nep-bec New Economics Papers
on Business Economics
Issue of 2019‒10‒14
sixteen papers chosen by
Vasileios Bougioukos
Bangor University

  1. Do firms manage pay inequality? By Willman, Paul; Pepper, Alexander
  2. Market Size and Competition: A "Hump-Shaped" Result By Grant, Iris; Kesternich, Iris; Schumacher, Heiner; Van Biesebroeck, Johannes
  3. Service Imports, Workforce Composition, and Firm Performance: Evidence from Finnish Microdata By Andrea Ariu; Katariina Nilsson Hakkala; J. Bradford Jensen; Saara Tamminen
  4. Firm Debt Covenants and the Macroeconomy: The Interest Coverage Channel By Daniel Greenwald
  5. Use of AI and Its Impact on Business: Updated Evidence from a Firm Survey (Japanese) By MORIKAWA Masayuki
  6. Firm Growth, Finance and Development By Francisco Buera
  7. Tying in evolving industries, when future entry cannot be deterred By Fumagalli, Chiara; Motta, Massimo
  8. Family Ownership and Antitrust Violations By Amore, Mario Daniele; Marzano, Riccardo
  9. Products or Markets: What Type of Experience Matters for Export Survival? By Martina Lawless; Zuzanna Studnicka
  10. Essays on corporate ownership and human capital By Hébert, Camille
  11. Intermodal competition between intercity buses and trains: A theoretical model By Gremm, Cornelia; Bälz, David; Corbo, Chris; Mitusch, Kay
  12. Skill Shortages as a Barrier to Women’s Start Ups: A Model with Evidence from Eswatini By Zuzana Brixiová; Thierry Kangoye
  13. Complementarity between Firm Exporting and Firm Importing on Industry Productivity and Welfare By ARA Tomohiro
  14. Shock Propagation Through Cross-Learning in Opaque Networks By Jan Schneemeier
  15. Government support of small and medium sized entrepreneurship in Russia By Barinova Vera; Zemtsov Tsepan; Tsareva Yulia
  16. Dynamic Productivity Decomposition with Allocative Efficiency By HOSONO Kaoru; TAKIZAWA Miho

  1. By: Willman, Paul; Pepper, Alexander
    Abstract: We examine the role of the modern firm in generating income inequality. Specifically, we consider the growth in the use of asset-based rewards for senior executives, combined with continued use of salaries and wages for other employees, and the impact this has on measures of inequality within firms. Our paper presents data on intra firm inequality from the UK FTSE 100 for the period 2000-2015. It looks at ratios of CEO to average earnings and attempts to explain both the growth in inequality on this measure and the extent of variance between firms. It distinguishes between a period of “administered inequality” up to the early 1980’s when intra-firm processes defined differential pay and a subsequent one of “outsourced inequality” when capital market measures dominate executive pay. In the latter period, intra firm inequality measures are defined by upward movements in capital market measures and the extent of outsourcing of low paid work.
    Keywords: executive compensation; intra-firm inequality; salaries & wages
    JEL: D31 J31 M21
    Date: 2019–03
  2. By: Grant, Iris; Kesternich, Iris; Schumacher, Heiner; Van Biesebroeck, Johannes
    Abstract: An active empirical literature estimates entry threshold ratios, introduced by Bresnahan and Reiss (1991), to learn about the impact of firm entry on the strength of competition. These ratios measure the increase in minimum market size needed per firm to sustain one additional firm in the market. We show that there is no monotonic relationship between a change in the entry threshold ratio and a change in the strength of competition or in the price-cost margin. In the standard homogenous goods oligopoly model with linear or constant elasticity demand, the ratio is hump-shaped in the number of active firms, increasing at first and only when additional firms enter it gradually decreases and converges to one. Empirical applications should use caution and interpret changes in the entry threshold ratios as indicative of changes in competition only from the third entrant onwards.
    Keywords: Competition; Entry Threshold Ratio; Market entry; market size
    JEL: D43 L13
    Date: 2019–09
  3. By: Andrea Ariu; Katariina Nilsson Hakkala; J. Bradford Jensen; Saara Tamminen
    Abstract: This paper uses unique Finnish firm-level micro data on service imports, work- force composition, and firm characteristics to examine changes in employment composition and performance of Finnish service importers during a period of a significant increase in services imports (2002-2012). We use world service export supply shocks, which we allocate to firms based on their highly specialized service input structure, as an instrument to identify the impact of service offshoring. We find that firms that increase imports of service inputs reduce employment of low-skill service workers, increase employment of (high-skilled) managers and improve their performance in terms of sales (turnover), assets, service exports, and firm survival. The employment composition and performance responses to service imports differ across firms in the manufacturing sector and those in the service sector.
    JEL: F10 F14 L80
    Date: 2019–10
  4. By: Daniel Greenwald (MIT)
    Abstract: Interest Coverage covenants, which set a maximum ratio of interest payments to earnings, are among the most popular provisions in firm debt contracts. For affected firms, the amount of additional debt that can be issued without violating these covenants is highly sensitive to interest rates. Combining a theoretical model with firm-level data, I find that Interest Coverage limits generate strong amplification from interest rates into firm borrowing and investment. Importantly, most firms that have Interest Coverage covenants also face a maximum on the ratio of the stock of debt to earnings. Simultaneously imposing these limits implies a novel source of state-dependence: when interest rates are high, interest coverage limits are tighter, amplifying the influence of interest rate changes and monetary policy. Conversely, in low-rate environments, debt-to-earnings covenants dominate and transmission is weakened.
    Date: 2019
  5. By: MORIKAWA Masayuki
    Abstract: This study, based on an original survey of Japanese firms, presents evidence on the use of AI, big data, and robots as well as firms' perception about the impacts of these new technologies on business and employment. The major findings can be summarized as follows. First, the number of firms already using AI and big data is small, but the number of firms interested in using these technologies for their business is large and increasing. Second, the use of AI and big data is positively associated with the share of highly educated employees, but this relationship is weak for the use of robots in the manufacturing industry. Third, the use of the new technologies has a strong positive association with the innovation probability of the firms. Fourth, the majority, and an increasing number of firms view the impact of these new technologies on their future business positively. Fifth, relatively large numbers of firms expects that the use of these new technologies is likely to reduce their employees.
    Date: 2019–08
  6. By: Francisco Buera (Washington University at St. Louis)
    Abstract: How important are financial markets for economic development? What are the costs of frictions in credit market on aggregate productivity? A recent literature stresses the role of the persistence of the exogenous process of firm's productivity in determining the answer to these question. If the productivity process is very persistent, then self-finance is a good substitute of external finance. Instead, we highlight the role of growth processes exhibiting a skewed distribution of firm growth, specially among young firms, a key feature of the data in developed countries.
    Date: 2019
  7. By: Fumagalli, Chiara; Motta, Massimo
    Abstract: We show that the incentive to engage in exclusionary tying (of two complementary products) may arise even when the incumbent's dominant position in the primary market cannot be protected. By engaging in tying, an incumbent firm sacrifices current profits but can exclude a more efficient rival from a complementary market by depriving it of the critical scale it needs to be successful. In turn, exclusion in the complementary market allows the incumbent to be in a favorable position when a more efficient rival will enter the primary market, and to appropriate some of the rival's efficiency rents. The paper also shows that tying is a more profitable exclusionary strategy than pure bundling, and that exclusion is the less likely the higher the proportion of consumers who multi-home.
    Keywords: Inefficient foreclosure; network externalities; Scale Economies; Tying
    JEL: K21 L41
    Date: 2019–09
  8. By: Amore, Mario Daniele; Marzano, Riccardo
    Abstract: We study how family ownership shapes the firms' likelihood of being involved in antitrust indictments. Using data from Italy, we show that family firms are significantly less likely than other firms to commit antitrust violations. To achieve identification, we exploit a law change that made it easier to transfer family control. Studying the mechanisms at play, we find that family firms are especially less likely to commit antitrust violations when they feature a more prominent size relative to the city where they are located, which magnifies reputational concerns. Next, we show that family firms involved in antitrust violations appoint more family members in top executive positions in the aftermath of the indictment. Moreover, these firms invest less and curb equity financing as compared to nonfamily firms. Collectively, our findings suggest that family control wards off reputational damages but, at the same time, it weakens the ability to expand in order to keep up with fiercer competition following the dismantlement of the anticompetitive practice.
    Keywords: Antitrust violation; Financing; investment; ownership
    JEL: D22 G34 G38 K21
    Date: 2019–09
  9. By: Martina Lawless; Zuzanna Studnicka
    Abstract: Previous research has generally shown that increased export experience has a positive impact on the subsequent survival of newly launched export relationships of a firm. In this paper, we find that there are important differences in the effects of firm experience on export survival depending on the source of the experience. Specifically, experience built up by a firm from previously exporting a particular product before launching it in a new market has a strong positive impact on the survival of a new product-market relationship. In contrast, experience within a market prior to adding a new product has a mainly negative effect on the survival probability of the additional product. This shows that taking a successful product to new markets is more likely to succeed than expanding product range within a market.
    Keywords: Duration of trade; Firm survival; Export experience; Multi-product firms
    JEL: F10
    Date: 2019–10
  10. By: Hébert, Camille (Tilburg University, School of Economics and Management)
    Abstract: This thesis consists of three chapters and studies the firm's organizational structure at a different stage of its life cycle: early-stage, growth, business group. The first chapter investigates the underlying reasons for the gender funding gap in the venture capital industry. It highlights a significant role for investors' stereotypes that ultimately impedes minority-founded startups' growth. The second chapter identifies conditions under which firms choose to grow by buying an incumbent company as opposed to building on their pre-existing human capital resources. The third chapter focuses on large business groups. It provides evidence that investors are not always aware of the boundaries of the firm and miss predictive information released at another level of the group.
    Date: 2019
  11. By: Gremm, Cornelia; Bälz, David; Corbo, Chris; Mitusch, Kay
    Abstract: The intercity bus market in Germany was deregulated in 2013. As a consequence, there is now a dense network of intercity bus lines. For the first time, the German state-owned railway company Deutsche Bahn AG faces intermodal competition in public intercity passenger land transport on a large number of lines. This paper examines market entry factors for intercity bus companies and price reactions of the incumbent railway company from a theoretical perspective. Our model builds on Salop's circular city model to describe the horizontal product differentiation among the bus companies. At the same time, the railway company occupies the center of the circle and offers a higher product quality than the buses. It dominates the market, while a number of bus companies constitute an oligopolistic competitive fringe. In the subsequent comparative statics analysis, it is shown that the quality differential between the train and bus services have a considerable effect on market entry decisions by buses as well as on price reactions by the incumbent railway company. In particular, on routes where the quality advantage of railway services is rather small, buses are more likely to enter and the railway company will respond with a stronger price reduction than on other routes.
    Keywords: intermodal competition,intercity railway and bus services,Salop circle model with center, vertical and horizontal product differentiation,dominant firm with oligopolistic fringe
    JEL: R40 L11 L13
    Date: 2019
  12. By: Zuzana Brixiová; Thierry Kangoye
    Abstract: The shortages of entrepreneurial skills, both perceived and actual, have lowered the rate of opportunity-driven women’s entrepreneurship. This paper contributes to the literature on entrepreneurship, gender and development with a theoretical and empirical analysis linking gender differences in entrepreneurial outcomes to skills and business training. The role of skills, including self-confidence, and training for the entrepreneurial performance is tested on a survey of urban entrepreneurs in Swaziland. The results help explain why narrow business training programs for female entrepreneurs have often limited success in improving performance of women-run firms. Training programs for women entrepreneurs encompassing advanced business and technical (e.g. hard) skills as well as networking and confidence building (e.g. soft skills) could be more effective.
    Keywords: women’s entrepreneurship, firm performance, hard and soft skills, model, micro data
    JEL: L53 O12 J4
    Date: 2018–12
  13. By: ARA Tomohiro
    Abstract: How different are the impacts of trade barriers on trade flows between intermediate inputs and final goods? How large are the welfare gains from trade for intermediate inputs relative to final goods? To address these questions, we develop a heterogeneous-firm model in which firm exporting and firm importing play a key role in industry productivity and welfare. We derive a gravity equation in intermediate-input trade to show that reductions in intermediate-input trade costs increase aggregate trade flows more than those in final-good trade costs, due to an extra adjustment operating through the extensive margin. We also find the general condition under which the welfare gains from trade are greater in intermediate-input trade than those in final-good trade.
    Date: 2019–08
  14. By: Jan Schneemeier (Indiana University)
    Abstract: This paper studies information transmission in opaque networks with uncertain inter-firm linkages. Local traders can identify their firm's direct neighbors but are unsure about these firms' linkages to other firms. This uncertainty renders prices of neighboring firms difficult to interpret and leads to the propagation of shocks across firms. Payoff-relevant information diffuses slowly and there is excess comovement between fundamentally unrelated assets. Traders and firms in higher network layers suffer from less informative prices and invest less efficiently. Surprisingly, more volatile noise trading can render stock prices more efficient in opaque networks as it discourages cross-learning and reduces the propagation of unrelated shocks.
    Date: 2019
  15. By: Barinova Vera (Gaidar Institute for Economic Policy); Zemtsov Tsepan (Gaidar Institute for Economic Policy); Tsareva Yulia (Gaidar Institute for Economic Policy)
    Abstract: Support of the small and medium sized entrepreneurship (SME) sector is recognized to be one of Russia’s economic policy priorities2,3. It is customary to speak of that sector’s low level of development compared with other countries. However, when comparable estimates are applied, the gap does not appear to be catastrophic. The relative share of SMEs in the value added produced by Russia’s business sector amounts to about 44 percent, in the developed countries – OECD member states it amounts on average to 55 percent, in the USA – to 48 percent, and in Canada – to 30 percent. The problems faced by Russian SMEs, in qualitative terms, are as follows: the percentage of exporters and technological startups is low, and a greater part of that sector is unregulated; in 2018, the relative share of medium sized firms and the number of technological startups shrank even further. The conditions for and specific features of the SME sector’s development vary across Russia’s regions, and this fact is completely overlooked by prevailing legislation. According to our estimations, entrepreneurial activity in the regions does not depend on government support, instead responding to macroeconomic and institutional changes. In 2018, in a majority of Russian regions, the number of SME subjects and their turnover declined in response to shrinking personal income, especially in the regions with a high relative share taken up by the shadow sector, while the same indices increased in those regions that hosted the FIFA World Cup events.
    Keywords: Russian economy, small businesses, medium-sized enterprises
    JEL: C53 E37 L21 L52
    Date: 2019
  16. By: HOSONO Kaoru; TAKIZAWA Miho
    Abstract: We propose a novel approach to decomposing aggregate productivity growth into changes in technical efficiency, allocative efficiency, and variety of goods as well as relative efficiency of entrants and exiters. We measure technical efficiency by the aggregate production possibility frontier and allocative efficiency by the distance from the frontier. Applying our approach to establishment- and firm-level datasets from Japan, we find that the allocative efficiency among survivors declined during the banking crisis period. We also find that the technical efficiency declined during the Global Financial Crisis period. Furthermore, we find that both entrants and exiters were likely to be more efficient than survivors.
    Date: 2019–09

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