costs: a comparison By Nicola Meccheri; Luciano Fanti
  2. Firm size and unrelated diversification. An empirical test on the ‘survivalist hypothesis’ By Enrico Guzzini; Donato Iacobucci
  3. Exact Draws from the Stationary Distribution of Entry-Exit Models By Takashi Kamihigashi; John Stachurski
  4. Birthplace Diversity of the Workforce and Productivity Spill-overs in Firms By René Böheim; Thomas Horvath; Karin Mayr
  5. Demand or productivity: What determines firm growth? By Pozzi, Andrea; Schivardi, Fabiano
  6. Merger results under price competition and plant-specific unions By Luciano Fanti; Nicola Meccheri
  7. Cycles of length two in monotonic models By José Alvaro Rodrigues-Neto
  8. Asymmetric Price Adjustments in Airlines By Escobari, Diego
  9. The structure of CEO pay: pay-for-luck and stock-options By Chaigneau, Pierre; Sahuguet, Nicolas
  11. Prices, productivity and irregular cycles in a walrasian labour market. By Luciano Fanti
  12. Communication in Cournot Oligopoly By Maria Goltsman; Gregory Pavlov
  13. Surviving Trade Liberalization in Philippine Manufacturing By Aldaba, Rafaelita M.
  14. Global and country-specific business cycle risk in time-varying excess returns on asset markets By Thomas Nitschka
  15. Pollution abatement and reservation prices in a market game By Halkos, George; Papageorgiou, George
  16. Minimum wages: do they really hurt young people? By Sofía Galán; Sergio Puente
  17. Innovation Systes and Knowledge-Intensive Enterpreneurship: a Country Case Study of Poland By Richard Woodward; Elzbieta Wojnicka; Wojciech Pander
  18. Asymmetries with R&D-Driven Growth and Heterogeneous Firms. By Frédéric Olland
  19. Environmental standards and Cournot duopoly: a stability analysis. By Luciano Fanti
  20. Game Theory in Oligopoly By Marx Boopathi
  21. Small and Medium Enterprises` (SMEs) Access to Finance: Philippines By Aldaba, Rafaelita M.
  22. On the Welfare Costs of Business-Cycle Fluctuations and Economic-Growth Variation in the 20th Century By Guillén, Osmani Teixeira de Carvalho; Issler, João Victor; Franco Neto, Afonso Arinos de Mello
  23. Regulatory Protection and Spillovers When Firms Decide First on Collaboration By Joanna Poyago-Theotoky; Huw Edwards

  1. By: Nicola Meccheri; Luciano Fanti
    Abstract: In this paper we study how managerial delegation schemes in a duopoly product market interact with wage decisions taken by a monopoly central (industry-wide) union in the labour market. We analyse a model where, at the first stage, firms’ owners optimally choose for their managers a delegation contract that can be “sales delegation” or “relative profit delegation”; at the second stage, the union fixes the wage for all (non-managerial) workers in the industry; and finally, at the third stage, managers compete in the product market. Interestingly, our results prove to be more varied with respect to findings by the managerial delegation literature with exogenous production costs for firms. Most notably, it is pointed out that, in equilibrium, both firm profitability and welfare outcomes can be superior under both sales delegation and relative profit delegation, depending on various factors such as the degree of product differentiation and the competition regime.
    Keywords: sales delegation, relative profit delegation, unionised duopoly, endogenous wage.
    JEL: J33 J51 L13
    Date: 2012–06–01
  2. By: Enrico Guzzini (Università degli Studi e-Campus, Italy); Donato Iacobucci (Dept. of Information Engineering Università Politecnica delle Marche, Italy)
    Abstract: The aim of this paper is to empirically verify the hypothesis of a U shaped relation between size and unrelated diversification. Specifically we test the so called “survivalist hypothesis” according to which unrelated diversification is observed not only in large firms but also in small firms as a result of poor performance in the initial business. We empirically test this hypothesis using a representative sample of Italian business groups. The empirical results confirm the presence of a U shaped relation between size and unrelated diversification. Small groups are more diversified than medium-sized groups. We think that this is an interesting result, since according to traditional theories of diversification (resource based view and agency view) we should expect a linear and positive relation between size and unrelated diversification. The second novelty of the paper is that of considering the group rather than the single legal entity as unit of analysis. This is specifically appropriate in this case as unrelated diversification is often carried out by setting-up or acquiring new companies.
    Keywords: diversification; firm size; business groups
    JEL: L25 L26
    Date: 2012–10
  3. By: Takashi Kamihigashi; John Stachurski
    Abstract: In equilibrium models of firm dynamics, the stationary equilibrium distribution of firms summarizes the predictions of the model for a given set of primitives. Focusing on Hopenhayn's seminal model of firm dynamics with entry and exit (Econometrica, 60:5, 1992, p.~1127--1150), we provide an algorithm that generates exact draws from the stationary distribution in finite time for any specified exit threshold. The technique is able to rapidly generate large numbers of exact and independent draws.
    JEL: C61 C63
    Date: 2012–10
  4. By: René Böheim (WIFO); Thomas Horvath (WIFO); Karin Mayr
    Abstract: We analyse the effect of workforce composition by birthplace in Austrian firms on workers' wages. In our model, each worker's productivity may depend on whether the co-workers are of the same or of a different birthplace and wages depend therefore both on the relative size of workers' groups as well as on the production structure of firms. We derive empirically testable hypotheses about the effect of co-worker birthplace on wages using a stylised model of intra-firm spill-overs across worker groups. We find evidence for complementarities between workers of different birthplace in line with our model that persist (but become smaller in size) after we control for observable productivity characteristics such as occupation and work experience.
    Keywords: Immigration, Labour force composition, Labour productivity
    Date: 2012–10–22
  5. By: Pozzi, Andrea; Schivardi, Fabiano
    Abstract: We disentangle the contribution of unobserved heterogeneity in idiosyncratic demand and productivity to firm growth. We use a model of monopolistic competition with Cobb-Douglas production and a dataset of Italian manufacturing firms containing unique information on firm-level prices to reach three main conclusions. First, demand shocks are at least as important as productivity shocks for firm growth. Second, firms respond to shocks less than a frictionless model would predict, suggesting the existence of adjustment frictions. Finally, the degree of under-response is much larger for TFP shocks. This implies the existence of frictions with differential effects according to the nature of the shock, unlike the typical frictions studied by the literature on factor misallocation. We consider hurdles to firm reorganization as one such friction and show that they hamper firms' responses to TFP shocks but not to demand shocks.
    Keywords: demand heterogeneity; firm growth; misallocation; TFP
    JEL: D24 L11
    Date: 2012–10
  6. By: Luciano Fanti; Nicola Meccheri
    Abstract: This paper analyses the effects of a downstream merger in a differentiated duopoly under price competition and plant-specific unions. We show, in contrast with the preceding literature, that the standard welfare results may be reversed: a downstream merger may increase consumer surplus and overall welfare. In particular, this applies when unions are sufficiently wage-oriented and the market size is included in a certain intermediate range.
    Keywords: mergers, social welfare, price competition, plant-specific unions.
    JEL: D43 L13 J50
    Date: 2012–03–01
  7. By: José Alvaro Rodrigues-Neto
    Abstract: In the context of partitional knowledge models, we prove that, in a monotonic model, any cycle equation can be obtained as the product of cycle equations corresponding to cycles of length two. Hence, if a model is monotonic, has finite states, and players' posteriors satisfy all cycle equations corresponding to cycles of length two, then these posteriors are consistent (i.e., there is a common prior). We also propose a new and elegant proof for one of the main results of Rodrigues-Neto 2012.
    JEL: C02 D80 D82 D83
    Date: 2012–10
  8. By: Escobari, Diego
    Abstract: This paper uses a unique daily time series data set to investigate the asymmetric response of airline prices to capacity costs driven by demand fluctuations. We use a Markov regime-switching model with time-varying transition probabilities to capture the time variation in the response. The results show strong evidence of asymmetric price adjustments: positive cost shifts have a large positive effect, while negative cost shifts have no effect. The asymmetry is also explained by summer travel, but not by the size of cost shifts. The findings show the importance of consumer heterogeneity and capacity constraints as a source of asymmetric responses.
    Keywords: Asymmetric pricing; Airlines; Regime switching; Capacity costs
    JEL: L93 C22
    Date: 2012–10–21
  9. By: Chaigneau, Pierre; Sahuguet, Nicolas
    Abstract: We develop a stylized model of efficient contracting in which firms compete for CEOs. The optimal contracts are designed to retain and insure CEOs. The retention motive explains pay-for-luck in executive compensation, while the insurance feature explains asymmetric pay-for-luck. We show that the optimal contract can be implemented with stock-options based on a single performance measure which does not filter out luck. When the capacity to dismiss underperforming CEOs differs across firms, and the ability of different CEOs is more or less precisely estimated ex-ante, endogenous matching between CEOs and firms can explain the observed association between pay-for-luck and bad corporate governance. The model also predicts that an improvement in the governance of badly governed firms has spillover effects that increase CEO pay in all firms.
    Keywords: CEO pay; corporate governance; pay-for-luck; stock-options
    JEL: G34 M12
    Date: 2012–10
    Abstract: The purpose of this special issue is to promote research on the role of family in nurturing entrepreneurial ventures as well as on the importance of strategic entrepreneurship in maintaining the strength and viability of established and multigenerational family firms. Two related research questions are at the heart of this inquiry: (1) In what ways does the influence of family matter to strategic entrepreneurship?; and (2) How can strategic entrepreneurship contribute to understanding and strengthening family firms? We begin this introductory paper by providing a brief overview of the contributions of each of the papers in this issue. We then develop a framework for addressing the role of family firms in strategic entrepreneurship that highlights the input-process-output nature of strategic entrepreneurship in family business and the contexts in which they occur. We conclude by outlining a research agenda for future research in this area along the themes relating to this framework.
    Date: 2012–06
  11. By: Luciano Fanti
    Abstract: A standard Cobb Douglas labour market model is used to examine the role of changes in prices and productivity on the stability. It is shown that in this walrasian labour market deterministic endogenous economic fluctuations, which are seemingly stochastic, emerge. Therefore it may be argued that the controversial - in empirical as well as theoretical recent literature – co-movement between variables does not necessarily ground on stochastic shocks on prices and technology as retained in the prevailing business cycle theory. In particular, we show that negative shocks on prices and productivity are always destabilising and trigger robust chaotic fluctuations.
    Date: 2012–09–01
  12. By: Maria Goltsman (University of Western Ontario); Gregory Pavlov (University of Western Ontario)
    Abstract: We study communication in a static Cournot duopoly model under the assumption that the firms have unverifiable private information about their costs. We show that cheap talk between the firms cannot transmit any information. However, if the firms can communicate through a third party, communication can be informative even when it is not substantiated by any commitment or costly actions. We exhibit a simple mechanism that ensures informative communication and interim Pareto dominates the uninformative equilibrium for the firms.
    Keywords: Cournot oligopoly; communication; information; cheap talk; mediation
    JEL: C72 D21 D43 D82 D83
    Date: 2012
  13. By: Aldaba, Rafaelita M.
    Abstract: <p>Firm entry and exit play a crucial role in spurring a reallocation of resources across firms as tariffs are reduced. In the light of the substantial trade reforms implemented in the Philippines over the last two decades, the paper examines the impact of trade reforms on the exit of domestic firms controlling for firm characteristics that may affect firm death likelihood. The results provide some evidence that tariffs have a highly significant negative impact on firm exit suggesting that trade liberalization increases the probability of exit of a given firm. These effects are, however, mitigated by the characteristics of individual firms, particularly by productivity. Firms with high productivity are more likely to survive as tariffs are reduced. This seems to be consistent with Melitz` (2003) finding that trade liberalization induces the exit of less productive firms.</p><p>As the results show, exposure to trade forces the least efficient firms out of the industry. The results also show that apart from high productivity, other individual firm characteristics matter with larger, older, foreign-affiliated, and export-oriented firms having a lower probability of exit. These indicate that in designing adjustment policies toward a more open trade regime, it is necessary to understand not only the process or mechanism of interfirm reallocations taking place in the face of declining tariffs but also the factors hindering this process.</p>
    Keywords: trade liberalization, Philippines, firm entry, exit, survival, Philippine manufacturing
    Date: 2012
  14. By: Thomas Nitschka
    Abstract: Deviations of national industrial production indexes from trend explain time variation in excess returns on the G7 countries' stock markets. This paper highlights that this finding is driven by a global, common component in the national production gaps. The global component is not a mirror image of the U.S. business cycle. Quite to the contrary, a "rest-ofthe-world" production gap explains time variation in U.S. stock market excess returns while the U.S.-specific production gap does not. However, both U.S.-specific and global gap components explain time-varying excess returns on U.S. bonds. The relative importance of the U.S.-specific risk gap increases with the maturity of bonds.
    Keywords: bond return, business cycle risk, excess returns, industrial production, predictability, stock return
    JEL: E32 F44 G15
    Date: 2012
  15. By: Halkos, George; Papageorgiou, George
    Abstract: In this paper we set up an oligopolistic market model, where firms invest in pollution abatement in order to increase the whole market size via an increase in the consumers’ reservation price. Moreover, we suppose that the demand function is not a linear one and the resulting game is not a usual linear quadratic one. In the considered model we investigate the open loop, the memory less closed-loop and the collusive patterns equilibrium. Additionally, we examine the social planning perspective. In the case of a convex demand we found the surprising result that the control and state variables have higher values in the open-loop steady state equilibrium than in the closed loop, while in a linear demand case the equilibrium is undetermined. In all cases we find that only if the market demand has concave curvature are the conclusions clear. A number of propositions and remarks are provided.
    Keywords: Oligopoly Game; non-linear demand; pollution abatement; reservation price
    JEL: Q52 C61 D43 C62 Q58
    Date: 2012–10
  16. By: Sofía Galán (Banco de España); Sergio Puente (Banco de España)
    Abstract: We estimate the effects of a significant increase in the minimum wage in Spain between 2004 and 2010 on the individual probability of losing employment, using a large panel of social security records. Our main finding is that older people experienced the largest increase in the probability of losing their job, when compared with other age groups, including young people. The intuition is simple: among the affected (low-productivity) workers, young people are expected to increase their productivity more than older ones, who are in the flat part of their life-cycle productivity curve. Consequently, an employer facing a uniform increase in the minimum wage may find it profitable to retain young employees and to fire older ones
    Keywords: Minimum wage, labour demand, firing
    JEL: J23 J38 J63
    Date: 2012–10
  17. By: Richard Woodward; Elzbieta Wojnicka; Wojciech Pander
    Abstract: This study surveys the current state of affairs in Poland with regard to the development of knowledge-intensive entrepreneurship (KIE), or new firm creation in industries considered to be science-based or to use research and development (R&D) intensively. We place KIE in Poland in the larger institutional context, outlining the key features of the country’s National Innovation System, and then focus on KIE itself. Our findings are perhaps more optimistic than many previous studies of knowledge-based economy development in Poland. We observe significant progress due to Polish access to the European Union. The frequency with which universities are playing a significant role as partners for firms in the innovation process has increased significantly; moreover, we observe a significant degree of internationalization of innovation-related cooperation. Another optimistic development is that the level of activity of venture capitalists seems to be fairly high in Poland considering the relatively low degree of development of capital markets offering VC investors exit opportunities. Moreover, after almost two decades of decline in the share of R&D spending in GDP, there are signs that this is beginning to rise, and that businesses are beginning to spend more on R&D. While demand-side problems continue to be significant barriers for the development of KIE, due to the relatively low level of education and GDP per capita in the country, the trends here are optimistic, with high rates of economic growth and improvements in the level of education of younger generations. Significant improvement is still needed in the area of intellectual property protection.
    Keywords: Knowledge-Based Economy, Entrepreneurship, Transition, Post-Communist, SMEs, Poland
    JEL: L26 O31 O52 P27
    Date: 2012–10
  18. By: Frédéric Olland
    Abstract: This paper studies the impact of trade liberalization on the productivity growth of two asymmetric countries in a R&D driven growth model with heterogeneous firms. The Melitz’s reallocation of production induces positive but asymmetric productivity gains. Growth is also affected in an asymmetric way because trade liberalization reduces innovation incentives with a different strength in the two countries. A more productive country suffers a higher slowdown in the productivity growth rate.
    Keywords: heterogeneous firms, trade and endogenous growth, productivity gap.
    JEL: F43 O47
    Date: 2012
  19. By: Luciano Fanti
    Abstract: In this paper the dynamical effects of public environmental policies are investigated in a Cournot duopoly with heterogeneous expectations in a context of limited rationality. It is shown that the introduction of upper limits to emissions always tends to destabilise and generate a chaotic market dynamics. By contrast the role played by the cost of the abatement technology is more complicated: although in most cases higher costs imply a higher likelihood of stability loss, in some cases increases of such costs when their level is sufficiently low tends to stabilise and in such cases if the market is stable either a decrease or an increase of such costs may lead to a stability loss. The policy implications of these results suggest caution in the use of environmental policies from a market stability point of view.
    Keywords: Environmental policies; Bifurcation; Chaos; Cournot; Oligopoly;
    JEL: Q52 C62 D43 L13
    Date: 2012–09–01
  20. By: Marx Boopathi
    Abstract: The game theory techniques are used to find the equilibrium of a market. Game theory refers to the ways in which strategic interactions among economic agents produce outcomes with respect to the preferences (or utilities) of those agents, where the outcomes in question might have been intended by none of the agents. The oligopolistic market structures are taken and how game theory applies to them is explained.
    Date: 2012–10
  21. By: Aldaba, Rafaelita M.
    Abstract: <p>Based on a survey of 97 firms in the garments, textiles, automotive, electrical and electronics, and food manufacturing industries; the paper highlights the difficulties faced by small and medium enterprises (SMEs) in accessing finance. For both firms with access to finance as well as those that did not make any finance request, financing obstacles posed as one of the top four serious problems for the growth of their businesses. The survey indicates the continued dependence of SMEs on internal sources of financing not only during the start-up phase but also to finance the current operations of the business.</p><p>Close to 41 percent of the respondents intend to expand the size and scope of their business in the next two years. Sixty-seven percent said that financing the expansion through internal funds alone is not sufficient with the same proportion of firms indicating that they would finance their expansion by making a loan request. Previous surveys also showed a substantial proportion of firms that planned to borrow in the future. However, the continuing dependence of firms on internal sources of financing seem to suggest a gap between the plans of firms to borrow and the actual amount of funding made available by banks.</p><p>SMEs particularly the smaller ones have been unable to access funds due to their limited track record, limited acceptable collateral, and inadequate financial statements and business plans. The bank survey showed that the top reasons for turning down financial requests were the firms` poor credit history, insufficient collateral, and insufficient sales, income or cash flow, unstable business type, and poor business plan.</p><p>To improve MSMEs access to finance, the paper suggests the implementation of the Central Credit Information Corporation in order to address informational asymmetries. Changing the mindsets of banks and introducing nontraditional approach to SME lending would also be important along with trainings and capacity-building programs for SMEs to improve their financial literacy and management capacity.</p>
    Keywords: Philippines, small and medium enterprises (SMEs), finance access, Philippine SMEs
    Date: 2012
  22. By: Guillén, Osmani Teixeira de Carvalho; Issler, João Victor; Franco Neto, Afonso Arinos de Mello
    Abstract: Lucas(1987) has shown a surprising result in business-cycle research: the welfare cost ofbusiness cycles are very small. Our paper has several original contributions. First, in computingwelfare costs, we propose a novel setup that separates the effects of uncertainty stemming frombusiness-cycle uctuations and economic-growth variation. Second, we extend the sample fromwhich to compute the moments of consumption: the whole of the literature chose primarily to work with post-WWII data. For this period, actual consumption is already a result of counter-cyclical policies, and is potentially smoother than what it otherwise have been in their absence.So, we employ also pre-WWII data. Third, we take an econometric approach and computeexplicitly the asymptotic standard deviation of welfare costs using the Delta Method.Estimates of welfare costs show major diferences for the pre-WWII and the post-WWII era.They can reach up to 15 times for reasonable parameter values = 0:985, and = 5. Forexample, in the pre-WWII period (1901-1941), welfare cost estimates are 0.31% of consumptionif we consider only permanent shocks and 0.61% of consumption if we consider only transitoryshocks. In comparison, the post-WWII era is much quieter: welfare costs of economic growth are0.11% and welfare costs of business cycles are 0.037% the latter being very close to the estimatein Lucas (0.040%). Estimates of marginal welfare costs are roughly twice the size of the totalwelfare costs. For the pre-WWII era, marginal welfare costs of economic-growth and business-cycle uctuations are respectively 0.63% and 1.17% of per-capita consumption. The same guresfor the post-WWII era are, respectively, 0.21% and 0.07% of per-capita consumption.
    Date: 2012–10–17
  23. By: Joanna Poyago-Theotoky (School of Economics, La Trobe University); Huw Edwards (School of Business and Economics, Loughborough University, U.K.)
    Abstract: We investigate the imposition of a horizontal technical barrier to trade (HTBT) in a symmetric, cross-hauling duopoly. Tariffs and subsidies are ruled out, but, in the absence of a mutual recognition agreement, it is possible for governments to impose HTBTs, so long as firms apply different technologies. If firms are first movers, this possibility may induce them to avoid technical collaboration, in order to tempt governments into creating national monopolies, except where spillovers and R&D effects are high. This exacerbates the costs of regulatory protection, compared to standard models without R&D or spillovers.
    Keywords: Research and development, spillovers, trade, protection
    JEL: F10 F19 L13 L50
    Date: 2012

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