New Zealand firms exhibit significant variation in the extent to which they formally involve CEOs in the executive pay-setting process: a considerable number sit on the compensation committee, while others are excluded from the board altogether. Using 1997-2005 data, we find that CEOs who sit on the compensation committee obtain generous annual pay rewards that have low sensitivity to poor performance shocks. By contrast, CEOs who are not board members receive pay increments that have low mean and high sensitivity to firm performance. Moreover, the greater the pay increment attributable to CEO involvement in the pay-setting process, the weaker is subsequent firm performance over one, three- and five-year periods.
pay-performance sensitivity; compensation committee; CEO influence
Like milk or wine: Does firm performance improve with age?
Our empirical literature review shows that little is known about how firm performance changes with age, presumably because of the paucity of data on firm age. For Spanish manufacturing firms, we analyse the firm performance related to firm age between 1998 and 2006. We find evidence that firms improve with age, because ageing firms are observed to have steadily increasing levels of productivity, higher profits, larger size, lower debt ratios, and higher equity ratios. Furthermore, older firms are better able to convert sales growth into subsequent growth of profits and productivity. On the other hand, we also found evidence that firm performance deteriorates with age. Older firms have lower expected growth rates of sales, profits and productivity, they have lower profitability levels (when other variables such as size are controlled for), and also that they appear to be less capable to convert employment growth into growt h of sales, profits and productivity.
The ability of firms to access external financial resources represents a key factor influencing several dimensions of firms’ dynamics. However, while recent qualitative evidence suggests the existence of heterogeneous and asymmetric reactions of firms to financing constraints (FC) problems, the literature on the empirics of size-growth dynamics focuses on the effects of FC on average growth rate and on the long term evolution of the firm size distribution. In this paper we extend the analysis to a wider range of possible FC effects on firm growth dynamics, including its autoregressive and heteroskedastic structure and the degree of asymmetry in growth shocks distribution. We measure FC with an official credit rating index, which directly captures the borrowers’ opinion about firm’s financial soundness deciding, in turn, the availability and cost of its external resources. Our broader investigation reveals that FC si gnificantly affect firm’s performance and operate through several channels. In the short run, they reduce expected firm growth rate, induce anti-correlation in growth shocks and a milder dependence of growth rates volatility on size, and also operate through asymmetric “threshold effects”, either preventing potentially fast growing firms from enjoying attractive growth opportunities, or further deteriorating the growth prospects of already slow growing firms. The subdiffusive nature of the growth process of constrained firms is compatible with the observed differences in their size distribution.
Financial constraints, Firm size distribution, Firm growth, Risk rating, Asymmetric exponential power distribution
Oil Price Shocks and Labor Market Fluctuations
Ordóñez, Javier (Universitat Jaume I de Castelló)
Sala, Hector (Universitat Autònoma de Barcelona)
Silva, José I. (University of Girona)
We examine the impact of real oil price shocks on labor market flows in the U.S. We first use smooth transition regression (STR) models to investigate to what extent oil prices can be considered as a driving force of labor market fluctuations. Then we develop and calibrate a modified version of Pissarides’ (2000) model with energy costs, which we simulate in response to shocks mimicking the behavior of the actual oil price shocks. We find that (i) these shocks are an important driving force of job market flows; (ii) the job finding probability is the main transmission mechanism of such shocks; and (iii) they bring a new amplification mechanism for the volatility and should thus be seen as complementary of labor productivity shocks. Overall we conclude that shocks in oil prices cannot be neglected in explaining cyclical labor adjustments in the U.S.
oil prices, unemployment, vacancies, business fluctuations
The Business Cycle Implications of Reciprocity in Labor Relations
Danthine, Jean-Pierre (Swiss National Bank)
Kurmann, André (Université du Québec à Montréal)
We develop a reciprocity-based model of wage determination and incorporate it into a modern dynamic general equilibrium framework. We estimate the model and find that, among potential determinants of wages, rent-sharing (between workers and firms) and wage entitlement (based on wages earned in the past) are important to fit the dynamic responses of output, wages and inflation to various exogenous shocks. Aggregate employment conditions (measuring workers’ outside option), on the other hand, are found to play only a negligible role for wage setting. These results are broadly consistent with micro-studies on reciprocity in labor relations but contrast with traditional efficiency wage models which emphasize aggregate labor market variables as the main determinant of wage setting.
This article presents a critical review of advances in incentive-based and knowledge-based theories of the firm. In particular, we address some developments in the incentive-based approach regarding relational contracts and contracts as « reference points ». As far as the evolution of knowledge-based theories is concerned, we focus on the interesting implications of the concept of dynamic capabilities. Finally, we investigate some recent attempts to bridge these two main streams of research, which have for a long time been regarded as rival rather than complementary.
Theory of the firm, contracts, incentives, knowledge, competencies
The Vanishing Procyclicality of Labor Productivity
Galí, Jordi (CREI and Universitat Pompeu Fabra)
van Rens, Thijs (CREI and Universitat Pompeu Fabra)
We document three changes in postwar US macroeconomic dynamics: (i) the procyclicality of labor productivity has vanished, (ii) the relative volatility of employment has risen, and (iii) the relative (and absolute) volatility of the real wage has risen. We propose an explanation for all three changes that is based on a common source: a decline in labor market frictions. We develop a simple model with labor market frictions, variable effort, and endogenous wage rigidities to illustrate the mechanisms underlying our explanation. We show that the reduction in frictions may also have contributed to the observed decline in output volatility.
We start considering an optimal matching of opaque (transparent) borrowing firrms with relational (transactional) lending main banks. Next we contemplate the possibility that firm-bank « odd couples » materialize where opaque (transparent) firrms end up matched with transactional (re- lational) main banks. We conjecture the « odd couples » emerge either since the bank’s lending technology is not perfectly observable to the rm or because riskier firrms – even though opaque – strategically select transac- tional banks in the hope of being classified as lower risks. Our econometric results show the probability of rationing is larger when firrms and banks match in « odd couples ».
Relationship Banking, Credit Rationing and Asymmetric Information
Inventory investment is an important component of the Canadian business cycle. Despite its small average size – less than 1 per cent of output — it exhibits volatile procyclical fluctuations, accounting for almost one-third of output variance. Procyclicality of inventories is somewhat smaller than that of sales, resulting in a counter-cyclical aggregate inventory-sales ratio. These salient inventory facts are matched in a partialequilibrium version of Kryvtsov and Midrigan’s (2010) model in which firms hold stocks of goods to buffer against stockouts. In booms, firms boost their inventories to avoid stocking out due to the rise in demand. The model combines the real marginal cost estimated by ToTEM with the convex cost of adjusting inventories to match the dynamics of the inventory-sales ratio in the data.
Business fluctuations and cycles; Transmission of monetary policy
Employment effects of acquisitions: Evidence from acquired European firms
This paper examines the employment effects of acquisitions for acquired European firms taking non-random selection of acquisition targets explicitly into account. Following the empirical firm growth literature and theories put forward in the mergers and acquisition (M&A) literature we control for convergence dynamics in firm size and distinguish between different types of acquisitions. Empirically, we estimate an endogenous treatment model using accounting data for a newly created sample of acquired and non-acquired European firms. Our results reveal positive employment effects for all different types of acquisitions.
Acquisitions; employment effects; firm growth; endogenous treatment model
« Why Did « Zombie » Firms Recover in Japan? »
Shin-ichi Fukuda (Faculty of Economics, University of Tokyo)
Jun-ichi Nakamura (Development Bank of Japan)
The Japanese economy experienced prolonged recessions during the 1990s. Previous studies suggest that evergreen lending to troubled firms known as « zombie firms » distorted market discipline in terms of stabilizing the Japanese economy and caused significant delays in the economy’s recovery. However, the eventual bankruptcy of zombies was rare. In fact, a majority of the « zombie » firms substantially recovered during the first half of the 2000s. The purpose of this paper is to investigate why zombie firms recovered in Japan. We first extend the method of Caballero, Hoshi, and Kashyap (2008) and identify zombies from among the listed firms. Subsequently, we investigate the nature of corporate restructuring that was effective in reviving zombie firms. Our multinomial logistic regressions suggest that reducing the employee strength of zombie firms and selling its fixed assets were beneficial in facilitating their recovery. How ever, corporate restructuring without accounting transparency or by discouraging incentives for managers was ineffective. In addition, corporate restructuring lacked effectiveness in the absence of favorable macroeconomic environment as well as substantial external financial support.
Productivity, Markup, Scale Economies, and the Business Cycle: Estimates from firm-level panel data in Japan
This paper examines the relationship between productivity, markup, scale economies, and the business cycle. The paper contributes to the literature by presenting a simple econometric framework that permits simultaneous estimation of the changes in productivity, markup, and scale economies from a panel of firm-level data. The framework is then applied to Japanese firm-level data for 1994-2006. The results indicate that productivity is procyclical even after the changes in markup and scale economies are controlled for. However, both markup and scale economies are neither procyclical nor countercyclical once the changes in productivity are taken into account.
Endogenous Financing of Production in General Equilibrium with Incomplete Markets
This paper considers the financing of production in a two period general equilibrium model with incomplete markets. This requires a model where the efficient boundary of the production set available to a producer in period two in every state of the world is not independent of the financial activities of the firm in period one. The novelty of the paper is a definition of a class of long run profit maximization objective functions of the firm which is independent of any average utility of the owners of the firm. This generalizes the traditional objective of profit maximization of the Arrow-Debreu model to the case of incomplete markets. The paper shows that equilibrium exists for convex smooth and convex piecewise linear endogenized production sets.
Modelling structural changes in the volatility process
Tibor Neugebauer (Luxembourg School of Finance, University of Luxembourg)
Juan A. Lacomba (University of Granada, Department of Economics)
Francisco Lagos (University of Granada, Department of Economics)
The tension between cooperation and competition that characterizes many business relationships is experimentally studied in a “pie”-creation game; value is created and increased through cooperation in a repeated prisoner’s dilemma game. At the end, the player with the greater stake in the joint pie decides on the division of the pie. Three treatments of the pie-creation game are considered: in the first treatment, rivals create the pie; in the second, non-rivals create the pie; finally, in the third, the pie is created by subjects who do not know about the future pie-division. The data show that the competition for the right to split the pie biases behaviors towards defection when subjects play with their rival.
Proposing a novel research design for firm-level impact studies, I investigate the effects of venture capital financing on corporate performance by applying a two-stage propensity score matching on Austrian micro-data. Controlling for differences in industry, location, legal status, size, age, credit rating, export and innovation behaviour, the findings (i) assert the financing function of venture capital, showing that recipients lacked access to satisfactory alternative sources of capital; (ii) identify selection effects, where venture capital is invested in firms with high performance potential; and finally (iii) confirm the value adding function in terms of a genuine causal impact of venture capital on firm growth, yet not on innovation output.
The hypotheses of profit rates gravitating around or converging towards a common value is tested using Danish, Finnish, Italian and US data. Both hypotheses are rejected for all the countries considered. This is interpreted as the result of limitations to capital mobility and of persistent differentials in the innovative performance of industries.
capital mobility, gravitation of profit rates, convergence, SURE estimation, exactly median unbiased estimator
The Wage-Productivity Gap Revisited: Is the Labour Share Neutral to Employment?
Karanassou, Marika (University of London)
Sala, Hector (Universitat Autònoma de Barcelona)
This paper challenges the prevailing view of the neutrality of the labour income share to labour demand, and investigates its impact on the evolution of employment. Whilst maintaining the assumption of a unitary long-run elasticity of wages with respect to productivity, we demonstrate that productivity growth affects the labour share in the long run due to frictional growth (that is, the interplay of wage dynamics and productivity growth). In the light of this result, we consider a stylised labour demand equation and show that the labour share is a driving force of employment. We substantiate our analytical exposition by providing empirical models of wage setting and employment equations for France, Germany, Italy, Japan, Spain, the UK, and the US over the 1960-2008 period. Our findings show that the time-varying labour share of these countries has significantly influenced their employment trajectories across decades. Thi s indicates that the evolution of the labour income share (or, equivalently, the wage-productivity gap) deserves the attention of policy makers.
wages, productivity, labour income share, employment
Quantity Competition, Endogenous Motives and Behavioral Heterogeneity
The paper shows that strategic quantity competition can be characterized by behavioral heterogeneity, once competing firms are allowed in a pre-market stage to optimally choose the behavioral rule they will follow in their strategic choice of quantities. In particular, partitions of the population of identical firms in profit maximizers and relative profit maximizers turn out to be deviation-proof equilibria, both in simultaneous and sequential game structures. Our findings that in a strategic framework heterogeneous behavioral rules are consistent with individual incentives provides a game-theoretic microfoundation of heterogeneity.
We study the role of a central counterparty (CCP) in controlling counterparty risk. When trading is organized via a centralized exchange with fungible contracts – like in a futures market – we show that it is optimal to clear trades via a CCP that uses (i) novation to pool the risk of default and (ii) mutualization of losses to insure against the aggregate cost of default in the form of price risk. We then analyze the design of CCP clearing for over-the-counter (OTC) trades where contracts are customized and, hence, not fungible. A CCP can still offer gains from novation by pooling default risk across all customized contracts. Bargaining in OTC trades leads to an inefficient allocation of default risk across trades. A transfer scheme can alleviate this inefficiency, but necessitates novation being offered by a CCP. Hence, the benefit from CCP clearing for OTC markets goes beyond simple netting as it is a prerequisite for an efficient allocation of default risk in such markets.
Central Counterparty, Clearing, Over-the-counter Markets, Novation and Mutualization, Default Risk
Optimal control of a large insurance company with debt liability under bankrupt probability constraints
This paper considers an optimal control of a large company with debt liability under bankrupt probability constraints. The company, which faces constant liability payments and has choices to choose various production/business policies from an available set of control policies with different expected profits and risks, controls the business policy and dividend payout process to maximize the expected present value of the dividends until the time of bankruptcy. However, if the dividend payout barrier is too low to be acceptable, it may result in the company’s bankruptcy soon. In order to protect the shareholders’ profits, the managements of the company impose a reasonable and normal constraint on their dividend strategy, that is, the bankrupt probability associated with the optimal dividend payout barrier should be smaller than a given risk level within a fixed time horizon. This paper aims at working out the optimal retenti on ratio, dividend payout level, explicit value function of the insurance company under bankrupt probability constraint by stochastic analysis, PDE methods and variational inequality approach, getting a risk-based capital standard to ensure the capital requirement of can cover the total given risk by numerical analysis, and giving reasonable economic interpretation for the results.
Shifting the risk in pricing and reimbursement schemes. A new model of risk-sharing agreements for innovative drugs
Stefano Capri (Cattaneo University (LIUC))
Rossella Levaggi (University of Brescia (UNIBS))
Risk sharing is becoming increasingly an increasingly popular instrument to regulate the price of new drugs. In the recent past, forms of risk-sharing agreements between the public regulator and the industry have been proposed and implemented, but their effects on price and profits are still controversial. Methods: We develop a model aimed at studying the effects on price and expected pro.t of several risk-sharing agreement between a regulator and the industry, based on the ex post effectiveness of the drug. We assume that the probability of being listed depends on the relative performance of the new drug in terms of effectiveness and budget required. The price is set according to the declared effcacy of the new drug, but if ex post the effectiveness falls short of what declared, several forms of penalties may be used by the regulator. Results: We show that the number of patients that are treated is not necessarily affect ed by risk-sharing/risk-shifting mechanisms; the price for which the drug is listed may be higher than without risk-sharing, but the expected profit of the industry is: a) always lower for risk-shifting schemes; b) for true risk-sharing it depends on the bargaining power of the company. Conclusions. Our model shows the difference between risk-sharing and risk shifting. The .rst mechanism could be used by the regulator to reduce uncertainty while the second is used to reduce the expected price of the drug. In the presence of risk sharing the listing price is not a good proxy for value for money.
Do Product Market Regulations in Upstream Sectors Curb Productivity Growth?: Panel Data Evidence for OECD Countries
Based on an endogenous growth model, we show that intermediate goods markets imperfections can curb incentives to improve productivity downstream. We confirm such prediction by estimating a model of multifactor productivity growth in which the effects of upstream competition vary with distance to frontier on a panel of 15 OECD countries and 20 sectors over 1985-2007. Competitive pressures are proxied with sectoral product market regulation data. We find evidence that anticompetitive upstream regulations have curbed MFP growth over the past 15 years, more strongly so for observations that are close to the productivity frontier.<P>Les réglementations du marché des produits dans les secteurs amont limitent-elles la croissance de la productivité ? Résultats de données de panel pour les pays de l’OCDE<BR>En s?appuyant sur un modèle de croissance endogène, nous montrons dans cette étude que les imperfectio ns de marché dans les secteurs amont abaissent les incitations à améliorer la productivité en aval. Cette conjecture est confirmée empiriquement par l?estimation d?un modèle qui différencie les effets potentiels, sur la productivité globale des facteurs (PGF), d?une concurrence insuffisante dans les secteurs amont selon la distance à la frontière technologique sectorielle. Ces estimations sont réalisées sur un panel de 15 pays de l?OCDE et 20 secteurs d?activité sur la période 1985-2007. La concurrence en amont est mesurée par des indicateurs sectoriels de régulation sur les marchés des biens. Les résultats montrent que, sur les 15 dernières années, les régulations anticompétitives dans les secteurs amont ont affaibli les gains de PGF, tout particulièrement pour les observations proches de la frontière technologique.
It is analyzed the impacts of outsourcing cost and wage tax progression under labor market imperfections with Nash wage bargaining and flexible outsourcing. With sufficiently strong (weak) labor market imperfection, lower outsourcing cost has a wage-moderating (wage-increasing) effect so that there is a negative (positive) effect on equilibrium unemployment. Higher tax progression, to keep the relative tax burden per worker constant, has a wage moderating and a positive effect on employment and negative effect on outsourcing.
A survey of the literature on asset price impacts on the real economy shows a much wider range of work on consumption and related wealth effects than on investment. The existence of wealth effects on consumption is little contested, but there remains an issue of whether different effects should hold between countries and across assets. There is less empirical work available on investment, partly reflecting poor results for Tobin?s Q, the user cost of capital and the financial accelerator. Panel investment functions for up to 23 OECD countries are estimated. Significant asset price effects from the financial accelerator and Tobin?s Q are found especially for the G7 countries as well as uncertainty effects as proxied by asset price volatility, but they only matter for the smaller OECD countries.<P>Les prix des actifs et l’économie réelle<BR>Un examen des etudes consacrees a l.impact des prix des actifs sur l .economie reelle montre que beaucoup plus de travaux portent sur la consommation et les effets connexes de patrimoine que sur l.investissement. L.existence d.effets de patrimoine sur la consommation n.est guere contestee, mais il reste a savoir si les differents effets sont valables d.un pays et d.un actif a l.autre. Les travaux empiriques sur l.investissement sont moins nombreux, en partie parce que les resultats sont mediocres pour le Q de Tobin, le cout d.usage du capital et l.accelerateur financier. On a estime des fonctions d.investissement sur donnees de panel pouvant couvrir jusqu’a 23 pays de l’OCDE. On constate des effets sensibles de prix des actifs dus a l.accelerateur financier et au Q de Tobin en particulier pour les pays du G7, et egalement des effets d.incertitude etablis a travers la volatilite des prix des actifs, mais ces derniers effets ne sont importants que pour les petits pays de la zone de l’OCDE.
uncertainty, asset prices, credit channel, wealth effect on consumption, aggregate fixed investment, Tobin’s Q, financial accelerator, incertitude, prix des actifs, canal du crédit, effet de patrimoine sur la consommation, investissement fixe total, Q de Tobin, accélérateur financier
We find that both the aggregate issuance of bonds, and the volume of commercial and industrial loans outstanding in the US, respond to fluctuations in industrial production and interest rates, but in opposite directions. This empirical result suggests that universal banks can reduce the cyclical fluctuations of their income, by jointly providing direct lending and security underwriting services.
Universal Banking, Diversification
Job Changes and Individual-Job Specific Wage Dynamics
This paper develops an error components model that is used to examine the impact of job changes on the dynamics and variance of individual log earnings. I use data on work histories drawn from the Panel Study of Income Dynamics (PSID) that makes it possible to distinguish between voluntary and involuntary job-to-job changes. The potential endogeneity of job mobility in relation to earnings is circumvented by means of an instrument variable estimation method that also allows to control for unobserved individual-job specific heterogeneity. Once controlled for individual and job-specific effects, the persistence within jobs is almost zero, whereas across jobs is significant but small.
Competition has long been regarded as productivity enhancing. Understanding the mechanism by which competition affects innovation and productivity is therefore an important topic for economic policy. The main contribution of this paper is to disentangle the relationship between competition and two sides of innovation: product and process. I write down a model and discuss the conditions under which we can identify the causal mechanism. Overall I find that competition, measured by the number of competitors or market shares, has negative effects on product innovation and no effects on process innovation. The explanation is very simple. By shifting demand, competition directly changes the optimality condition for product but not for process innovation. Thus, competition has no direct effects on process innovations or, as a consequence, productivity.
competition, innovation, R&D, product innovation, process innovation
On the Evolution of the Firm Size Distribution in an African Economy
The size of the informal sector is commonly associated with low per capita GDP and a poor business environment. Recent episodes of reform and growth in several African countries appear to contradict this pattern. From the mid 1980’s onward, Ghana underwent dramatic liberalization and achieved steady growth, yet average firm size in the manufacturing sector fell from 19 to just 9 employees between 1987 and 2003. I use a new panel of Ghanaian firms, spanning 17 years immediately post-reform, to model firm dynamics that differ markedly from well-established ‘stylized facts’ in the empirical literature from other regions. In contrast with American and European firms, entry of new firms and selection on observable characteristics, rather than within-firm growth, dominates industrial evolution in Ghana.