nep-bec New Economics Papers
on Business Economics
Issue of 2014‒11‒12
fourteen papers chosen by
Vasileios Bougioukos
Bangor University

  1. The cleansing effect of minimum wages Minimum wages, firm dynamics and aggregate productivity in China By Florian MAYNERIS; Sandra PONCET; Tao ZHANG
  2. What is 'Firm Heterogeneity' in Trade Models? The Role of Quality, Scope, Markups and Cost By Colin Hottman; Stephen J. Redding; David E. Weinstein
  3. Entrepreneurial Couples By Michael S. Dahl; Mirjam van Praag; Peter Thompson
  4. Incentive Compensation and Incentive Regulation: Empirical Evidence By Carlo Cambini; Sara De Masi; Laura Rondi
  5. Independent directors: less informed, but better selected? New evidence from a two-way director-firm fixed effect model By Sandra Cavaco; Patricia Crifo; Antoine Rebérioux; Gwenaël Roudaut
  6. Trade in Tasks and the Organization of Firms By Marin, Dalia; Schymik, Jan; Tarasov, Alexander
  7. Revisiting Executive Pay in Family-Controlled Firms: Family Premium in Large Business Groups By Cheong, Juyoung; Kim, Woochan
  8. Temporary Expats for Export: Firm-Level Evidence By Graneli, Anna; Lodefalk, Magnus
  9. Acquisitions, productivity, and profitability : Evidence from the Japanese cotton spinning industry By Serguey Braguinsky; Atsushi Ohyama; Tetsuji Okazaki; Chad Syverson
  10. Foreign Direct Investment, Source Country Heterogeneity and Management Practices By Heyman, Fredrik; Nor, Pehr-Johan; Hammarberg, Rickard
  11. A note on the granular nature of imports in German manufacturing industries By Wagner, Joachim
  12. Misallocation and productivity in the lead up to the Eurozone crisis By Daniel Dias; Carlos Robalo Marques; Christine Richmond
  13. Forecasting for Economics and Business By Gloria Gonzalez-Rivera
  14. Strategic Trade Policies in International Rivalry When Competition Mode is Endogenous By Choi, Kangsik; Lee, Ki-Dong; Lim, Seonyoung

  1. By: Florian MAYNERIS (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) and Center for Operations Research and Econometrics (CORE)); Sandra PONCET (Paris School of Economics (University of Paris 1), CEPII and FERDI); Tao ZHANG (Shanghai University of International Business and Economics)
    Abstract: We here consider how Chinese firms adjust to higher minimum wages and how these affect aggregate productivity, exploiting the 2004 minimum-wage reform in China. We find that higher city-level minimum wages reduced the survival probability of firms which were the most exposed to the reform. For the surviving firms, thanks to significant productivity gains, wage costs rose without any negative employment effect. At the city-level, our results show that higher minimum wages affected aggregate productivity growth via both productivity growth in incumbent firms and the net entry of more productive firms. Hence, in a fast-growing economy like China, there is a cleansing effect of labor-market standards.
    Keywords: minimum wages, firm-level performance, aggregate TFP, China
    JEL: O14 J38 O47
    Date: 2014–10–20
  2. By: Colin Hottman; Stephen J. Redding; David E. Weinstein
    Abstract: We estimate a structural model of heterogeneous multiproduct firms to examine the sources of firm heterogeneity emphasized in the recent trade and macro literatures. Using Nielsen barcode data on prices and sales, we estimate elasticities of substitution within and between firms, and use the estimated model to recover unobserved qualities, marginal costs and markups. We find that variation in firm quality and product scope explains at least four fifths of the variation in firm sales. Most firms are well approximated by the monopolistic competition benchmark of constant markups, but the largest firms that account for most of aggregate sales depart substantially from this benchmark. Although the output of multiproduct firms is differentiated, cannibalization is quantitatively important for the largest firms. This imperfect substitutability of products within firms, and the fact that larger firms supply more products than smaller firms, implies that standard productivity measures are not independent of demand system assumptions and probably dramatically understate the relative productivity of the largest firms.
    Keywords: Firm heterogeneity, multiproduct firms, cannibalization effects
    JEL: L11 L21 L25 L60
    Date: 2014–09
  3. By: Michael S. Dahl (Aalborg University, Denmark); Mirjam van Praag (Copenhagen Business School, Denmark); Peter Thompson (Emory University, United States)
    Abstract: We study possible motivations for co-entrepenurial couples to start up a joint firm, using a sample of 1,069 Danish couples that established a joint enterprise between 2001 and 2010. We compare their pre-entry characteristics, firm performance and postdissolution private and financial outcomes with a selected set of comparable firms and couples. We find evidence that couples often establish a business together because one spouse – most commonly the female – has limited outside opportunities in the labor market. However, the financial benefits for each of the spouses, and especially the female, are larger in co-entrepreneurial firms, both during the life of the business and post-dissolution. The start-up of co-entrepreneurial firms seems therefore a sound investment in the human capital of both spouses as well as in the reduction of income inequality in the household. We find no evidence of non-pecuniary benefits or costs of coentrepreneurship
    Keywords: Entrepreneurship, motives, performance, couples, co-entrepreneurship.
    JEL: J12 L26
    Date: 2014–05–08
  4. By: Carlo Cambini; Sara De Masi; Laura Rondi
    Abstract: This paper examines the relationship between CEO pay and firm performance within a sample of European publicly listed energy utilities from 2000 to 2010, focusing on the differential responses that arise from being subject to different regulatory regimes. In particular, we investigate the difference in pay-performance sensitivity across regulated and unregulated firms as well as the impact of different regulatory schemes – incentive vs. cost-based regulation - on CEO monetary incentives. Using various measures of performance, we find that European energy utilities link CEO compensation to firm performance, but CEO pay-performance is higher for unregulated companies. When we focus on the effect of alternative regulatory schemes, our results show that payperformance sensitivity is significantly higher for firms under incentive regulation than within firms under cost-based regulation. This result holds after controlling for firm - private vs. state - ownership and for varying degrees of market liberalization across countries.
    Keywords: Managerial compensation, Incentive contracts, Incentive regulation, Energy utilities
    JEL: G30 J33 L51 M12
    Date: 2013
  5. By: Sandra Cavaco; Patricia Crifo; Antoine Rebérioux; Gwenaël Roudaut
    Abstract: This paper develops a two-way director-firm fixed effect model to study the relationship between independent directors’ individual heterogeneity and firm operating performance, using French data. This strategy allows considering and differentiating in a unified empirical framework mechanisms related to board functioning and to director selection. We first show that the independence status, netted out unobservable individual heterogeneity, is negatively related to performance. This result suggests that independent board members experience an informational gap compared to other affiliated members. However, we show that industry-specific expertise as well as informal connections inside the boardroom may help to bridge this gap. Finally, we provide evidence that independent directors have higher intrinsic ability as compared to affiliated board members, consistent with a reputation-based selection process.
    Keywords: independent director heterogeneity, information asymmetry, director selection, firm performance, two-way fixed effect model,
    JEL: G30 G34
    Date: 2014–09–01
  6. By: Marin, Dalia; Schymik, Jan; Tarasov, Alexander
    Abstract: We incorporate trade in tasks à la Grossman and Rossi-Hansberg (2008) into a small open economy version of the theory of firm organization of Marin and Verdier (2012) to examine how offshoring affects the way firms organize. We show that the offshoring of production tasks leads firms to reorganize with a more decentralized management, improving the competitiveness of the offshoring firms. We show further that the offshoring of managerial tasks relaxes the constraint on managers but toughens competition, and thus has an ambiguous impact on the level of decentralized management and CEO wages of the offshoring firms. In sufficiently open economies, however, managerial offshoring unambiguously leads to more decentralized management and to larger CEO wages. We test the predictions of the model based on original firm level data we designed and collected of 660 Austrian and German multinational firms with 2200 subsidiaries in Eastern Europe. We find that offshoring firms are 33.4% more decentralized than non-offshoring firms. We find further that the average fraction of managers offshored reduces the level of decentralized management by 3.1%, but increases the level of decentralized management by 4% in industries with a level of openness above the 25th percentile of the openness distribution. Lastly, we find that one additional offshored manager lowers CEO wages relative to workers by 4.9%.
    Keywords: international trade with endogenous organizations; the rise of human capital; theory of the firm; multinational firms; CEO pay
    JEL: F12 F14 L22 D23
    Date: 2014–10
  7. By: Cheong, Juyoung; Kim, Woochan
    Abstract: According to the prior literature, family executives of family-controlled firms receive lower compensation than non-family executives. One of the key driving forces behind this is the existence of family members who are not involved in management, but own significant fraction of shares and closely monitor and/or discipline those involved in management. In this paper, we show that this assumption falls apart if family-controlled firm is part of a large business group, where most of the family members take managerial positions but own little equity stakes in member firms. Using 2014 compensation data of 564 executives in 368 family-controlled firms in Korea, we find three key results consistent with our prediction First, family executives are paid more than non-family executives (by 27% more, on average) and this family premium is pronounced in larger business group firms even after controlling for potential selection bias problems. Second, pay to family-executives falls with the influence of outside family members (their aggregate ownership in the firm minus the ownership held by the family executive in the same firm). Third, family premium in large business group firms rises with group size, but falls with family’s cash flow rights. It also rises for group chairs, but falls with the number of board seats the family-executive holds within the group.
    Keywords: executive compensation, family firms, business groups, chaebols, dividend
    JEL: G30 G32 G34 G35
    Date: 2014–08
  8. By: Graneli, Anna (National Board of Trade); Lodefalk, Magnus (Örebro University School of Business)
    Abstract: We analyze the relation between temporary expats in firms and exports. Temporary expats are positively associated with exports. The within-firmdestination- country link with export intensity is substantially larger for services than for merchandise and for exports of heterogeneous services and merchandise than for exports of homogeneous products. Additionally, the association with exports is stronger for temporary than for permanent expats. Furthermore, our evidence suggests that temporary expats are positively related to exports by assisting firms in overcoming informal trade barriers. Overall, our findings suggest the importance of the temporary movement of persons for providing firms with up-to-date links to export markets.
    Keywords: Expats; temporary movement of persons; migration; networks; firm trade
    JEL: D80 F10 F20 J60
    Date: 2014–10–06
  9. By: Serguey Braguinsky (Carnegie Mellon University); Atsushi Ohyama (Hokkaido University); Tetsuji Okazaki (University of Tokyo); Chad Syverson (University of Chicago Booth School of Business and NBER)
    Abstract: We explore how changes in ownership and managerial control affect the productivity and profitability of producers. Using detailed operational, financial, and ownership data from the Japanese cotton spinning industry at the turn of the last century, we find a more nuanced picture than the straightforward “higher productivity buys lower productivity” story commonly appealed to in the literature. Acquired firms’ production facilities were not on average less physically productive than the plants of the acquiring firms before acquisition, conditional on operating. They were much less profitable, however, due to consistently higher inventory levels and lower capacity utilization—differences that reflected problems in managing the uncertainties of demand. When purchased by more profitable firms, these less profitable acquired plants saw drops in inventories and gains in capacity utilization that raised both their productivity and profitability levels, consistent with acquiring owner/managers spreading their better demand management abilities across the acquired capital.
    Date: 2014–10
  10. By: Heyman, Fredrik (Research Institute of Industrial Economics (IFN)); Nor, Pehr-Johan (Research Institute of Industrial Economics (IFN)); Hammarberg, Rickard (Research Institute of Industrial Economics (IFN))
    Abstract: This paper examines whether and, if so, why source country heterogeneity exists in foreign direct investment (FDI). Using detailed data on all Swedish firms for the period from 1996 to 2009, we find statistical evidence that affiliate performance differs systematically across source countries. For instance, affiliates of US multinational enterprises (MNEs) are, on average, approximately three times more productive than affiliates headquartered in the Nordic countries. One possible explanation for these discrepancies is differences in organization practices across source countries. Using new firm-level data from the World Management Survey to estimate a global index of the quality of management practices for MNEs with headquarters in our source countries of interest, we find that source country heterogeneity in affiliate performance is highly correlated with differences in management practices.
    Keywords: Multinational firms; FDI; Management practices; Firm performance
    JEL: F21 F23 L10 M10
    Date: 2014–09–25
  11. By: Wagner, Joachim (Leuphana University Lueneburg, Germany, and CESIS, KTH, Stockholm, Sweden)
    Abstract: This paper uses an approach recently suggested by Gabaix (Eonometrica 2011) to investigate for the first time the role of idiosyncratic shocks to the largest firms in the dynamics of imports by firms from manufacturing industries. For Germany we find evidence that imports are power-law distributed and that the distribution of imports in the industries can be characterised as fat-tailed. Results show that idiosyncratic shocks to very large firms are important for the import dynamics in 2010/2011 but not in 2009/2010.
    Keywords: Imports; power law; granular residual; Germany
    JEL: E32 F14 L60
    Date: 2014–10–14
  12. By: Daniel Dias; Carlos Robalo Marques; Christine Richmond
    Abstract: We use Portuguese firm-level data to investigate whether changes in resource misallocation may have contributed to the poor economic performance of some southern and peripheral European countries leading up to the Eurozone crisis. We extend Hsieh and Klenow's (2009) methodology to include intermediate inputs and consider all sectors of the economy (agriculture, manufacturing, and services). We find that within-industry misallocation almost doubled between 1996 and 2011. Equalizing total factor revenue productivity across firms within an industry could have boosted valued-added 48 percent and 79 percent above actual levels in 1996 and 2011, respectively. This implies that deteriorating allocative eficiency may have shaved around 1.3 percentage points of the annual GDP growth during the 1996-2011 period. Allocative eficiency deterioration, despite being a widespread phenomenon, is significantly higher in the service sector, with 5 industries accounting for 72 percent of the total variation. Capital distortions are the most important source of potential value-added eficiency gains, especially in the service sector, with a relative contribution increasing over time.
    JEL: D24 O11 O47 O41
    Date: 2014
  13. By: Gloria Gonzalez-Rivera (Department of Economics, University of California Riverside)
    Date: 2013–01
  14. By: Choi, Kangsik; Lee, Ki-Dong; Lim, Seonyoung
    Abstract: We investigate government subsidy policies in which a home firm and a foreign firm choose to strategically set prices or quantities in a third market. We show that even though each firm can earn higher profits under Cournot competition than under Bertrand competition regardless of the nature of goods, choosing Bertrand competition is the dominant strategy for both firms. This can lead each firm to face a prisoners' dilemma in equilibrium. We also show that from the aspects of governments under subsidy regime, Cournot competition is more efficient than Bertrand competition when the goods are substitutes, and vice versa when the goods are complements. However, trade liberalization such as via free trade agreements brings about a change in the competition mode from Bertrand competition to Cournot competition if goods are substitutes. On the other hand, if goods are complements, there are no such a change in the competition mode and Bertrand competition prevails the market. Hence, a move toward free trade among countries increases not only profits of firms but also the welfare of both countries irrespective of the nature of goods.
    Keywords: Subsidy, Cournot, Bertrand, Social Welfare, Prisoners' Dilemma.
    JEL: F12 F13 L13
    Date: 2014–11–06

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