nep-bec New Economics Papers
on Business Economics
Issue of 2013‒04‒13
fifteen papers chosen by
Vasileios Bougioukos
Bangor University

  1. Do entrepreneurs matter? By Becker, Sascha O.; Hvide, Hans K
  2. Risk tolerance and entrepreneurship By Hvide, Hans K; Panos, Georgios
  3. Bonus Culture: Competitive Pay, Screening, and Multitasking By Bénabou, Roland; Tirole, Jean
  4. Does Vertical Integration Promote Downstream Incomplete Collusion? An Evaluation of Static and Dynamic Stability By Mariana Cunha; Paula Sarmento
  5. Employee ownership: does firm's size matter ? By Marc-Arthur Diaye; Amal Hili; Rim Lahmandi-Ayed
  6. Worker Matching and Firm Value By Moen, Espen R; Yashiv, Eran
  7. Cartel stability and profits under different reactions to entry in markets with growing demand By João Correia-da-Silva; Joana Pinho; Hélder Vasconcelos
  8. Firm Heterogeneity and Aggregate Welfare By Melitz, Marc J; Redding, Stephen J.
  9. Antitrust as facilitating factor for collusion By Vermeulen A.J.; Bos A.M.; Letterie W.A.
  10. Wage Dynamics along the Life-Cycle of Manufacturing Plants By Emin Dinlersoz; Henry Hyatt; Sang Nguyen
  11. The profit-sharing rule that maximizes sustainability of cartel agreements By João Correia-da-Silva; Joana Pinho
  12. Do Institutions and Culture Matter for Business Cycles? By Altug, Sumru G.; Canova, Fabio
  13. Suppliers of multinationals and the forced linkage effect: Evidence from firm level data By Godart, Olivier; Görg, Holger
  14. Monopolistic Competition and Optimum Product Selection: Why and how heterogeneity matters By Nocco, Antonella; Ottaviano, Gianmarco; Salto, Matteo
  15. The Internationalization Process of Firms: from Exports to FDI By Conconi, Paola; Sapir, André; Zanardi, Maurizio

  1. By: Becker, Sascha O.; Hvide, Hans K
    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 G39 J23 L11 L25
    Date: 2013–01
  2. By: Hvide, Hans K; Panos, Georgios
    Abstract: A tradition from Knight (1921) argues that more risk tolerant individuals are more likely to become entrepreneurs, but perform worse. We test these predictions with two risk tolerance proxies: stock market participation and personal leverage. Using investment data for 400,000 individuals, we find that common stock investors are around 50 percent more likely to subsequently start up a firm. Firms started up by stock market investors have about 25 percent lower sales and 15 percent lower return on assets. The results are similar using personal leverage as risk tolerance proxy. We consider alternative explanations including unobserved wealth and behavioral effects.
    Keywords: entrepreneurial entry; entrepreneurial performance; firm entry; firm performance; firm productivity; firm survival; overconfidence; risk aversion; stock market participation
    JEL: C30 D14 D22 L26
    Date: 2013–02
  3. By: Bénabou, Roland; Tirole, Jean
    Abstract: This paper analyzes the impact of labor market competition and skill-biased technical change on the structure of compensation. The model combines multitasking and screening, embedded into a Hotelling-like framework. Competition for the most talented workers leads to an escalating reliance on performance pay and other high-powered incentives, thereby shifting effort away from less easily contractible tasks such as long-term investments, risk management and within-firm cooperation. Under perfect competition, the resulting efficiency loss can be larger than that imposed by a single firm or principal, who distorts incentives downward in order to extract rents. More generally, as declining market frictions lead employers to compete more aggressively, the monopsonistic underincentivization of low-skill agents first decreases, then gives way to a growing overincentivization of high-skill ones. Aggregate welfare is thus hill-shaped with respect to the competitiveness of the labor market, while inequality tends to rise monotonically. Bonus caps and income taxes can help restore balance in agents' incentives and behavior, but may generate their own set of distortions.
    Keywords: adverse selection; bonuses; competition; contracts; executive compensation; Hotelling; incentives; inequality; moral hazard; performance pay; screening; work ethic
    JEL: D31 D82 D86 J31 J33 L13 M12
    Date: 2013–04
  4. By: Mariana Cunha (FEP-UP, School of Economics and Management); Paula Sarmento (CEF.UP, Research Center in Economics and Finance, University of Porto and FEP-UP)
    Abstract: This paper analyzes the impact of vertical integration on the static and dynamic stability of downstream incomplete collusion. It is shown that a vertical merger between an upstream firm and a downstream cartel or fringe firm promotes downstream collusion, under certain conditions on the market size. However, for low market concentration, a vertical merger with a cartel firm hinders collusion. Moreover, a welfare analysis shows that consumer surplus increases with the vertical merger because the merger partially eliminates the double marginalization problem.
    Keywords: Vertical integration, Collusion, Cartel Stability
    JEL: L12 L13 L42 D43
    Date: 2012–08
  5. By: Marc-Arthur Diaye (EPEE, Université d’Evry Val d’Essonne); Amal Hili (Laboratoire d’Ingénierie Mathématique - Ecole Polytechnique de Tunisie, FDSEPS Sousse and GREQAM, Université de la Méditerranée); Rim Lahmandi-Ayed (Laboratoire d’Ingénierie Mathématique - Ecole Polytechnique de Tunisie and ESSAI)
    Abstract: A theoretical model is considered in a monopoly setting, where the production cost of the firm depends on the efforts of employees who may receive a positive part of the capital if the shareholders find profitable to do so. We specify the condition under which at Nash equilibrium the firm distributes a positive part of its capital to employees, and analyze the effects of this employee ownership strategy on social welfare. We show that the conditions under which shareholders attribute a positive share of capital to employees, is related jointly to the firm’s size and effort disutility, which makes the novelty of our paper relative to the previous papers considering the firm’s size alone. This joint role is tested empirically, using a French data base “REPONSE 2004-2005”. Our paper may allow to explain why in the empirical literature there is no consensus regarding the relationship between firm’s size and employee ownership implementation.
    Keywords: employee ownership, employees’ efforts, firm’s size, effort disutility, social welfare, absenteeism
    JEL: C25 C7 M5
    Date: 2012–05
  6. By: Moen, Espen R; Yashiv, Eran
    Abstract: This paper studies the hiring and firing decisions of firms and their effects on firm value. This is done in an environment where the productivity of workers depends on how well they match with their co-workers and the firm acts as a coordinating device. Match quality derives from a production technology whereby workers are randomly located on the Salop circle, and depends negatively on the distance between the workers. It is shown that a worker's contribution in a given firm changes over time in a nontrivial way as co-workers are replaced with new workers. The paper derives optimal hiring and replacement policies, including an optimal stopping rule, and characterizes the resulting equilibrium in terms of employment, firm output and the distribution of firm values. The paper stresses the role of horizontal differences in worker productivity, as opposed to vertical, assortative matching issues. Simulations of the model reveal a rich pattern of worker turnover dynamics and their connections to the resulting firm value and age distributions.
    Keywords: complementarity; firing; firm value; hiring; match quality; optimal stopping; Salop circle; worker value
    JEL: E23 J62 J63
    Date: 2013–03
  7. By: João Correia-da-Silva (CEF.UP e Faculdade de Economia do Porto.); Joana Pinho (CEF.UP e Faculdade de Economia do Porto.); Hélder Vasconcelos (Autoridade Nacional de Comunicações (ANACOM). CEF.UP e Faculdade de Economia do Porto.)
    Abstract: We study sustainability of collusion with optimal penal codes, in markets where demand growth may trigger the entry of a new firm. In contrast with grim trigger strategies, optimal penal codes make collusion easier to sustain before entry than after. We compare different reactions of the incumbents to entry in terms of: sustainability of collusion, incumbent’s profits, entrant’s profits, consumer surplus and social welfare. Surprisingly, the incumbent firms may prefer competition to collusion.
    Keywords: Collusion; Demand growth; Optimal penal codes; Reactions to entry.
    JEL: K21 L11 L13
    Date: 2013–03
  8. By: Melitz, Marc J; Redding, Stephen J.
    Abstract: We examine how firm heterogeneity influences aggregate welfare through endogenous firm selection. We consider a homogeneous firm model that is a special case of a heterogeneous firm model with a degenerate productivity distribution. Keeping all structural parameters besides the productivity distribution the same, we show that the two models have different aggregate welfare implications, with larger welfare gains from reductions in trade costs in the heterogeneous firm model. Calibrating parameters to key U.S. aggregate and firm statistics, we find these differences in aggregate welfare to be quantitatively important (up to a few percentage points of GDP). Under the assumption of a Pareto productivity distribution, the two models can be calibrated to the same observed trade share, trade elasticity with respect to variable trade costs, and hence welfare gains from trade (as shown by Arkolakis, Costinot and Rodriguez-Clare, 2012); but this requires assuming different elasticities of substitution between varieties and different fixed and variable trade costs across the two models.
    Keywords: firm heterogeneity; welfare gains from trade
    JEL: F12 F15
    Date: 2013–03
  9. By: Vermeulen A.J.; Bos A.M.; Letterie W.A. (GSBE)
    Abstract: We study collusion in an infinitely repeated prisoners' dilemma when firms' discount factor is private information. If tacit collusion is not feasible, firms that are capable of sustaining high prices may still be willing and able to collude explicitly. Firms eager to collude may signal their intentions when forming the agreement is costly, but not too costly. As antitrust makes explicit collusion costly in expected terms, it may in fact function as a signaling device. We show that there always exists a cost level for which explicit collusion is viable. Moreover, our analysis suggests that antitrust enforcement is unable to fully deter collusion.
    Keywords: Market Structure, Firm Strategy, and Market Performance: General;
    Date: 2013
  10. By: Emin Dinlersoz; Henry Hyatt; Sang Nguyen
    Abstract: This paper explores the evolution of average wage paid to employees along the life-cycle of a manufacturing plant in U.S. Average wage starts out low for a new plant and increases along with labor productivity, as the plant survives and ages. As a plant experiences productivity decline and approaches exit, average wage falls, but more slowly than it rises in the case of surviving new plants. Moreover, average wage declines slower than productivity does in failing plants, while it rises relatively faster as productivity increases in surviving new plants. These empirical regularities are studied in a dynamic model of labor quality and quantity choice by plants, where labor quality is reflected in wages. The model’s parameters are estimated to assess the costs a plant incurs as it alters its labor quality and quantity in response to changes in its productivity over its life-cycle.
    Keywords: Wage dynamics; plant productivity; firm dynamics; plant life-cycle; employment dynamics; manufacturing.
    Date: 2011–08
  11. By: João Correia-da-Silva (CEF.UP and Faculdade de Economia, Universidade do Porto); Joana Pinho (FCT and RGEA, Universidad de Vigo)
    Abstract: We propose a profit-sharing rule that maximizes sustainability of cartel agreements. This rule is such that the critical discount factor is the same for all the firms. If a cartel applies this rule, then asymmetries among firms may not hinder collusion (contrarily to the typical finding in the literature). In the simplest case of a Cournot duopoly in which firms differ in their stocks of capital, we find that the cartel is the least sustainable when one of the firms is approximately two times bigger than the other.
    Keywords: Collusion sustainability, Profit-sharing rule.
    JEL: L11 L13 L41
    Date: 2012–08
  12. By: Altug, Sumru G.; Canova, Fabio
    Abstract: We examine the relationship between macroeconomic, institutional, and cultural indicators and cyclical fluctuations for European, Middle Eastern and North African Mediterranean countries. Mediterranean cycles are different from EU cycles: the duration of expansions is shorter; the amplitude and the output costs of recessions are larger; and cyclical synchronization is smaller. Differences in macroeconomic and institutional indicators partly account for the relative differences in cyclical synchronization. By contrast, differences in cultural indicators account for relative differences in the persistence, the volatility and the synchronization of cyclical fluctuations. Theoretical and policy implications are discussed.
    Keywords: Business cycles; institutions and culture; Mediterranean countries; synchronization.
    JEL: C32 E32
    Date: 2013–03
  13. By: Godart, Olivier; Görg, Holger
    Abstract: Using information on more than 1000 firms in a number of emerging countries, we find quantitative evidence that suppliers of multinationals that are pressured by their customers to reduce production costs or develop new products have higher productivity growth than other firms, including other host country suppliers of multinationals. These findings provide first empirical support for a “forced linkage effect” from supplying multinational companies. Our findings hold controlling for other factors within and outside the supplier- customer relationship and when endogeneity concerns are taken into consideration.
    Keywords: backward linkages; forced linkage; multinational customers; productivity spillovers; suppliers
    JEL: F23 O12
    Date: 2013–01
  14. By: Nocco, Antonella; Ottaviano, Gianmarco; Salto, Matteo
    Abstract: After some decades of relative oblivion, the interest in the optimality properties of monopolistic competition has recently re-emerged due to the availability of an appropriate and parsimonious framework to deal with firm heterogeneity. Within this framework we show that non-separable utility, variable demand elasticity and endogenous firm heterogeneity cause the market equilibrium to err in many ways, concerning the number of products, the size and the choice of producers, the overall size of the monopolistically competitive sector. More crucially with respect to the existing literature, we also show that the extent of the errors depends on the degree of firm heterogeneity. In particular, the inefficiency of the market equilibrium seems to be largest when selection among heterogenous firms is needed most, that is, when there are relatively many firms with low productivity and relatively few firms with high productivity.
    Keywords: heterogeneity; monopolistic competition; product diversity; selection; welfare
    JEL: D4 D6 F1 L0 L1
    Date: 2013–04
  15. By: Conconi, Paola; Sapir, André; Zanardi, Maurizio
    Abstract: This paper shows that uncertainty can lead firms to follow a gradual internationalization process. We describe a model in which firms are uncertain about their ability to earn profits in a foreign market and must decide whether or not to serve it, and whether to do so through exports or foreign affiliate sales. We show that a firm may first test the foreign market via exports, before engaging in foreign direct investment (FDI). To assess the evidence, we exploit a unique dataset of firm-level exports and FDI in individual destination countries, covering all Belgian companies over the 1998-2008 period. We show that a firm’s FDI entry in a foreign market is almost always preceded by its export entry. More uncertain foreign market conditions lead new exporters to delay FDI entry decisions. Our analysis suggests that exports and FDI, although substitutes from a static perspective, may be complements over time, since the knowledge acquired through export experimentation can lead firms to start investing abroad.
    Keywords: experimentation; exports; FDI; uncertainty
    JEL: D21 F10 F13
    Date: 2013–02

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