nep-bec New Economics Papers
on Business Economics
Issue of 2014‒06‒14
fourteen papers chosen by
Vasileios Bougioukos
Bangor University

  2. Firm Dynamics and Assortative Matching By Leland D. Crane
  3. Organizational Governance: Managerial Discretion, Automatic Rules or Ethics? By Maria Alessandra Antonelli
  4. Equilibrium Downstream Mark-up and Upstream Free Entry By Ioannis Pinopoulos
  5. Emissions Trading, Firm Heterogeneity, and Intra-Industry Reallocations in the Long Run By Konishi, Yoshifumi; Tarui, Nori
  6. The Naive Extrapolation Hypothesis and the Rosy-Gloomy Forecasts By Vasileios Barmpoutis
  7. Match Made at Birth? What Traits of a Million Swedes Tell Us about CEOs By Keloharju, Matti; Knüpfer, Samuli
  8. Are Firms Paying More For Performance? By Alex Bryson; John Forth; Lucy Stokes
  9. Pay-for-(Persistent)-Luck: CEO Bonuses Under Relational and Formal Contracting By Jed DeVaro; Jin-Hyuk Kim; Nick Vikander
  10. Multinational production and trade in an endogenous growth model with heterogeneous firms By Maemir H.; Ziesemer T.H.W.
  11. Inter-Firm Mobility and Return Migration Patterns of Skilled Guest Workers By Briggs Depew; Peter Norlander; Todd A. Sorensen
  12. Debt, Managers and Cartels By Salvatore Piccolo; Giancarlo Spagnolo
  13. The Return to R&D and Seller-buyer Interactions: A Quantile Regression Approach By Westerberg, Hans Seerar
  14. Mergers, managerial incentives, and efficiencies By Jovanovic, Dragan

  1. By: Francesco Aiello; Fernanda Ricotta (Dipartimento di Economia, Statistica e Finanza, Università della Calabria)
    Abstract: This paper analyses the TFP heterogeneity of a sample of manufacturing firms operating in seven EU countries (Austria, France, Germany, Hungary, Italy, Spain and UK). TFP data refer to 2008. The empirical setting is based on the multilevel modelling which provides two main results. Firstly, we show that TFP heterogeneity is largely due to firm-specific features (85% of TFP variability in the empty-model). Interestingly, we find that some key-drivers of TFP (size, family-management, group membership, innovations and human capital) influence heterogeneity in productivity with the expect sign, but do not, on the whole, absorb much of firm-TFP variance, implying that differences in productivity are due to sizable yet unobservable firm characteristics. Secondly, as far the role of localization is concerned, we demonstrate that country-effect is more influential than region-effect in explaining individual productivity. Net of the country-effect, the localisation in different European regions explains about 5% of TFP firm heterogeneity. When considering the case of three individual countries (France, Italy and Spain), location in different regions explains 4.7% of TFP heterogeneity in Italy, while this proportion is lower (2.9%) in France and higher (7.6%) in Spain.
    Keywords: TFP heterogeneity, firm-behavior, localization, European countries, multilevel model
    JEL: C30 D22 L60 R15
    Date: 2014–05
  2. By: Leland D. Crane
    Abstract: I study the relationship between firm growth and the characteristics of newly hired workers. Using Census microdata I obtain a novel empirical result: when a given firm grows faster it hires workers with higher past wages. These results suggest that productive, fast-growing firms tend to hire more productive workers, a form of positive assortative matching. This contrasts with prior research that has found negligible or negative sorting between workers and firms. I present evidence that this difference arises because previous studies have focused on cross-sectional comparisons across firms and industries, while my results condition on firm characteristics (e.g. size, industry, or firm fixed effects). Motivated by the empirical findings I develop a search model with heterogeneous workers and firms. The model is the first to study worker-firm sorting in an environment with worker heterogeneity, firm productivity shocks, multi-worker firms, and search frictions. Despite this richness the model is tractable, allowing me to characterize assortative matching, compositional dynamics and other properties analytically. I show that the model reproduces the positive firm growth-quality of hires correlation when worker and firm types are strong complements in production (i.e. the production function is strictly log-supermodular).
    Keywords: Assortative Matching, Firm Growth, Wages, Unemployment, Vacancies, Search Theory, Microdata
    JEL: E24 J31 J63 J64
    Date: 2014–05
  3. By: Maria Alessandra Antonelli (Sapienza University of Rome)
    Abstract: Economic literature on organizations (Milgrom, 1998; Milgrom and Roberts 1992, 2009) points out that when distributive policies are discretionary realized within firms by managers, the agents working in the organization will undertake "influence activities" with possible negative effects on firm's productivity. Following the Milgrom's model (1988), we define a principal-agent framework analyzing alternative organizational governance methods. The paper shows that managerial discretion can always result in improved firm's performance with a principal complying with the organizational goals. Nevertheless, some reforms, especially in the public organizations, have been addressed to limit managerial discretion introducing more rules to template the mangers' behavior. Disappointing results suggest to invest for a greater development of ethical culture within organizations.
    Keywords: organizations, influence activities, managerial discretion, principal-agent
    JEL: D23 L2
    Date: 2014–05
  4. By: Ioannis Pinopoulos (Department of Economics, University of Macedonia)
    Abstract: In a successive Cournot oligopoly with upstream free entry, we show that the equilibrium downstream mark-up may increase with the number of downstream firms.
    Keywords: Vertical relations, Cournot competition, Free entry, Mark-up.
    JEL: D43 L11 L13
    Date: 2014–06
  5. By: Konishi, Yoshifumi; Tarui, Nori
    Abstract: Design of environmental regulation has substantial implications for size distribution and mass of firms within and across industries in the long run. In a general equilibrium model that accounts for endogenous entry and exit of heterogeneous firms, the welfare impacts of emissions trading are analytically decomposed into the effects on economy-wide income, mass of firms, size distribution, markups, and factor prices. Distortionary impacts on size distribution and permit price depend on the conditionality of permit distribution, interactions between changes in entry-exit conditions and in aggregate accounting conditions, the factor intensity of entry, and coverage of non-pollution-intensive sectors in emissions trading.
    Keywords: Conditional Allocation Rules, Emissions Trading, Heterogeneous Firms, Endogenous, Entry/Exit, Melitz Model, Imperfect Competition
    JEL: Q50 Q52 Q58
    Date: 2014–05
  6. By: Vasileios Barmpoutis
    Abstract: I study the behavior and the performance of the long-term forecasts issued by financial analysts with respect to the Extrapolation Hypothesis. That hypothesis states that investors, extrapolating from the firms' recent performances, are too optimistic about growth and large firms and too pessimistic about value and small firms. I find that the forecasting errors are higher for the growth firms and large firms, thus providing support for the Extrapolation Hypothesis. However, in addition to the rosy picture of the growth and large firms, the forecasts of the value and small firms are not so gloomy in many cases. My analysis also reveals that expectations move together for all categories of book-to-market and all sizes of firms. I proceed by investigating some common factors that may influence analysts' long-term forecasts, including co-movement and excessive optimism. I find that macro factors beyond a firm's recent performance may influence the formation of expectations.
    Date: 2014–06
  7. By: Keloharju, Matti (Aalto University); Knüpfer, Samuli (London Business School)
    Abstract: This paper analyzes the role three personal traits—cognitive and non-cognitive ability, and height—play in the market for CEOs. We merge data on the traits of more than one million Swedish males, measured at age 18 in a mandatory military enlistment test, with comprehensive data on their income, education, profession, and service as a CEO of any Swedish company. We find that the traits of large-company CEOs are at par or higher than those of other high-caliber professions. For example, large-company CEOs have about the same cognitive ability, and about one-half of a standard deviation higher non-cognitive ability and height than medical doctors. Their traits compare even more favorably with those of lawyers. The traits contribute to pay in two ways. First, higher-caliber CEOs are assigned to larger companies, which tend to pay more. Second, the traits contribute to pay over and above that driven by firm size. We estimate that 2758 percent of the effect of traits on pay comes from CEO’s assignment to larger companies. Our results are consistent with models where the labor market allocates higher-caliber CEOs to more productive positions.
    Keywords: CEO; Cognitive ability; Non-cognitive ability; Height; Compensation; Firm size
    JEL: G30 J24 J31
    Date: 2014–06–03
  8. By: Alex Bryson; John Forth; Lucy Stokes
    Abstract: Despite its potential to raise productivity, performance-related-pay (PRP) is not widespread in market-oriented economies. Furthermore, despite secular changes conducive to its take-up, there is mixed evidence as to whether it has become more prominent over time. Ours is the first paper to present firm-level data for the Britain on both the incidence and size of bonus payments in the 2000s. We decompose the share of the total wage bill accounted for by bonuses into the shares of employment in the PRP and non-PRP sectors, the ratio of base pay between the two sectors, and the gearing of bonus payments to base pay within the PRP sector. We show that there was some growth in the share of total pay accounted for by bonuses in Britain in the mid-2000s. However this rise - and subsequent fluctuations since the onset of recession in 2008 - can be almost entirely explained by changes in the gearing of bonus to base pay within the PRP sector. There has been no substantial change in the percentage of employment accounted for by PRP firms; if anything it has fallen over the past decade. Furthermore, the movements in the gearing of bonuses to base pay in the economy at large are heavily influenced by changes in the Finance industry: a sector which accounts for a large proportion of all bonus payments in the British economy.
    Keywords: Performance pay, bonuses, recession, business cycle, finance
    JEL: J33
    Date: 2014–06
  9. By: Jed DeVaro (California State University); Jin-Hyuk Kim (University of Colorado at Boulder); Nick Vikander (Department of Economics, Copenhagen University)
    Abstract: This study investigates the structure of optimal incentives in a stochastic environment and provides evidence for the use of self-enforcing relational contracts. We show theoretically that under relational contracting, firms can credibly promise chief executive officers (CEOs) larger bonuses in good states than in bad, in a way that depends crucially on the state's persistence and the firm's discount factor. Formal contracting instead implies the same bonus in both states. Estimating an empirical model using ExecuComp data, we find that CEO annual bonuses are related to "luck" in a manner consistent with relational contracting.
    Keywords: relational contracts, CEO compensation, pay-for-luck
    JEL: C73 D86 J41
    Date: 2014–04–08
  10. By: Maemir H.; Ziesemer T.H.W. (UNU-MERIT)
    Abstract: This paper offers a unified framework to explore both the static and dynamic welfare effects of trade and multinational production MP in the presence of firm-specific productivity heterogeneity. The model captures the dynamic effects by allowing for RD spillovers between firms in a framework of Helpman et al. 2004 that generates endogenous growth without scale effects. We show that multinational presence improves average productivity by strengthening the selection process among heterogeneous firms, but leads to a lower growth rate of intermediate varieties along the transition path toward the new steady state. Thus the presence of multinationals has an ambiguous effect on overall welfare. We also compare the welfare implications of a change in trade cost in our model and in trade models without multinationals. We find that the gains from trade can be higher or lower than the gains obtained in the trade-only models, depending on the degree of firm heterogeneity, the size of trade and FDI costs, and the magnitude of technology spillover parameters. We further show that firm heterogeneity always magnifies average productivity, international spillovers and fixed costs of developing a new variety, which leads to ambiguous effects on overall welfare. Calibrating the model to the US economy suggests that aggregate welfare improves in response to a reduction in trade and FDI costs for empirically plausible parameter values.Keywords firm heterogeneity, endogenous growth, trade, multinational production, technology spillovers.
    Keywords: Models of Trade with Imperfect Competition and Scale Economies; Multinational Firms; International Business; Economic Growth of Open Economies; Innovation and Invention: Processes and Incentives; One, Two, and Multisector Growth Models;
    JEL: F12 F23 F43 O31 O41
    Date: 2014
  11. By: Briggs Depew; Peter Norlander; Todd A. Sorensen
    Abstract: Critics of U.S. high-skilled guest worker visa programs argue that 1) program regulations tie workers to their sponsoring firm, creating working conditions akin to indentured servitude and that 2) the pro- grams lack a vehicle for adjusting downward the number of visas avail- able during a recession. We address these two criticisms using unique payroll data from firms that rely upon these programs. Contrary to popular belief, we find that the guest workers in our sample exhibit a significant amount of inter-firm mobility that varies over both the earn- ings distribution and the business cycle. This suggests that, despite regulatory frictions of the visa programs, competitive pressures are a driving force in this labor market. Furthermore, we find evidence of increased return migration during periods of high unemployment. This is especially true for lower paid workers, suggesting positive selection.
  12. By: Salvatore Piccolo (Università Cattolica del Sacro Cuore di Milano and CSEF); Giancarlo Spagnolo (SITE Stockholm School of Economics, DEF Tor Vergata, and CEPR)
    Abstract: We propose a theory of anticompetitive effects of debt finance based on the interaction between capital structure, managerial incentives, and firms ability to sustain collusive agreements. Shareholders' commitments not to expropriate debtholders through managers with valuable reputations or common incentive schemes greatly facilitate collusive behavior in product markets. Disclosure rules aimed at improving transparency in corporate governance or network-based credit markets can confer credibility to such arrangements even in environments where firms lack commitment power, thereby inducing collusion through leverage in otherwise competitive downstream industries. Managers are happy with the arrangement since they share in the collusive rent.
    Keywords: Bankruptcy, capital structure, collusion, corporate governance, credit markets, disclosure rules, financial regulation, managerial incentives, product market competition.
    JEL: D21 G32 L13 L41
    Date: 2014–06–06
  13. By: Westerberg, Hans Seerar (Ratio institute)
    Abstract: In this paper we analyze whether a firm’s return to its R&D stock is affected by seller-buyer interactions. We suggest that firms that are in close contact with their customers will be relatively more sensitive to their customers’ needs, and therefore adjust their R&D activities accordingly. This, in turn, will boost sales and increase the return to R&D. To the extent that seller-buyer interactions are costly, large and productive firms will have an advantage in overcoming such costs. We test these hypotheses using a fixed effects quantile regression framework. Results suggest that large firms active in industries characterized by frequent seller-buyer interactions have a higher return to R&D than other firms.
    Keywords: firm behavior; firm performance; production and organizations; firm size; diversification and scope
    JEL: D22 D29 L25 O32
    Date: 2014–06–09
  14. By: Jovanovic, Dragan
    Abstract: We analyze the effects of synergies from horizontal mergers in a Cournot oligopoly where principals provide their agents with incentives to cut marginal costs prior to choosing output. We stress that synergies come at a cost which possibly leads to a countervailing incentive effect: The merged firm's principal may be induced to stifle managerial incentives in order to reduce her agency costs. Whenever this incentive effect dominates the well-known direct synergy effect, synergies actually reduce consumer surplus which opposes the use of an efficiency defense in merger control. --
    Keywords: Managerial Incentives,Horizontal Mergers,Merger Control,Productive Efficiency Gains,Synergies,Efficiency Defense
    JEL: D21 D86 L22 L41
    Date: 2014

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