nep-bec New Economics Papers
on Business Economics
Issue of 2013‒02‒03
thirteen papers chosen by
Vasileios Bougioukos
Bangor University

  1. Do Entrepreneurs Matter? By Becker, Sascha O.; Hvide, Hans K.
  2. Exact Sampling from the Stationary Distribution of Entry-Exit Models By Takashi Kamihigashi; John Stachurski
  3. Dynamic Voluntary Advertising and Vertical Product Quality By Tenryu, Yohei; Kamei, Keita
  4. Export market exit and firm survival: theory and first evidence By Sanne Hiller; Philipp J.H. Schroeder; Allan Sorensen
  5. Cross-Ownership as a Structural Explanation for Over- and Underestimation of Default Probability By Sabine Karl; Tom Fischer
  6. Competition in Posted Prices With Bargaining By David Gill; John Thanassoulis
  7. Is Sticky Price Adjustment Important for Output Fluctuations? By John W. Keating; Isaac K. Kanyama
  8. Gaming and Strategic Ambiguity in Incentive Provision By Margaret Meyer; Florian Ederer; Richard Holden
  9. Base Salaries, Bonus Payments, and Work Absence among Managers in a German Company By Pfeifer, Christian
  10. Asymmetric welfare implication between a small number of leaders and a small number of followers in Stackelberg models By Hiroaki Ino; Toshihiro Matsumura
  11. The effects of remedies on merger activity in oligopoly By Dertwinkel-Kalt, Markus; Wey, Christian
  12. The impact of corporate taxes and flexibility on entrepreneurial decisions with moral hazard and simultaneous firm and personal level taxation By Meißner, Fabian; Schneider, Georg; Sureth, Caren
  13. Do Firms Use the Trade Credit Channel to Manage Growth? By A. FERRANDO; K. MULIER

  1. By: Becker, Sascha O. (University of Warwick); Hvide, Hans K. (University of Bergen)
    Abstract: In the large literature on firm performance, economists have given little attention to entrepreneurs. We use deaths of more than 500 entrepreneurs as a source of exogenous variation, and ask whether this variation can explain shifts in firm performance. Using longitudinal data, we find large and sustained effects of entrepreneurs at all levels of the performance distribution. Entrepreneurs strongly affect firm growth patterns of both very young firms and for firms that have begun to mature. We do not find significant differences between small and larger firms, family and non-family firms, nor between firms located in urban and rural areas, but we do find stronger effects for founders with high human capital. Overall, the results suggest that an often overlooked factor – individual entrepreneurs – plays a large role in affecting firm performance.
    Keywords: entrepreneurship, firm performance, human capital
    JEL: D21 D24 J23 L11 L25 G39
    Date: 2013–01
  2. By: Takashi Kamihigashi (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); John Stachurski (Research School of Economics, Australian National University, Australia)
    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 samples exactly from the stationary distribution for any specified exit threshold. The algorithm is able to rapidly generate large numbers of exact and independent draws from this distribution, and can therefore be used to obtain unbiased estimates and confidence intervals for moments and distributions of interest.
    Keywords: Simulation, Stationary equilibrium, Firm dynamics
    JEL: C61 C63
    Date: 2013–01
  3. By: Tenryu, Yohei; Kamei, Keita
    Abstract: We investigate the dynamic relationship between advertising and product quality under duopolistic competition. By using a simplified vertical product differentiation model with voluntary advertising, we show that the firm with larger market share has a larger advertising share and that there is a positive relationship between the difference in product quality and the number of customers in an industry.
    Keywords: Advertising; product quality; differential games; duopoly
    JEL: L13 C72
    Date: 2012–12–01
  4. By: Sanne Hiller (Department of Economics, Leuphana University Lueneburg, Germany); Philipp J.H. Schroeder (Aarhus University, School of Business and Social Sciences, Department of Economics and Business, Denmark); Allan Sorensen (Aarhus University, School of Business and Social Sciences, Department of Economics and Business, Denmark)
    Abstract: This paper deploys a dynamic extension of the Melitz (2003) model to generate predictions on export market exit and firm survival in a setting where firms endogenously make exit decisions. The central driver of the model dynamics is the inclusion of exogenous economy wide technological progress. The model predicts – inter alia – that a higher relative productivity not only increases the likelihood of exporting, but also the chances of firm survival and continued export market engagements. We relate these predictions to the empirical stylized facts of export market exit and firm survival based on Danish firm-level data. We find strong evidence that firms experience a decline in market share prior to export market exit and prior to death and that the firms discontinuing their exporting activity or closing down tend to be small. Overall, our empirical results support the central predictions from the model.
    Keywords: Intra-industry trade, entry/exit, heterogeneous firms, technological change
    JEL: F12 F15 O33 L11 L16
    Date: 2013–01
  5. By: Sabine Karl; Tom Fischer
    Abstract: Based on the work of Suzuki (2002), we consider a generalization of Merton's asset valuation approach (Merton, 1974) in which two firms are linked by cross-ownership of equity and liabilities. Suzuki's results then provide no arbitrage prices of firm values, which are derivatives of exogenous asset values. In contrast to the Merton model, the assumption of lognormally distributed assets does not result in lognormally distributed firm values, which also affects the corresponding probabilities of default. In a simulation study we see that, depending on the type of cross-ownership, the lognormal model can lead to both, over- and underestimation of the actual probability of default of a firm under cross-ownership. In the limit, i.e. if the levels of cross-ownership tend to their maximum possible value, these findings can be shown theoretically as well. Furthermore, we consider the default probability of a firm in general, i.e. without a distributional assumption, and show that the lognormal model is often able to yield only a limited range of probabilities of default, while the actual probabilities may take any value between 0 and 1.
    Date: 2013–01
  6. By: David Gill; John Thanassoulis
    Abstract: In this paper we study price competition between firms when some consumers attempt tobargain while others buy at the public list or posted prices. Even though bargainers succeed innegotiating discounts off the list prices, their presence dampens competitive pressure in the marketby reducing the incentive to undercut a rival’s list price, thus raising all prices and increasingprofits. Welfare falls because of the uncertainty in the bargaining process, which generates somemisallocation of products to consumers. We also find that the bargainers facilitate collusion byreducing the market share that can be gained from a deviation.
    Keywords: Posted prices, list prices, collusion, bargaining, negotiation, haggling, discounts, outside option, price takers, Hotelling line
    JEL: C78 D43 L13
    Date: 2013–01–14
  7. By: John W. Keating (Department of Economics, The University of Kansas); Isaac K. Kanyama (Department of Economics, University of Johannesburg)
    Abstract: We find that shocks with no immediate effect on the price level explain essentially all short-run variance of aggregate output while shocks that immediately affect price explain virtually none of that variance. Similar findings are obtained with aggregate, sectoral and industry-level data, both seasonally adjusted and not seasonally adjusted. With aggregate data, shocks that immediately raise the price level eventually cause output to fall while shocks that affect price with a lag immediately raise output and eventually cause the price level to rise. These responses combined with the variance decompositions suggest the short-run aggregate supply curve is nearly horizontal and the aggregate demand curve is nearly vertical. A statistical model that identifies shocks that don't affect prices for at least two months is also developed. Shocks with the slowest effect on prices explain essentially all of the short-run output variance in almost all cases. This robust finding is inconsistent with theories in which prices adjust rapidly to clear markets.
    Keywords: sticky price adjustment, aggregate supply and demand, moving average representation, identification restrictions.
    Date: 2013–01
  8. By: Margaret Meyer; Florian Ederer; Richard Holden
    Abstract: It is often suggested that incentive schemes under moral hazard can be gamed by an agent with superior knowledge of the environment, and that deliberate lack of transparency about the incentive scheme can reduce gaming.  We formally investigate these arguments.  Ambiguous incentive schemes induce more balanced efforts from an agent who performs multiple tasks and is better informed about the environment, but also impose more risk on the agent.  If tasks are sufficiently complementary for the principal, ambiguous schemes can dominate the best deterministic scheme and can completely eliminate the efficiency losses from the agent's better knowledge of the environment.
    Keywords: Contracts, incentives, gaming, strategic ambiguity, randomization
    JEL: L13 L22
    Date: 2013–01–17
  9. By: Pfeifer, Christian (Leuphana University Lüneburg)
    Abstract: Questions about compensation structures and incentive effects of pay-for-performance components are important for firms' Human Resource Management as well as for economics in general and labor economics in particular. This paper provides scarce insider econometric evidence on the structure and the incentive effects of fixed base salaries, paid bonuses, and agreed bonuses under a Management-by-Objectives (MBO) incentive scheme. Six years of personnel data of 177 managers in a German company are analyzed. The main findings are: (1) base salaries increase significantly with age, whereas bonuses decrease with age; (2) larger agreed bonuses are correlated with fewer absent working days.
    Keywords: absenteeism, bonus, effort, incentives, insider econometrics, wages
    JEL: J22 J24 J31 J33 M12 M52
    Date: 2012–12
  10. By: Hiroaki Ino (School of Economics, Kwansei Gakuin University); Toshihiro Matsumura (Institute of Social Science, the University of Tokyo)
    Abstract: We investigate a Stackelberg oligopoly model in which m leaders and N-m followers compete. We find an asymmetric welfare implication of the Stackelberg model. Introducing a small number of leaders into the Cournot model can reduce welfare. However, introducing a small number of followers into the Cournot model always improves welfare. The key result behind this asymmetry is contrasting limit results in the cases where m ! 0 and m ! N. We also discuss the optimal number of leaders and the integer constraint for the number of the firms.
    Keywords: multiple leaders, Stackelberg, Cournot, limit result, integer constraint, convex cost
    JEL: L13 L40
    Date: 2013–01
  11. By: Dertwinkel-Kalt, Markus; Wey, Christian
    Abstract: We analyze the effects of structural remedies on merger activity in a Cournot oligopoly when the antitrust agency applies a consumer surplus standard. Remedies increase the scope for pro…table and acceptable mergers, while divestitures to an entrant …rm are most effective in this regard. Remedial divestitures are most attractive from a social welfare point of view, when the merging parties can extract the entire gains associated with the asset sale. We also show that the merging parties have strong incentives to search for the most efficient buyer. Finally, we identify instances so that a remedy rule induces strictly price-decreasing mergers. --
    Keywords: Remedies,Divestiture,Merger Control,Oligopoly,Synergies
    JEL: L13 L41 K21
    Date: 2012
  12. By: Meißner, Fabian; Schneider, Georg; Sureth, Caren
    Abstract: In this paper we investigate the incentive effects of corporate taxes in an agency setting with a principal facing an investment opportunity including an abandonment option. We are particularly interested in the interplay of taxation and the real option on the principal's incentives to motivate the agent to work hard. First, we extend the well-known studies on tax effects on decision making under uncertainty to moral hazard settings. In a benchmark case we find that, as confirmed in current literature, the corporate income tax has no incentive effect. If the principal accounts for the real option we show that paradoxical tax effects may occur. Also, with respect to the effect of the real option on the incentive problem we show that the option makes it less attractive for the principal to induce the agent to exert a high effort. --
    Keywords: Tax Effects,Real Options,Moral Hazard,Investment Decisions
    Date: 2013
    Abstract: While many theories of accounts payable and receivable are related to firm performance, there has not been a direct test whether firms actively use them to manage their growth. We argue that it is not just the accounts payable but also the accounts receivable that matter. While the former help to alleviate imperfections in the financial market, the latter do so in the product market. Using over 2.5 million observations for 600.000 firms in 8 euro area countries in the period 1993-2009, we show that firms use the trade credit channel to manage growth. In countries where the trade credit channel is more present, the marginal impact is lower, but the total impact is still bigger. Further, firms that are more vulnerable to financial market imperfections, and therefore more likely to be financially constrained, rely more on the trade credit channel to manage growth. Finally, we show that also the overall conditions of the financial market matter for the importance of the trade credit channel for growth.
    Keywords: firm performance, trade credit, accounts payable, accounts receivable
    JEL: C23 E44 G32 L25
    Date: 2012–11

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