nep-bec New Economics Papers
on Business Economics
Issue of 2015‒10‒25
fifteen papers chosen by
Vasileios Bougioukos
Bangor University

  1. Firm entry and exit, investment irreversibility, and business cycle dynamics By Pavol Majher
  2. Firm Growth and Selection in a Finite Economy By Staley, Mark
  3. Gender Gaps in Performance: Evidence from Young Lawyers By Ghazala Azmat; Rosa Ferrer
  4. The Carrot and the Stick: The Business Cycle Implications of Incentive Pay in the Labor Search Model By Julien Champagne
  5. Intensive and Extensive Margins of South–South–North Trade: Firm-Level Evidence By Lili Yan ING; Miaojie YU
  6. Exporter behavior, country size and stage of development : evidence from the exporter dynamics database By Fernandes,Ana Margarida; Freund,Caroline; Pierola Castro,Martha D.
  7. Credit risk characteristics of US small business portfolios By Bams, Dennis; Pisa, Magdalena; Wolff, Christian C
  8. State-Dependent Media Focus: Measurement and Economic Implications By Stefan Pitschner; Kristoffer Nimark
  9. Dynamics of Compatibility under Switching Costs By Doh-Shin Jeon; Domenico Menicucci; Nikrooz Nasr
  10. Trends in Firm Entry and New Entrepreneurship in Canada By Shutao Cao; Mohanad Salameh; Mai Seki; Pierre St-Amant
  11. Heterogeneity in the Dynamic Effects of Uncertainty on Investment By Sungje Byun; Soojin Jo
  12. The banks that said no: banking relationships, credit supply and productivity in the United Kingdom By Franklin, Jeremy; Rostom, May; Thwaites, Gregory
  13. Breaking Free From the Bell Curve: An Alternate Proposition for Performance Management By Shrihari S. Sohani; Varkkey, Biju
  14. How Firms Export: Processing vs. Ordinary Trade With Financial Frictions By Kalina Manova; Zhihong Yu
  15. Testing for Endogenous Sunk Costs in the Retail Industry By Roman, Hernan

  1. By: Pavol Majher
    Abstract: This paper studies the role of rms' entry and exit for business cycle dynamics in an environment, where physical capital is partially sunk. Extending a heterogeneous-rm model a la Hopenhayn (1992) by aggregate productivity shocks and partially irreversible investment yields substantial endogenous amplication and propagation. A positive aggregate productivity shock increases the number of entrants and their initial investment levels, because the expected entry value outweighs the implicit sunk cost associated with investment irreversibility. The endogenous propagation of an exogenous stimulus arises via a built-in selection device, as the production growth of new businesses over their lifecycle exceeds the decay due to exits of the least productive rms.
    JEL: D92 E22 E37 L11
    Date: 2015–10
  2. By: Staley, Mark
    Abstract: A model of firm dynamics is presented in which the growth rate of knowledge capital is linked to productivity, and productivity fluctuates randomly. The distribution of productivity forms a stable traveling wave, representing a growing economy. Granularity is maintained by way of spinoffs, resulting in a firm size distribution that rapidly approaches the Zipf distribution. An unexpected consequence of the model is that the growth rate is proportional to the log of the number of firms. The model also implies that specialization is positive for growth.
    Keywords: Growth, Ideas, Selection, Scale effect
    JEL: O40 O41
    Date: 2015–10–12
  3. By: Ghazala Azmat (Queen Mary University of London, and Centre for Economic Performance (LSE)); Rosa Ferrer (Universitat Pompeu Fabra and Barcelona GSE)
    Abstract: This paper documents and studies the gender gap in performance among associate lawyers in the United States. Unlike other high-skilled professions, the legal profession assesses performance using transparent measures that are widely used and comparable across firms: the number of hours billed to clients and the amount of new client revenue generated. We find clear evidence of a gender gap in annual performance with respect to both measures. Male lawyers bill ten percent more hours and bring in more than twice the new client revenue than do female lawyers. We demonstrate that the differential impact across genders in the presence of young children and differences in aspirations to become a law firm partner account for a large share of the difference in performance. We also show that accounting for performance has important consequences for gender gaps in lawyers' earnings and subsequent promotion. Whereas individual and firm characteristics explain up to 50 percent of the earnings gap, the inclusion of performance measures explains a substantial share of the remainder. Performance measures also explain a sizeable share of the gender gap in promotion.
    Keywords: Performance measures, Gender gaps, High-skilled professionals
    JEL: M52 J16 K40 J44
    Date: 2015–10
  4. By: Julien Champagne
    Abstract: This paper considers a real business cycle model with labor search frictions where two types of incentive pay are explicitly introduced following the insights from the micro literature on performance pay (e.g. Lazear, 1986). While in both schemes workers and firms negotiate ahead of time-t information, the object of the negotiation is different. The first scheme is called an “efficiency wage,” since it follows closely the intuition of the shirking model by Shapiro and Stiglitz (1984), while the second is called a “performancepay” wage, since the negotiation occurs over a wage schedule that links the worker’s wage to the worker’s output. The key feature here is that the worker can then adjust the level of effort (i.e. performance) provided in any period. I simulate a shift toward performance-pay contracts as experienced by the U.S. labor market to assess whether it can account simultaneously for two documented business cycle phenomena: the increase in relative wage volatility and the Great Moderation. While the model yields higher wage volatility when performance pay is more pervasive in the economy, it produces higher volatility of output and higher procyclicality of wages, two results counterfactual to what the U.S. economy has experienced during the Great Moderation. These results pose a challenge to the idea that higher wage flexibility through an increase in performance-pay schemes can account for business cycle statistics observed over the past 30 years.
    Keywords: Business fluctuations and cycles; Labour markets
    JEL: E24 J33 J41
    Date: 2015
  5. By: Lili Yan ING (Economic Research Institute for ASEAN and East Asia (ERIA) and University of Indonesia); Miaojie YU (CCER, Peking University)
    Abstract: The main value added of our paper is twofold. First, we construct a theoretical framework on how South–South trade will affect productivity cut-offs. Second, we present empirical exercises using highly disaggregated data. Our model is based on the South–South–North trade framework. Using a vertical integration among Southern countries (Indonesia and China) and testing it by employing merged Chinese firms and customs trade data, we find that three types of tariff reductions—foreign tariff reductions, home output tariff reductions, and home input tariff reductions—significantly increase home country firm productivity and exports via extensive and intensive margins. Our findings are robust using ex-ante and expost productivity.
    Keywords: China, Indonesia, Tariff, Exports, Manufacturing
    JEL: F1 F13 F14
    Date: 2015–09
  6. By: Fernandes,Ana Margarida; Freund,Caroline; Pierola Castro,Martha D.
    Abstract: This paper presents new data on the micro structure of the export sector for 45 countries and studies how exporter behavior varies with country size and stage of development. Larger countries and more developed countries have more exporters, larger exporters, and a greater share of exports controlled by the top 5 percent. The extensive margin (more firms) plays a greater role than the intensive margin (average size) in supporting exports of larger countries. In contrast, the intensive margin is relatively more important in explaining the exports of richer countries. Exporter entry and exit rates are higher and entrant survival is lower at an early stage of development. The paper discusses the results in light of trade theories with heterogeneous firms and the empirical literature on resource allocation, firm size, and development. An implication from the findings is that developing countries export less because the top of the firm-size distribution is truncated.
    Keywords: Free Trade,Economic Theory&Research,Debt Markets,Country Strategy&Performance,Currencies and Exchange Rates
    Date: 2015–10–21
  7. By: Bams, Dennis; Pisa, Magdalena; Wolff, Christian C
    Abstract: This paper addresses issues related to industry heterogeneity, default clustering and parameter uncertainty of capital requirements in US retail loan portfolios. Using a multi-factor model of credit risk, we show that the Basel II capital requirements overstate the riskiness of small businesses. Retail exposures are a much safer investment than the regulator would suggest. We find that sensitivity to the common risk factors is low and that small business risk is predominantly a reflection of idiosyncratic risk. Our results show that only 0.00-3.39% of the asset variability is explained by economy-wide risk factors. The remaining 96.61%-100.00% of small business risk is due to changes in the firm-specific characteristics. Moreover, both expected and unexpected losses are time dependent. Their shifts over the course of financial crisis cause uncertainty in the provisions level and capital requirements. Importantly, our estimates of asset correlations are significantly lower than any available estimates for corporate firms. Our results are based on a new, representative dataset of US retail businesses from 2005 to 2011 and give fundamental insights into the US economy.
    Keywords: capital requirements
    JEL: G17 L14 L25
    Date: 2015–10
  8. By: Stefan Pitschner (Universitat Pompeu Fabra); Kristoffer Nimark (Cornell University)
    Abstract: News media provide information about economic conditions to a large part of society and serve as a source of public signals that coordinate beliefs and decisions. We document how the focus of news media shifts over the business cycle and discuss the implications for the ability of economic agents to coordinate their actions.
    Date: 2015
  9. By: Doh-Shin Jeon (Toulouse School of Economics and CEPR, 21 allees de Brienne, 31000 Toulouse, France); Domenico Menicucci (Dipartimento di Scienze per l'Economia e l'impresa, Università degli Studi di Firenze, Via delle Pandette 9, I-50127 Firenze (FI), Italy); Nikrooz Nasr (Toulouse School of Economics, 21 allees de Brienne, 31000 Toulouse, France)
    Abstract: We study firms’ choices of compatibility in a dynamic setting. Current compatibility choice shapes the distribution of consumers’ switching costs and thereby affects competition and compatibility choice in the future. Given today’s market shares, the dynamics of compatibility is asymmetric in that firms are more likely to embrace compatibility tomorrow if products are compatible today but no such inertia exists for incompatibility. However, this asymmetry disappears when the market shares are endogenous. Contrary to what happens in a static setting, when consumer lock-in arises due to a significant switching cost, firms make their systems incompatible in order to soften future competition, which hurts consumers and tends to reduce welfare.
    Keywords: (In)Compatibility, Dynamics, Lock-in, Switching Cost
    JEL: D43 L13 L41
    Date: 2015–04
  10. By: Shutao Cao; Mohanad Salameh; Mai Seki; Pierre St-Amant
    Abstract: Recently released data show downward trends for both the firm entry rate and the rate of new entrepreneurship since the early 1980s in Canada. This paper documents these trends and discusses potential explanations. A shift-share analysis suggests that changes to Canada’s industrial and demographic structures cannot explain the long-term downward trends, although population aging accounts for part of the decline in new entrepreneurship since around 2000. The paper also discusses other factors potentially contributing to the downward trends: increased industrial concentration, changing labour market conditions, an increased college wage premium and higher student debt. In-depth analysis of these factors is left for future research.
    Keywords: Firm dynamics; Market structure and pricing; Productivity
    JEL: L11 M13
    Date: 2015
  11. By: Sungje Byun; Soojin Jo
    Abstract: How does aggregate profit uncertainty influence investment activity at the firm level? We propose a parsimonious adaptation of a factor-autoregressive conditional heteroscedasticity model to exploit information in a subindustry sales panel for an efficient and tractable estimation of aggregate volatility. The resulting uncertainty measure is then included in an investment forecasting model interacted with firm-specific coefficients. We find that higher profit uncertainty induces firms to lower capital expenditure on average, yet to a considerably different degree: for example, both small and large firms are expected to reduce investment much more than medium-sized firms. This highlights significant and substantial heterogeneity in the uncertainty transmission mechanism.
    Keywords: Econometric and statistical methods; International topics; Domestic demand and components
    JEL: E22 D80 C22 C23
    Date: 2015
  12. By: Franklin, Jeremy (Bank of England); Rostom, May (Bank of England); Thwaites, Gregory (Bank of England)
    Abstract: This paper uses a large firm-level data set of UK companies and information on their pre-crisis lending relationships to identify the causal links from changes in credit supply to the real economy following the 2008 financial crisis. Controlling for demand in the product market, we find that the contraction in credit supply reduced labour productivity, wages and the capital intensity of production at the firm level. Firms experiencing adverse credit shocks were also more likely to fail, other things equal. We find that these effects are robust, statistically significant and economically large, but only when instruments based on pre-crisis banking relationships are used. We show that banking relationships were conditionally randomly assigned and were strong predictors of credit supply, such that any bias in our estimates is likely to be small.
    Keywords: Credit shock; financial frictions; productivity puzzle; firm-level data
    JEL: D21 D22 D24 G21
    Date: 2015–10–09
  13. By: Shrihari S. Sohani; Varkkey, Biju
    Abstract: Performance management processes that follow a Gaussian distribution (bell curve) and focus on past performance rather than a future promise have come under critical focus. Such systems have been found to foster short-term focus among the employees that does not augur well for the competitiveness of the firm. Also, utilising the same rating for determination of rewards as well as finding suitability for the role and vertical mobility has been found to be myopic. Off late, many organisations have done away with the bell curve but the move has raised questions about the alternatives. In this manuscript, we have suggested alternate mechanisms of appraisal that handles reward determination and suitability for promotion through two distinct levers. We also present a case study that enumerates a novel approach to performance management that allows accrual of value for the firm along with incrementing employee motivation and engagement.
  14. By: Kalina Manova; Zhihong Yu
    Abstract: The fragmentation of production across borders allows firms to make and export final goods, or to perform only intermediate stages of production by processing imported inputs for re-exporting. We examine how financial frictions affect companies' choice between processing and ordinary trade - implicitly a choice of production technology and position in global supply chains - and how this decision affects performance. We exploit matched customs and balance-sheet data from China, where exports are classified as ordinary trade, import-and-assembly processing trade (processing firm sources and pays for imported inputs), and pure-assembly processing trade (processing firm receives foreign inputs for free). Value added, profits and profitability rise from pure assembly to processing with imports to ordinary trade. However, more profitable trade regimes require more working capital because they entail higher up-front costs. As a result, credit constraints induce firms to conduct more processing trade and pure assembly in particular, and preclude them from pursuing higher value-added, more profitable activities. Financial market imperfections thus impact the organization of production across firms and countries, and inform optimal trade and development policy in the presence of global production networks.
    Keywords: China, trade regime, processing trade, global value chain, credit constraints, heterogeneous firms
    JEL: F10 F13 F14 F23 F34 G32
    Date: 2015–10
  15. By: Roman, Hernan
    Abstract: This paper uses data from retail industries in Chile to test Shaked and Sutton's (1987) hypothesis of endogenous sunk costs. I find that industries which are less likely to have endogenous sunk costs display a signicant negative relationship between market size and concentration. In contrast, in the supermarket industry, where investment in advertising is presumed to be more intense, the tests show that concentration does not vary with market size and is bounded away from zero.
    Keywords: Endogenous Sunk costs, concentration
    JEL: L11 L81
    Date: 2010

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