nep-bec New Economics Papers
on Business Economics
Issue of 2016‒11‒20
fifteen papers chosen by
Vasileios Bougioukos
Bangor University

  1. Aggregate Hiring and the Value of Jobs Along the Business Cycle By Eran Yashiv
  2. Firms Behaving Badly: How Law-Trained Executives Affect Investor Reaction to Corporate Social Irresponsibility By Vamsi K. Kanuri; Reza Houston; Michelle Andrews
  3. The Social Background of Elite Executives: The Swedish Case By Henrekson, Magnus; Lyssarides, Odd
  4. How exporters set prices: evidence from a large behavioural survey By Parker, Miles
  5. The Growth of Multinational Firms in the Great Recession By Vanessa Alviarez; Andrei A. Levchenko; Javier Cravino
  6. Firm responses to employment subsidies: a regression discontinuity approach to the 2012 Spanish labour market reform By Gamberoni, Elisa; Gradeva, Katerina; Weber, Sebastian
  7. Vertical integration and upstream horizontal mergers By Ioannis Pinopoulos
  8. It’s a Sweetheart of a Deal: Political Connections and Federal Contracting By Stephen P. Ferris; Reza Houston
  9. Firm-level trade creation and diversion of regional trade agreements in Thailand By Hayakawa, Kazunobu; Kimura, Fukunari; Laksanapanyakul, Nuttawut
  10. New Business Formation and Incumbents' Perception of Competitive Pressure By Javier Changoluisa; Michael Fritsch
  11. Corruption, innovation and firm growth: Firm-level evidence from Egypt and Tunisia By Goedhuys, Micheline; Mohnen, Pierre; Taha, Tamer
  12. A microeconomic model of opportunistic financial crimes: prosecutorial strategy when firms are too big to jail By Nick Werle
  13. Firm Dynamics in the Neoclassical Growth Model By Licandro, Omar
  14. Price Competition in Product Variety Networks By Philip Ushchev; Yves Zenou
  15. Identifying Price-Leadership Structures in Oligopoly By Paul W. Dobson; Sang-Hyun Kim; Hao Lan

  1. By: Eran Yashiv (Tel Aviv University; Centre for Macroeconomics (CFM); CEPR)
    Abstract: U.S. CPS data indicate that in recessions firms actually increase their hiring rates from the pools of the unemployed and out of the labor force. Why so? The paper provides an explanation by studying the optimal recruiting behavior of the representative firm. The model combines labor frictions, of the search and matching type, with capital frictions, of the q-model type. Optimal firm behavior is a function of the value of jobs, i.e., the expected present value of the marginal worker to the firm. These are estimated to be counter-cyclical, the underlying reason being the dynamic behavior of the labor share of GDP. The counter-cyclicality of hiring rates and job values, which may appear counter-intuitive, is shown to be consistent with well-known business cycle facts. The analysis emphasizes the difference between current labor productivity and the wider, forward-looking concept of job values. The paper explains the high volatility of firm recruiting behavior, as well as the reduction over time in labor market fluidity in the U.S., using the same estimated model. Part of the explanation has to do with job values and another part with the interaction of hiring and investment costs, both determinants having been typically overlooked.
    Keywords: Counter-cyclical job values, Business cycles, Aggregate hiring, Vacancies, Labor market frictions, Capital market functions, Volatility, Labor market fluidity
    JEL: E24 E32
    Date: 2016–11
  2. By: Vamsi K. Kanuri; Reza Houston; Michelle Andrews
    Abstract: Corporate social irresponsibility (CSI) regularly headlines the popular press, although the topic has drawn limited academic attention. We address this gap by investigating the association between the percent of law-educated board members and top management team executives in a firm and investor reaction to CSI. We hypothesize that legal degrees of executives will affect investor perceptions of firm foresight, and in turn their judgment of blame and consequent punishment. Based on abnormal returns to 662 announcements of CSI, we find that both too few and too many executives with law degrees lead investors to mete out harsher punishment. We further find that firm size, risk, and industry concentration amplify this inverted U-shaped link. Our findings contribute to research on CSI, attribution, and the executive education-firm performance link.
    Keywords: Corporate social irresponsibility, Investors, Law education, Attribution, Stock returns.
    Date: 2016–08
  3. By: Henrekson, Magnus (Research Institute of Industrial Economics (IFN)); Lyssarides, Odd (Research Institute of Industrial Economics (IFN))
    Abstract: Sweden is often described as a country where intergenerational social mobility is high, but research also shows that social mobility decreases the closer one gets to the extreme top of the income distribution. We study the occupational mobility for an extreme elite group in society: the CEOs of Sweden’s 30 largest public firms since 1945. To our knowledge, there exists no similar study for any other country. The study is based on a hand-collected data set consisting of 229 former and current CEOs who grew up in Sweden and born between the late1800s and 1970. We have information about paternal occupations for 185 (81 percent) of them, and 60 percent grew up in Social Group I, which implies an overrepresentation for Social Group I by a factor of 9.7. Consequently, Social Groups II and III are underrepresented. However, almost four out of ten CEOs born in the 1940s came from Social Group III and toward the end of the period, the share coming from Social Group II roughly doubled to about 35 percent. Wallenberg-controlled firms were slightly more likely to have CEOs with a Social Group III background. More than half of the CEOs have a father holding a managerial position. Seven of the CEOs have noble surnames, which implies an overrepresentation equal to that of Social Group I; however, among CEOs born after 1939 only two come from a noble family, which suggests a drop in the advantage conferred by a noble background. Finally, less than five percent of the CEOs were members of a family that was a controlling owner or had a father who was also a large-firm CEO.
    Keywords: Social mobility; Chief executive officers; Occupational mobility; Sweden
    JEL: J00 J62 Z13
    Date: 2016–11–03
  4. By: Parker, Miles
    Abstract: This paper uses a survey of 1281 New Zealand exporters to investigate the role of firm characteristics in setting export prices. Larger, and more productive firms, are more likely to differentiate prices across markets. Primary sector firms are more likely to price to market than firms in other sectors, even taking into account other firm characteristics. This contrasts sharply with the commonly-held view that the price of these products is determined on the international market. In a further contribution to the literature, we find that service sector firms can also price to market, at similar rates to manufacturers. JEL Classification: E30, F31, F41
    Keywords: export pricing, invoicing, pricing to market, survey
    Date: 2016–11
  5. By: Vanessa Alviarez (University of British Columbia, Sauder); Andrei A. Levchenko (University of Michigan and NBER); Javier Cravino (University of Michigan and NBER)
    Abstract: Using a large firm-level dataset, this paper studies multinational firmsÕ performance during the Great Recession. Foreign multinationals grew faster than local firms outside of the crisis, but slower during the crisis. Industry and size differences between domestic and foreign-owned firms account for much of this slowdown. However, multinationals from different countries performed differently during the crisis. The paper then assesses the role of multinationals in the global recession using a quantitative model. Had multinationalsÕ relative performance remained unchanged during the crisis, the median countryÕs aggregate growth would have been 0.12% higher, with a range of -0.13 to 0.5% across countries.
    Keywords: Great Recession, multinational firms
    JEL: F23 F44
    Date: 2016–11–11
  6. By: Gamberoni, Elisa; Gradeva, Katerina; Weber, Sebastian
    Abstract: This study focuses on the employment effect of a hiring subsidy available to firms with less than 50 employees, granted in the context of the 2012 Spanish labour market reform. Exploiting the arbitrary firm size threshold using regression discontinuity design, estimates show on average 2 percentage points higher employment growth for firms that became eligible for the scheme. However, tests and complementary regressions suggest that the higher employment growth for smaller firms in 2013 is driven by a 2010 reform, which imposes more stringent reporting requirements on larger firms. Accounting for this using difference-in-discontinuity regressions, we fail to find any significant effect of the subsidy on increasing employment of eligible firms. While our study suggests several pitfalls arising from size-contingent regulations, more data are needed to test for benecial long-term effects from the hiring subsidy in addressing duality of the Spanish labour market. JEL Classification: C21, D22, E24, H25
    Keywords: employment subsidies, firm response, labour market reforms, quasi-experiment, regression discontinuity design
    Date: 2016–10
  7. By: Ioannis Pinopoulos (Department of Economics, University of Macedonia)
    Abstract: In this paper, we study upstream horizontal mergers in vertically related markets. A key aspect of our analysis is that one of the merging parties is a vertically integrated firm. We consider a two-tier market consisting of two competing vertical chains, with one upstream and one downstream firm in each chain. We assume that one vertical chain is vertically integrated whereas the other chain is vertically separated. We also assume that the vertically integrated chain is more cost-efficient in its downstream operations than the independent downstream firm. We show that a horizontal merger between the vertically integrated firm and the independent upstream supplier will increase the equilibrium input price and reduce both consumer and total welfare. When an upstream competitive fringe exists, however, the merger still decreases consumer surplus but it may increase total welfare. The latter finding is important since it implies that whether antitrust authorities favor a consumer or total welfare objective can lead to very different conclusions regarding the merger’s desirability.
    Keywords: Vertical relations; vertical integration; horizontal mergers; welfare.
    JEL: L11 L13 L41 L42
    Date: 2016–11
  8. By: Stephen P. Ferris; Reza Houston
    Abstract: We examine whether political connections measured by political contributions influences the choice of terms included in government contracts awarded to firms. We construct an index of four “sweetheart” contract terms that are highly favorable to the firm, but not obviously advantageous to the government. We find that firms making larger political contributions more frequently have these terms included in their contracts. We then examine how changes in a firm’s political contributions influence the terms of subsequent contracts. We find that firms which increase their contributions are more likely to have these terms as part of their contract. We conclude that there is a political effect on the choice of terms included in federal contracts awarded to firms.
    Keywords: contracting; political connections
    JEL: G32 G38
    Date: 2016–09
  9. By: Hayakawa, Kazunobu; Kimura, Fukunari; Laksanapanyakul, Nuttawut
    Abstract: Using highly detailed import data for Thailand, this paper examines firm-level trade creation and diversion of regional trade agreements (RTAs). Specifically, by focusing on firm-product pairs in which firms import a particular product from non-members but not from RTA members in the initial year of our sample, we empirically investigate the start of imports from RTA members under RTA schemes and the cessation of imports from non-members at the firm-level. We find that firms are more likely to stop importing products with low RTA tariff rates or high most-favored-nation tariff rates from non-members and to start importing such products from RTA member countries. However, from the quantitative point of view, there are very few firms that switch import sources from non-members to RTA members when facing the introduction of RTA schemes.
    Keywords: International trade, International agreements, International economic integration, RTA, Trade creation, Thailand
    JEL: F15 F53
    Date: 2016–11
  10. By: Javier Changoluisa (School of Economics and Business Administration, Friedrich-Schiller-University Jena); Michael Fritsch (School of Economics and Business Administration, Friedrich-Schiller-University Jena)
    Abstract: We investigate the relationship between new business formation and the level of competitive pressure perceived by manufacturing incumbent establishments. The perceived pressure of competition is stronger the higher the level of entries in the respective industry. This relationship holds not only for start-ups located in the same region of the incumbent, but also for start-ups across all regions of Germany. The productivity level of an incumbent moderates the extent of the perceived competitive pressure from start-ups. Highly productive incumbents are less threatened by new business formation. Such a moderating effect cannot be found for incumbent size and regional population density.
    Keywords: New business formation, competitive pressure, regional competition, incumbent firms, manufacturing industries
    JEL: L26 L60 D20 O12 R11
    Date: 2016–11–14
  11. By: Goedhuys, Micheline (UNU‐MERIT); Mohnen, Pierre (UNU-MERIT, and Maastricht University); Taha, Tamer (UNU-MERIT)
    Abstract: Using recently collected firm-level data from Egypt and Tunisia, this paper explores the effect of institutional obstacles and corruption on the innovative behaviour of firms and their effect on firms' employment growth. We estimate the micro-level interactions between corruption and institutional obstacles and test the hypothesis that corruption 'greases the wheels' of firm performance when bureaucratic procedures are more severe and hampering innovation. Accounting for endogeneity and simultaneity, the paper uses a conditional recursive mixed-process model (CMP). The results show that corruption has a direct negative effect on the likelihood that a firm is an innovator, but a positive effect when interacted with institutional obstacles. This provides support for the hypothesis that corruption serves as a mechanism to bypass the bureaucratic obstacles related to obtaining the necessary business permits and licences for product innovation. These effects also resonate into firm growth, through their effect on product innovation.
    Keywords: Innovation, corruption, employment growth, Egypt, Tunisia
    JEL: L25 D73
    Date: 2016–10–11
  12. By: Nick Werle
    Abstract: In the cases of corporate crime, US prosecutors can lodge charges against the corporation, its managers, or both. However, the emergence of systemically important firms, most notably in the financial sector, constrains prosecutors. This paper develops a new model of corporate criminal liability and shows how the Too Big To Jail problem reduces the deterrence effect of a crime control policy relying primarily on large corporate fines. Furthermore, this paper shows how corporate criminal liability may not incentivize a Too Big to Jail firm to invest in internal controls and may even attempt to subsidize an employees’ criminal activity. In the presence of Too Big to Jail firms, prosecutors should shift resources toward prosecutions of individual managers, so they bear a substantial personal risk from dealing dishonestly.
    JEL: F3 G3
    Date: 2015
  13. By: Licandro, Omar
    Abstract: This paper integrates firm dynamics theory into the Neoclassical growth framework. It embeds selection into an otherwise standard dynamic general equilibrium model of one good, two production factors (capital and labor) and competitive markets. Selection relies on firm specific investment: i) capital is a fixed production factor --playing the role of an entry cost, ii) the productivity of capital is firm specific, but observed after investment, iii) firm specific capital is partially reversible --its opportunity cost plays the same role as fixed production costs. At equilibrium, aggregate technology is Neoclassical, but the average quality of capital is endogenous and positively related to selection; due to capital irreversibility, the marginal product of capital is larger than the user cost and capital depreciation positively depends on selection. At steady state, output per capita and welfare both raise with selection; rendering capital more reversible or increasing the variance of the idiosyncratic shock both raise selection, productivity, output per capita and welfare.
    Keywords: Capital irreversibility; Entry and Exit; Firm Dynamics; Hopenhayn; Neoclassical growth model; Ramsey; selection
    JEL: O3 O4
    Date: 2016–11
  14. By: Philip Ushchev (NRU-Higher School of Economics); Yves Zenou (Monash University, Stockholm University, IFN and CEPR)
    Abstract: We develop a product-differentiated model where the product space is a network defined as a set of varieties (nodes) linked by their degrees of substitutability (edges). We also locate consumers into this network, so that the location of each consumer (node) corresponds to her “ideal” variety. We show that, even though prices need not to be strategic complements, there exists a unique Nash equilibrium in the price game among firms. Equilibrium prices are determined by both firms’ sign-alternating Bonacich centralities and the average willingness to pay across consumers. They both hinge on the network structure of the firm-product space. We also investigate how local product differentiation and the spatial discount factor affect the equilibrium prices. We show that these effects non-trivially depend on the network structure. In particular, we find that, in a star-shaped network, the firm located in the star node does not always enjoy higher monopoly power than the peripheral firms.
    Keywords: Networks, Product Variety, Monopolistic Competition, Spatial Competition
    JEL: D43 L11 L13
    Date: 2016–09
  15. By: Paul W. Dobson (University of East Anglia); Sang-Hyun Kim (University of East Anglia); Hao Lan (University of East Anglia)
    Abstract: Oligopoly can give rise to complex patterns of price interaction and price adjustment. While firms in oligopolistic markets may divide into price leaders and price followers, it is not inconceivable that some may take on dual roles, being a leader to one group but a follower to a different group. Thus who leads and who is led can be complicated and hierarchical. To help disentangle such pricing relationships, this paper develops a method to empirically identify price-leadership structures in n-firm oligopolistic markets by generalizing the duopoly method proposed by Seaton and Waterson (2013). Applying the method to UK food retailing industry, our analysis finds that it has a three-tier structure in which the two largest players (Tesco and Asda), tend to price-lead other retailers, while the other two of the Big 4 major chains (Sainsbury and Morrisons) play both follower (to the top two) and leader (to the smaller, premium/convenience positioned supermarket chains).
    Keywords: Price leadership, oligopolistic markets, UK food retailing industry
    JEL: D43 L13 L41 L81
    Date: 2016–11

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