nep-bec New Economics Papers
on Business Economics
Issue of 2013‒09‒28
eight papers chosen by
Vasileios Bougioukos
Bangor University

  1. CEO Pay and Firm Size: an Update after the Crisis By Gabaix, Xavier; Landier, Augustin; Sauvagnat, Julien
  2. What are we learning from business training and entrepreneurship evaluations around the developing world? By McKenzie, David J.; Woodruff, Christopher
  3. Building Reputation for Contract Renewal: Implications for Performance Dynamics and Contract Duration By Iossa, Elisabetta; Rey, Patrick
  4. Credit Crunches and Credit Allocation in a Model of Entrepreneurship By Marco Bassetto; Marco Cagetti; Mariacristina De Nardi
  5. Cartel Formation With Endogenous Capacity and Demand Uncertainty By Johannes Paha
  6. Contracting With Synergies By Edmans, Alex; Goldstein, Itay; Zhu, John
  7. News Driven Business Cycles: Insights and Challenges By Paul Beaudry; Franck Portier
  8. Generational shifts in managerial values and the coming of a global business culture By Hoorn, André van

  1. By: Gabaix, Xavier; Landier, Augustin; Sauvagnat, Julien
    Abstract: In the "size of stakes" view quantitatively formalized in Gabaix and Landier (2008), CEO compensation is determined in a competitive talent market, and re flects the size of firms affected by talent. This paper offers empirical update on this view. The years 2004-2011, which include the recent crisis, were not part of the initial study and oer a laboratory to examine the theory as they include new positive and negative shocks to the size of large firms. Executive compensation at the top (ex ante) did closely track the evolution of average rm value during those years. During the crisis (2007 - 2009), average total firm value decreased by 17%, and CEO pay decreased by 28%. During 2009-2011, we observe a rebound of firm value by 19% and of CEO pay increased by 22%. These fairly proportional changes provide a validity check in favor of the "size of stakes" view.
    Keywords: assignment models; economics of superstars; Executive pay; inequality; matching.
    JEL: G34 J24 J3
    Date: 2013–06
  2. By: McKenzie, David J.; Woodruff, Christopher
    Abstract: Business training programs are a popular policy option to try to improve the performance of enterprises around the world. The last few years have seen rapid growth in the number of evaluations of these programs in developing countries. We undertake a critical review of these studies with the goal of synthesizing the emerging lessons and understanding the limitations of the existing research and the areas in which more work is needed. We find that there is substantial heterogeneity in the length, content, and types of firms participating in the training programs evaluated. Many evaluations suffer from low statistical power, measure impacts only within a year of training, and experience problems with survey attrition and measurement of firm profits and revenues. Over these short time horizons, there are relatively modest impacts of training on survivorship of existing firms, but stronger evidence that training programs help prospective owners launch new businesses more quickly. Most studies find that existing firm owners implement some of the practices taught in training, but the magnitudes of these improvements in practices are often relatively modest. Few studies find significant impacts on profits or sales, although a couple of the studies with more statistical power have done so. Some studies have also found benefits to microfinance organizations of offering training. To date there is little evidence to help guide policymakers as to whether any impacts found come from trained firms competing away sales from other businesses versus through productivity improvements, and little evidence to guide the development of the provision of training at market prices. We conclude by summarizing some directions and key questions for future studies.
    Keywords: business training; consulting; firm productivity; randomized experiments
    JEL: J16 L26 M53 O12
    Date: 2013–07
  3. By: Iossa, Elisabetta; Rey, Patrick
    Abstract: We study how career concerns affect the dynamics of incentives in a multi-period contract, when the agent’s productivity is a stochastic function of his past productivity and investment. We show that incentives are stronger and performance is higher when the contract approaches its expiry date. Contrary to common wisdom, long-term contracts may strengthen reputational effects whereas short-term contracting may be optimal when investment has persistent, long-term effects.
    Keywords: career concerns; career duration; contract renewal; dynamic incentives; reputation
    JEL: D21 D23 D86 L24 L51
    Date: 2013–07
  4. By: Marco Bassetto; Marco Cagetti; Mariacristina De Nardi
    Abstract: We study the effects of credit shocks in a model with heterogeneous entrepreneurs, financing constraints, and a realistic firm size distribution. As entrepreneurial firms can grow only slowly and rely heavily on retained earnings to expand the size of their business in this set-up, we show that, by reducing entrepreneurial firm size and earnings, negative shocks have a very persistent effect on real activity. In determining the speed of recovery from an adverse economic shock, the most important factor is the extent to which the shock erodes entrepreneurial wealth.
    JEL: E2 E21 E23 E6
    Date: 2013–08
  5. By: Johannes Paha (University of Giessen)
    Abstract: This article analyzes the strategic decisions of firms whether to establish and adhere to a cartel when they can also shape competition by investing into production capacity while being subject to unexpected demand shocks with persistence. The model shows that a negative demand shock can facilitate cartel formation despite lowering collusive profits. This is because lower demand reduces capacity utilization and makes competition more intense especially when capacities are durable and when demand falls much within a short time. The model also shows that firms with a low discount rate strive for a dominant position in the market which results in asymmetric capacity distributions. These obstruct collusive strategies. This is interesting because a low discount rate is usually considered a facilitating factor for collusion.
    Keywords: Asymmetric firms, capacity investments, cartel formation, demand shocks, excess capacity
    JEL: D21 D43 L11 L13 L41
    Date: 2013
  6. By: Edmans, Alex; Goldstein, Itay; Zhu, John
    Abstract: This paper studies multi-agent optimal contracting with cost synergies. We model synergies as the extent to which effort by one agent reduces his colleague's marginal cost of effort. An agent's pay and effort depend on the synergies he exerts, the synergies his colleagues exert on him and, surprisingly, the synergies his colleagues exert on each other. It may be optimal to "over-work" and "over-incentivize" a synergistic agent, due to the spillover effect on his colleagues. This result can rationalize the high pay differential between CEOs and divisional managers. An increase in the synergy between two particular agents can lead to a third agent being endogenously excluded from the team, even if his own synergy is unchanged. This result has implications for optimal team composition and firm boundaries.
    Keywords: complementarities; contract theory; influence; multiple agents; principal-agent problem; synergies; teams
    JEL: D86 J31 J33
    Date: 2013–07
  7. By: Paul Beaudry; Franck Portier
    Abstract: There is a widespread belief that changes in expectations may be an important independent driver of economic fluctuations. The news view of business cycles offers a formalization of this perspective. In this paper we discuss mechanisms by which changes in agents' information, due to the arrival of news, can cause business cycle fluctuations driven by expectational change, and we review the empirical evidence aimed at evaluating its relevance. In particular, we highlight how the literature on news and business cycles offers a coherent way of thinking about aggregate fluctuations, while at the same time we emphasize the many challenges that must be addressed before a proper assessment of its role in business cycles can be established.
    JEL: E00 E3
    Date: 2013–09
  8. By: Hoorn, André van (Groningen University)
    Abstract: In a globalizing world, cross-national differences in values and business culture and understanding these differences become increasingly central to a range of managerial issues. Studies of cultural (dis)similarities in the values of managers (so-called managerial values) and the development of a unified, global business culture, however, have hardly developed beyond static, bi-country comparisons of managerial values. This paper addresses three recent critiques of the literature on cultural convergence. It develops a theory-driven empirical approach to the study of change in countries? business cultures that revolves around generational differences in managerial values and brings important advancement in our understanding of cross-national differences in managerial values and the dynamics therein. We use longitudinal data that cover 37,254 managers and are able, for the first time, to consider a sample of countries that is large and diverse enough to allow for credible international generalizations. Results show systematic generational shifts in managerial values towards a steady waning of cultural dissimilarities between managers. Interestingly, cultural convergence is not universal across values domains. Nevertheless, nationality is increasingly becoming a less relevant factor in managerial values. We now have strong empirical reason to move beyond thinking in simple country dichotomies when considering managerial values and business culture.
    Date: 2013

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