Discussion Papers

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SFB/TR 15 Discussion Paper No.

525

Jan Simon Schymik
Trade, Technologies, and the Evolution of Corporate Governance

Abstract:

Do international trade and technological change influence how firms create incentives for human capital? I present a model that incorporates agency problems into a framework with firm heterogeneity and human capital. My model indicates that trade liberalizations and skill-biased technological change alter the way how the largest firms in an economy incentivize their managers. Increases in managerial reservation wages lead to a reduction in corporate governance investments and a rise in performance compensation since monitoring managers becomes less efficient. Using data on CEO compensation and entrenchment opportunities in public industrial firms in the U.S., I document strong empirical regularities in support of the model predictions. Firms allow for more managerial entrenchment and offer larger CEO compensation when their industries become more open to trade or when production becomes more I.T. intensive.

 

JEL classification: F1, F16, G34, J33, L22, O33
Keywords: International Trade and Firm Organization, Agency Problems in International Trade, Endogenous Managerial Entrenchment, Corporate Governance and CEO Compensation

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525SFB.pdf

SFB/TR 15 Discussion Paper No.

513

Markus Nagler, Marc Piopiunik, Martin R. West
Weak Markets, Strong Teachers: Recession at Career Start and Teacher Effectiveness

Abstract:

How do alternative job opportunities affect teacher quality? We provide the first causal evidence on this question by exploiting business cycle conditions at career start as a source of exogenous variation in the outside options of potential teachers. Unlike prior research, we directly assess teacher quality with value-added measures of impacts on student test scores, using administrative data on 33,000 teachers in Florida public schools. Consistent with a Roy model of occupational choice, teachers entering the profession during recessions are significantly more effective in raising student test scores. Results are supported by placebo tests and not driven by differential attrition.

 

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513_02.pdf

SFB/TR 15 Discussion Paper No.

495

Dominika Paula Gałkiewicz
Manager Characteristics and Credit Derivative Use by U.S. Corporate Bond Funds

Abstract:

This study provides a comprehensive overview of the use of credit default swaps by U.S. corporate bond funds and analyzes in detail whether certain characteristics of managers, in addition to the fundamentals of a fund, determine how their use these credit derivatives. Results suggest that a manager’s education, age, experience, and skill are positively correlated with a fund’s CDS holdings. In particular, managers holding a master’s degree or educated at prestigious universities prefer using CDS. However, funds with older, more experienced managers or these keeping higher assets under their management are more likely to take on credit risk via selling CDS protection. Younger managers or managers that were educated at prestigious universities rather tend to buy CDS protection possibly due to differing concerns about their careers. If considering the Heckman correction for self-selection of funds into CDS use, the aforementioned findings remain stable.

 

JEL Classification: G23, G28

Keywords: Manager, manager characteristic, mutual fund, derivative use, credit default swap

 

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495.pdf

SFB/TR 15 Discussion Paper No.

494

Dominika Paula Gałkiewicz
Loss Potential and Disclosures Related to Credit Derivatives – A Cross-Country Comparison of Corporate Bond Funds under U.S. and German Regulation

Abstract:

This study analyzes the loss potential arising from investments into CDS for a sample of large U.S. and German mutual funds. Further, it investigates whether the comments funds make on CDS use in periodic fund reports are consistent with the disclosed CDS holdings. For several funds in the U.S., the potential losses arising from selling CDS protection are almost as high as net assets, while in Germany, this potential can be even higher. Regarding the information funds provide to investors about their use of CDS, the results of the study suggest that comments on CDS contained in periodic reports are often unspecific and sometimes misleading. Thus, investors might have to analyze portfolio holdings in order to learn about the true investment behavior of funds. For instance, in Germany, funds that use more short than long CDS often state that they only use long CDS for hedging purposes. Based on the results, it seems advisable that regulators in both countries tighten rules restricting the speculative use of derivatives by funds to a reasonable level, as well as implement more standardized disclosure policies.

 

JEL-Classification: G11, G15, G23, G28

Keywords: Mutual funds, leverage, derivative, credit default swaps, disclosure

 

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494.pdf

SFB/TR 15 Discussion Paper No.

492

Alexander Eisl, Hermann W. Elendner, Manuel Lingo
Re-Mapping Credit Ratings

Abstract:

Rating agencies report ordinal ratings in discrete classes. We question the market’s implicit assumption that agencies define their classes on identical scales, e.g., that AAA by Standard & Poor’s is equivalent to Aaa by Moody’s. To this end, we develop a non-parametric method to estimate the relation between rating scales for pairs of raters. For every rating class of one rater this, scale relation identifies the extent to which it corresponds to any rating class of another rater, and hence enables a rating-class specific re-mapping of one agency’s ratings to another’s. Our method is based purely on ordinal co-ratings to obviate error-prone estimation of default probabilities and the disputable assumptions involved in treating ratings as metric data. It estimates all rating classes’ relations from a pair of raters jointly, and thus exploits the information content from ordinality.

 

We find evidence against the presumption of identical scales for the three major rating agencies Fitch, Moody’s and Standard & Poor’s, provide the relations of their rating classes and illustrate the importance of correcting for scale relations in benchmarking.

 

Key words: credit rating, rating agencies, rating scales, comparison of ratings

JEL: C14, G24

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492.pdf

SFB/TR 15 Discussion Paper No.

491

Haina Ding
Innovation strategies and stock price informativeness

Abstract:

This paper models the interactions among technological innovation, product market competition and information leakage via the stock market. There are two firms who compete in a product market and have an opportunity to invest in a risky technology either early on as a leader or later once stock prices reveal the value of the technology. Information leakage thus introduces an option of waiting, which enhances production efficiency. A potential leader may nevertheless be discouraged from investing upfront, when anticipating its competitor to invest later in response to good news. I show that an increase in product market competition increases the option value of waiting but has an ambiguous effect on information production. It may thus be the case that intense competition leads to more leakage such that no firm would invest, especially so in a smaller market. Given a moderate level of competition, price informativeness may also improve investment outcome when investment profitability and the market size are relatively large. The model predicts that, under these conditions, the investment of a follower firm is more sensitive to share price movements.

 

JEL Classification Code: G14, G31, D43

Keywords: Price efficiency; Information leakage; Innovation; Feedback

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491.pdf

SFB/TR 15 Discussion Paper No.

490

Daniel Streitz
The Impact of Credit Default Swap Trading on Loan Syndication

Abstract:

We analyze the impact of CDS trading on bank syndication activity. Theoretically, the effect of CDS trading is ambiguous: on the one hand, CDS can improve risk-sharing and hence be a more flexible risk management tool than loan syndication; on the other hand, CDS trading can reduce bank monitoring incentives. We document that banks are less likely to syndicate loans and retain a larger loan fraction once CDS are actively traded on the borrower’s debt. We then discern the risk management and the moral hazard channel. We find no evidence that the reduced likelihood to syndicate loans is a result of increased moral hazard problems.

 

Keywords: Loan Sales, Credit Default Swaps, Syndicate Structure, Syndicated Loans

JEL-Classification: G21, G32

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490.pdf

SFB/TR 15 Discussion Paper No.

489

Tobias Berg, Anthony Saunders, Sascha Steffen
The Total Costs of Corporate Borrowing in the Loan Market: Don’t Ignore the Fees

Abstract:

More than 80% of US syndicated loans contain at least one fee type and contracts typically specify a menu of spread and different types of fees. We test the predictions of existing theories about the main purposes of fees and provide supporting evidence that: (1) fees are used to price options embedded in loan contracts such as the draw-down option for credit lines and the cancellation option in term loans; and (2) fees are used to screen borrowers about the likelihood of exercising these options. We also propose a new total-cost-of-borrowing measure that includes various fees charged by lenders.

 

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489.pdf

SFB/TR 15 Discussion Paper No.

488

Tobias Berg, Christoph Kaserer
Does contingent capital induce excessive risk-taking?

Abstract:

In this paper, we analyze the effect of the conversion price of CoCo bonds on equity holders' incentives. First, we use an option-pricing context to show that CoCo bonds can magnify equity holders' incentives to increase the riskiness of assets and decrease incentives to raise new equity in a crisis in cases in which conversion transfers wealth from CoCo bond holders to equity holders. Second, we present a clinical study of the CoCo bonds issued so far. We show that i) almost all existing CoCo bonds are designed in a way that implies a wealth transfer from CoCo bond holders to equity holders at conversion and ii) this contractual design is reflected in traded prices of CoCo bonds. In particular, CoCo bonds are short volatility with a magnitude five times greater than that which can be observed for straight bonds. These results are robust and economically significant. We conclude that the CoCo bonds issued so far can create perverse incentives for banks' equity holders.

 

Keywords: Contingent capital, banking regulation, risk-taking incentives, asset substitution, debt overhang, credit crunch

 

Full text in pdf format:
488.pdf

SFB/TR 15 Discussion Paper No.

482

Dalia Marin, Jan Schymik, Alexander Tarasov
Trade in Tasks and the Organization of Firms

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 classification: F12, F14, L22, D23

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482.pdf

SFB/TR 15 Discussion Paper No.

476

Tim R. Adam and Daniel Streitz
Hold-Up and the Use of Performance-Sensitive Debt

Abstract:

We examine whether performance-sensitive debt (PSD) is used to reduce hold-up problems in long-term lending relationships. We find that the use of PSD is more common in the presence of a long-term lending relationship and if the borrower has fewer financing alternatives available. In syndicated deals, however, the presence of a relationship lead arranger reduces the use of PSD, which is consistent with hold-up being of lesser concern in such cases. Further, supporting our hypothesis that hold-up concerns motivate the use of PSD, we find a substitution effect between the use of PSD and the tightness of financial covenants.

 

Keywords: Performance-sensitive debt, relationship lending, hold-up, holdout, syndicated debt, covenants

JEL-Classification: G21, G31, G32

Full text in pdf format:
476.pdf

SFB/TR 15 Discussion Paper No.

475

Tim R. Adam,Valentin Burg, Tobias Scheinert, Daniel Streitz
Managerial Optimism and Debt Contract Design: The Case of Syndicated Loans

Abstract:

We examine the impact of managerial optimism on the inclusion of performance-pricing provisions in syndicated loan contracts (PSD). Optimistic managers may view PSD as a relatively cheap form of financing given their upwardly biased expectations about the firm’s future cash flow. Indeed, we find that optimistic managers are more likely to issue PSD, and choose contracts with greater performance-pricing sensitivity than rational managers. Consistent with their biased expectations,

firms with optimistic managers perform worse than firms with rational managers after issuing PSD. Our results indicate that behavioral aspects can affect contract design in the market for syndicated loans.

 

Keywords: Optimism Bias, Performance-Sensitive Debt, Debt Contracting, Syndicated

Loans

JEL-Classification: G02, G30, G31, G32

Full text in pdf format:
475.pdf

SFB/TR 15 Discussion Paper No.

474

Dominika Paula Gałkiewicz
Similarities and Differences between U.S. and German Regulation of the Use of Derivatives and Leverage by Mutual Funds – What Can Regulators Learn from Each Other?

Abstract:

This study analyzes current regulation with respect to the use of derivatives and leverage by mutual funds in the U.S. and Germany. After presenting a detailed overview of U.S. and German regulations, this study thoroughly compares the level of flexibility funds have in both countries. I find that funds in the U.S. and Germany face limits on direct leverage (amount of bank borrowing) of up to 33% and 10% of their net assets, respectively. Funds can extend these limits indirectly by using derivatives beyond their net assets (e.g., by selling credit default swaps protection with a notional amount equal to their net assets). Additionally, issuer-oriented rules in the U.S. and Germany account for issuer risk differently: U.S. funds have greater discretion to undervalue derivative exposure compared to German funds. All analyses of this study reveal that under existing derivative and leverage regulation, funds in both countries are able to increase risk by using derivatives up to the point at which it is possible for them to default solely due to investments in derivatives. The results of this study are highly relevant for the public and regulators.

 

JEL-Classification: G15, G18

Key Words: Regulation, mutual funds, leverage, derivative, credit default swaps

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474.pdf

SFB/TR 15 Discussion Paper No.

456

Iris Kesternich, Heiner Schumacher, Joachim Winter
Professional norms and physician behavior: homo oeconomicus or homo hippocraticus?

Abstract:

Physicians' treatment decisions determine the level of health care spending to a large extent. The analysis of physician agency describes how doctors trade off their own and their patients' benefits, with a third party (such as the collective of insured individuals or the taxpayers) bearing the costs. Professional norms are viewed as restraining physicians' self-interest and as introducing altruism towards the patient. We present a controlled experiment that analyzes the impact of professional norms on prospective physicians' trade-offs between her own profits, the patients' benefits, and the payers' expenses for medical care. We find that professional norms derived from the Hippocratic tradition shift weight to the patient in the physician's decisions while decreasing his self-interest and efficiency concerns.

 

Keywords: social preferences, allocation of medical resources, professional norms

JEL classification: A13, I19, C72, C91

Full text in pdf format:
456_01.pdf

SFB/TR 15 Discussion Paper No.

453

Heiner Schumacher, Iris Kesternich, Michael Kosfeld, Joachim Winter
Us and Them: Distributional Preferences in Small and Large Groups

Abstract:

We analyze distributional preferences in games in which a decider chooses the provision of a good that benefits a receiver and creates costs for a group of payers. The average decider takes into account the welfare of all parties and has concerns for efficiency. However, she attaches similar weights to small and large groups so that she neglects large provision costs that are dispersed among many payers. This holds regardless of whether the decider benefits from the provision or not. A CES utility function which rationalizes average behavior implies altruism in bilateral situations and welfare-damaging actions when costs are  dispersed.

 

Keywords: Social Preferences, Distribution Games, Concentrated Benefits and

Dispersed Costs

JEL Classification: C91, D63, H00

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453.pdf

SFB/TR 15 Discussion Paper No.

451

Ola Kvaløy, Petra Nieken, Anja Schöttner
Hidden Benefits of Reward: A Field Experiment on Motivation and Monetary Incentives

Abstract:

We conducted a field experiment in a controlled work environment to investigate the effect of motivational talk and its interaction with monetary incentives. We find that motivational talk significantly improves performance only when accompanied by performance pay. Moreover, performance pay slightly reduces performance unless it is accompanied by motivational talk. These effects also carry over to the quality of work. Performance pay alone leads to more mistakes. Adding motivational talk makes the difference. In treatments with performance pay, motivational talk increases output by about 20 percent and reduces the ratio of mistakes by more than 40 percent.

 

JEL Classification: C93, M52, J33

Keywords: Verbal Motivation, Performance Pay, Field Experiment

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451.pdf

SFB/TR 15 Discussion Paper No.

445

Jörg Budde
Verifiable and Nonverifiable Information in a Two-Period Agency Problem

Abstract:

I examine how a firm’s opportunity to verify information influences the joint use of verifiable and unverifiable information for incentive contracting. I employ a simple two-period agency model, in which contract frictions arise from limited liability and the potential unverifiability of the principal’s information about the agent’s action. With short-term contract, the principal benefits from both a more informative and a more conservative verification of his private information. With long-term contracts, he may prefer a less informative verification, but his preference for a conservative verification persists.

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445.pdf

SFB/TR 15 Discussion Paper No.

444

Jörg Budde
Good news and bad news in subjective performance evaluation

Abstract:

Earlier studies show that contracts under subjective performance evaluation are dichotomous and punish only worst performance. I show that with limited liability payments need not be binary. More importantly, if the agent earns a rent from limited liability, the optimal contract distinguishes only signals of good news and bad news of the agent’s action.

 

Keywords: bonus, monotone likelihood ratio, wage compression

JEL classification numbers: D82, M52, M54

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444.pdf

SFB/TR 15 Discussion Paper No.

443

Jörg Budde, Christian Hofmann
Dynamic Bonus Pools

Abstract:

We analyze a two-period agency problem with limited liability and nonverifiable information. The principal commits to a dynamic bonus pool comprising a fixed total payment that may be distributed over time to the agent and a third party. We find that the optimal two-period contract features memory. If the agent succeeds in the first-period, second-period incentives are weakened whereas higher-powered incentives are provided if he fails. The two-period bonus pool offers a complementary reason for why third-party payments are not commonly observed in practice.

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443.pdf

SFB/TR 15 Discussion Paper No.

425

Matthias Kräkel, Petra Nieken
Relative Performance Pay in the Shadow of Crisis

Abstract:

We analyze whether incentives from relative performance pay are reduced or enhanced if a department is possibly terminated due to a crisis. Our benchmark model shows that incentives decrease in a severe crisis, but are boosted given a minor crisis since efforts are strategic complements in the former case but strategic substitutes in the latter one. We tested our predictions in a laboratory experiment. The results confirm the effort ranking but show that in a severe crisis individuals deviate from equilibrium significantly stronger than in other situations. This behavior contradicts the benchmark model and leads to a five times higher survival probability of the department. We develop a new theoretical approach that may explain players’ behavior.

 

Keywords: crisis; incentives; strategic complements; strategic substitutes; tournament

JEL Classification: C9; J3; J6; M5

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425.pdf

SFB/TR 15 Discussion Paper No.

414

Matthias Kräkel, Nora Szech, Frauke von Bieberstein
Externalities in Recruiting

Abstract:

External recruiting at least weakly improves the quality of the pool of applicants, but the incentive implications are less clear. Using a contest model, this paper investigates the pure incentive effects of external recruiting. Our results show that if workers are heterogeneous, the opening of a firm’s career system may lead to a homogenization of the pool of contestants and, thus, encourage the firm’s high ability workers to exert more effort. If this positive effect outweighs the discouragement of low ability workers, the firm will benefit from external recruiting. If, however, the discouragement effect dominates the homogenization effect, the firm should disregard external recruiting. In addition, product market competition makes opening of the career system less attractive for a firm since it increases the incentives of its competitors’ workers and hence strengthens the competitors.

 

Keywords: contest; externalities; recruiting; wage policy.

JEL Classification: C72; J2; J3.

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414.pdf

SFB/TR 15 Discussion Paper No.

413

Lorens Imhof, Matthias Kräkel
Bonus Pools and the Informativeness Principle

Abstract:

Previous work on moral-hazard problems has shown that, under certain conditions, bonus contracts create optimal individual incentives for risk-neutral workers. In our paper we demonstrate that, if a firm employs at least two workers, it may further bene.t from combining worker compensation via a bonus-pool contract and relative performance evaluation. Such combination leads to saved rents under a wide class of luck distributions. In addition, if the employer is wealth-constrained, complementing individual bonus contracts by the possibility of pooling bonuses can increase the set of implementable effort levels. All our results hold even though workers’ outputs are technically and stochastically independent so that, in view of Holmstrom’s informativeness principle, individual bonus contracts would be expected to dominate bonus-pool contracts.

 

Keywords: contract; hazard rate; informativeness principle; limited liability; relative

performance.

JEL classification: C72; D86.

Full text in pdf format:
413.pdf

SFB/TR 15 Discussion Paper No.

412

Matthias Krakel
Authority and Incentives in Organizations

Abstract:

The paper analyzes the choice of organizational structure as solution to the trade-off between controlling behavior based on authority rights and minimizing costs for implementing high efforts. The analysis includes the owner of a firm, a top manager and two division heads. If it is more expensive to incentivize the division heads, the owner will prefer full delegation of authority to them to replace their high incentive pay by incentives based on private benefits of control. In that situation, decentralization is optimal given that selfish behavior is more important than cooperation for maximizing returns, but concentrated delegation of full authority to a single division head is optimal for cooperation being crucial. If, however, incentivizing the division heads is clearly less expensive than creating incentives for the top manager, the owner will choose centralization given that cooperation is the dominating issue, but partial delegation if selfish behavior is crucial.

 

Keywords: authority, centralization, contracts, decentralization, moral hazard.

JEL classification: D21, D23, D86, L22.

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412.pdf

SFB/TR 15 Discussion Paper No.

411

Lorens Imhof, Matthias Kräkel
Tournaments with Gaps

Abstract:

A standard tournament contract specifies only tournament prizes. If agents’ performance is measured on a cardinal scale, the principal can complement the tournament contract by a gap which defines the minimum distance by which the best performing agent must beat the second best to receive the winner prize. We analyze a tournament with two risk averse agents. Under unlimited liability, the principal strictly benefits from a gap by partially insuring the agents and thereby reducing labor costs. If the agents are protected by limited liability, the principal sticks to the standard tournament.

 

Keywords: limited liability; moral hazard; risk aversion; tournament; unlimited liability.

JEL classification: C72; D86.

 

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411.pdf

SFB/TR 15 Discussion Paper No.

410

Matthias Kräkel, Daniel Müller
Merger Efficiency and Managerial Incentives

Abstract:

We consider a two-stage principal-agent model with limited liability in which a CEO is employed as agent to gather information about suitable merger targets and to manage the merged corporation in case of an acquisition. Our results show that the CEO systematically recommends targets with low synergies—even when targets with high synergies are available—to obtain high-powered incentives and, hence, a high personal income at the merger-management stage. We derive conditions under which shareholders prefer a self-commitment policy or a rent-reduction policy to deter the CEO from opportunistic recommendations.

 

JEL classification: D82; D86; G34

Keywords: acquisition; merger; moral hazard

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410.pdf

SFB/TR 15 Discussion Paper No.

407

Kala Krishna, Alexander Tarasov
Affirmative Action: One Size Does Not Fit All

Abstract:

This paper identifies a new reason for giving preferences to the disadvantaged using a model of contests. There are two forces at work: the effort effect working against giving preferences and the selection effect working for them. When education is costly and easy to obtain (as in the U.S.), the selection effect dominates. When education is heavily subsidized and limited in supply (as in India), preferences are welfare reducing. The model also shows that unequal treatment of identical agents can be welfare improving, providing insights into when the counterintuitive policy of rationing educational access to some subgroups is welfare improving.

 

Keywords: contests; educational quotas; private benefits; social welfare.

JEL classification: D61, I23

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407.pdf

SFB/TR 15 Discussion Paper No.

404

Michael Seitz, Alexander Tarasov, Roman Zakharenko
Trade Costs, Conflicts, and Defense Spending

Abstract:

This paper develops a quantitative model of trade, military conflicts, and defense spending. Trade liberalization between two countries reduces probability of an armed conflict between them, causing both to cut defense spending. This in turn causes a domino effect on defense spending by other countries. As a result, both countries and the rest of the world are better off. We estimate the model using data on trade, conflicts, and military spending. We find that, after reduction of costs of trade between a pair of hostile countries, the welfare effect of worldwide defense spending cuts is comparable in magnitude to the direct welfare gains from trade.

 

Keywords: general equilibrium, gains from trade, defense spending

JEL Codes: C5, C6, F13, F51, H56

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404.pdf

SFB/TR 15 Discussion Paper No.

402

Christian Hepenstrick, Alexander Tarasov
Trade Openness and Cross-country Income Differences

Abstract:

Development accounting literature usually attributes the observed cross-country variation in per capita income to differences in countries' factor endowments and total factor productivity (the Solow residual). While the former can be relatively straightforward interpreted and measured, the latter remains at least partly a black box. In this paper, we provide a structural interpretation for differences in total factor productivity across countries and quantitatively explore the role of trade barriers in explaining cross-country income differences. In particular, we find that giving all countries the same market entry costs or giving all country-pairs the same variable trade costs reduces inequality by around 13%.

 

Keywords: General equilibrium, market access costs, development accounting, experiments

JEL Classification: F11, F12, O10, O40

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402.pdf

SFB/TR 15 Discussion Paper No.

398

Dalia Marin, Linda Rousova, Thierry Verdier
Do Multinationals Transplant their Business Model?

Abstract:

What determines whether or not multinational firms transplant their mode of organisation to other countries? We embed the theory of knowledge hierarchies in an industry equilibrium model of monopolistic competition to examine how the economic environment may affect the decision of a multinational firm about transplanting its business organisation to other countries. We test the theory with original and matched parent and affiliate data on the internal organisation of 660 Austrian and German multinational firms and 2200 of their affiliate firms in Eastern Europe. We find that three factors stand out in promoting the multinational firm’s decision to transplant the business model to the affiliate firm in the host country: a competitive host market, the corporate culture of the multinational firm, and when an innovative technology is transferred to the host country. These factors increase the respective probabilities of organisational transfer by 18.5 percentage points, 37, and 31 percentage points.

 

JEL Codes: D23 F12 F23 F61

Keywords: organisational economics of multinational firms, trade and organisations, the theory of the firm, organisational transfer between countries

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398.pdf

SFB/TR 15 Discussion Paper No.

381

Anna Gumpert, James R. Hines Jr., Monika Schnitzer
The use of tax havens in exemption regimes

Abstract:

This paper analyzes the tax haven investment behavior of multinational firms from a country that exempts foreign income from taxation. High foreign tax rates generally encourage firms to invest in tax havens, though significant costs of reallocating taxable income dampen these incentives. The behavior of German manufacturing firms from 2002-2008 is consistent with this prediction: at the mean, one percentage point higher foreign tax rates are associated with three percentage point greater likelihoods of owning tax haven affiliates. This contrasts with earlier evidence for U.S. firms subject to home country taxation, which are more likely to invest in tax havens if they face lower foreign tax rates. Foreign tax rates appear to be unrelated to tax haven investments of German firms in service industries, possibly reflecting the difficulty they face in reallocating taxable income.
Keywords: Tax Havens, Multinational Firms, Tax Avoidance, Profit Shifting, Manufacturing FDI, Service FDI
JEL classification: H87, F23

Full text in pdf format:
381.pdf

SFB/TR 15 Discussion Paper No.

380

Katrin Peters, Monika Schnitzer
Trade liberalization and credit constraints: Why opening up may fail to promote convergence

Abstract:

Recent evidence suggests that despite opening up a country for trade, the productivity gap between developed and emerging economies often does not close. This paper examines credit constraints as one channel held responsible for hampering convergence. Specifically, we extend a Melitz and Ottaviano (2008) type trade model with variable mark-ups to allow for endogenous technology adoption. We consider a framework with two countries that potentially differ with respect to credit market development. Firms have the option to adopt a more efficient technology by paying some fixed cost. A fraction of the fixed technology adoption cost has to be financed externally: in a less developed credit market, the costs of external finance and thus the total costs of technology adoption are higher. A reduction in trade costs raises demand abroad (pro technology-adoption effect) but reduces demand at home because of import competition (anti technology-adoption effect). We find that trade liberalization increases economic performance, that is average productivity and technology adoption, in both countries but that the productivity gap widens. Simulations show that the welfare gap widens too. Opening up without sufficient access to external funding thus fails to promote convergence.
Keywords: Trade liberalization, Technology adoption, Financial constraints, Convergence, Productivity gap.
JEL classification: F1, O33, O16

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380.pdf

SFB/TR 15 Discussion Paper No.

379

Katharina Eck, Martina Engemann, Monika Schnitzer
How Trade Credits Foster International Trade

Abstract:

Internationally active firms rely intensively on trade credits even though they are considered particularly expensive. This phenomenon has been little explored so far. Our theoretical analysis shows that trade credits can alleviate financial constraints arising from asymmetric information because they serve as a quality signal and reduce the uncertainty related to international transactions. We use unique survey data on German enterprises to test the effect of the use of trade credits on firms' exporting and importing behavior, both at the extensive and intensive margins. Our results support the assertion that trade credits have a positive impact on firms' exporting and importing activities.
Keywords: trade credits, international trade, financial constraints, export, import, BEEPS
JEL classification: F10, G30

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379.pdf

SFB/TR 15 Discussion Paper No.

374

Francesca Fabbri, Dalia Marin
What explains the rise in CEO pay in Germany? A Panel Data Analysis for 1977-2009

Abstract:

The compensation of executive board members in Germany has become a highly controversial topic since Vodafone's hostile takeover of Mannesmann in 2000 and it is again in the spotlight since the outbreak of the financial crisis of 2009. Based on unique panel data evidence of the 500 largest firms in Germany in the period 1977-2009 we test two prominent hypothesis in the literature on executive pay: the manager power hypothesis and the efficient pay hypothesis. We find support for the manager power hypothesis for Germany as executives tend to be rewarded when the sector is doing well rather than the firm they work for. We reject, however, the efficient pay hypothesis as CEO pay and the demand for managers increases in Germany in difficult times when the typical firm size shrinks. We find further that domestic and global competition for managers has contributed to the rise in executive pay in Germany. Lastly, we show that CEOs in the banking sector are provided with incentives for performance and that the great recession of 2009 acted as a disciplining devise on CEO pay in Germany.
JEL classification: F23, J3, M12, M52.

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374.pdf

SFB/TR 15 Discussion Paper No.

372

Petra Nieken, Patrick W. Schmitz
Repeated moral hazard and contracts with memory: A laboratory experiment

Abstract:

This paper reports data from a laboratory experiment on two-period moral hazard problems. The findings corroborate the contract-theoretic insight that even though the periods are technologically unrelated, due to incentive considerations principals can benefit from offering long-term contracts that exhibit memory.
Keywords: Repeated moral hazard; Sequential hidden actions; Laboratory experiment
JEL classification: D82; J33

Full text in pdf format:
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SFB/TR 15 Discussion Paper No.

370

Dalia Marin
The Theory of the Firm goes Global

Abstract:

What insights can be gained from bringing the theory of the firm to the global economy? I discuss several new features of the world economy that can be explained by incorporating the theory of the firm into the theory of international trade. Among the new features I discuss are the move to flatter corporate hierarchies and the decentralization of authority in firms, the “war for talent”, the rise of CEO pay in rich countries, organizational convergence across countries, and firm heterogeneity.

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370_01.pdf

SFB/TR 15 Discussion Paper No.

368

Petra Nieken, Abdolkarim Sadrieh, Nannan Zhou
Overconfidence and Managers’ Responsibility Hoarding

Abstract:

Overconfidence is a well-established behavioral phenomenon that involves an overestimation of own capabilities. We introduce a model, in which managers and agents exert effort in a joint production, after the manager decides on the allocation of the tasks. A rational manager tends to delegate the critical task to the agent more often than given by the efficient task allocation. In contrast, an overconfident manager is more likely to hoard responsibility, i.e. to delegate the critical task less often than a rational manager. In fact, a manager with a sufficiently high ability and a moderate degree of overconfidence increases
the total welfare by hoarding responsibility and exerting more effort than a rational manager. Finally, we derive the conditions under which responsibility hoarding can persist in an organization, showing that the bias survives as long as the overconfident manager can rationalize the observed output by underestimating the ability of the agent.
Key Words: organizational behavior, management performance, bounded rationality, behavioral bias
JEL classification: C72, D03, D82, M12, M54

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SFB/TR 15 Discussion Paper No.

367

Dalia Marin, Linda Rousová
The Organization of European Multinationals

Abstract:

Recent literature on international trade has established that the most productive rms become multinationals. But our data reveal a startling variation in productivity levels of foreign aliates across the countries in Eastern Europe of the same European multinational parent rms suggesting that not all multinationals transplant their home productivity advantage to the new EU Member States and Emerging Europe. One candidate for this startling difference in productivity levels among foreign aliates is the ability of European multinationals to transport their business model abroad. This paper examines the conditions under which European multinationals give autonomy to their subsidiaries and delegate authority to them. We also analyse the conditions under which European multinationals transplant their business model to Eastern Europe. We collect original and unique matched parent and aliate data on the internal organization of 660 German and Austrian parent rms and 2200 of their subsidiaries in Eastern Europe including the former Soviet Union. We test the hypothesis that the ability of European multinationals to transplant their business model to foreign aliates is determined by the organization of European multinationals on the one hand and the market environment their aliate rms face in Eastern Europe on the other hand. We show that the business culture of parent rms accounts for about 50 percent of the variation of the organization of subsidiaries, while the market environment of subsidiaries contributes the rest.

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367_01.pdf

SFB/TR 15 Discussion Paper No.

341

Yuriy Gorodnichenko, Monika Schnitzer
Financial constraints and innovation: Why poor countries don't catchup

Abstract:

We examine micro-level channels of how financial development can affect macroeconomic outcomes like the level of income and export intensity. We investigate theoretically and empirically how financial constraints affect a firm's innovation and export activities, using unique firm survey data which provides direct measures for innovations and firm-specific financial constraints. We find that financial constraints restraint heability of domestically owned firms to innovate and export and hence to catch up to the technological frontiers. This negative effect is amplified as financial constraints force export and innovation activities to become substitutes although they are generally natural complements.

 

Keywords: innovation, productivity, financial constraint, export, technology frontier, BEEPS

JEL Classification: O3, O16, F1, G3

June 2010

 

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SFB/TR 15 Discussion Paper No.

340

Claudia M. Buch, Iris Kesternich, Alexander Lipponer, Monika Schnitzer
Exports Versus FDI Revisited: Does Finance Matter?

Abstract:

This paper explores the impact of financial constraints on the  internationalization strategies of firms. It contributes to the literature by focusing on three aspects: First, the paper studies the impact of financial constraints on exporting relative to FDI. Consistent with theory, the empirical results confirm  that the impact of financial constraints is stronger for FDI than for exporting. Second, the paper analyzes the extensive and the intensive margins and finds that financial frictions matter for  both. Third, the paper explores the impact on manufacturing as compared to service industries and shows that firms in service industries are affected more than firms in manufacturing. The paper also identifies a threshold effect: Financial constraints do not matter  for small firms whose productivity seems to be too low to consider international expansions.

 

Keywords: Multinational firms, exports versus FDI, financial constraints,
heterogeneity, productivity 

JEL Classification: F2, G2

November 2010

 

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SFB/TR 15 Discussion Paper No.

339

Jos Jansen
On Competition and the Strategic Management of Intellectual Property in Oligopoly

Abstract:

An innovative firm with private information about its indivisible process innovation chooses strategically whether to apply for a patent with probabilistic validity or rely on secrecy. By doing so, the firm manages its rivals’ beliefs about the size of the innovation, and affects the incentives in the product market. A Cournot competitor tends to patent big innovations, and keep small innovations secret, while a Bertrand competitor adopts the reverse strategy. Increasing the number of firms gives a greater (smaller) patenting incentive for Cournot (Bertrand) competitors. Increasing the degree of product substitutability increases the incentives to patent the innovation.


Keywords: Bertrand and Cournot competition, oligopoly, productdifferentiation,
asymmetric information, strategic disclosure, stochastic patent, tradesecret, process innovation, imitation

JEL Classification: D82, L13, O31, O32

October 2010

 

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SFB/TR 15 Discussion Paper No.

325

Johannes Berger, Petra Nieken
Heterogeneous Contestants and Effort Provision in Tournaments - an Empirical Investigation with Professional Sports Data

Abstract:

We empirically investigate if tournaments between heterogeneous contestants are less intense. To test our hypotheses we use professional sports data from the TOYOTA Handball-Bundesliga, the major handball league in Germany. Using either differences in betting odds or rankings to measure ability differences, our results support standard tournament theory as we find a highly significant negative impact of the matchup's heterogeneity on joint teame efforts. However, further analysis shows that this overall decrease in efforts is almost entirely driven by the reaction of the ex-ante favorite team.

 

Keywords: tournament, heterogeneity, incentives, sportseconomics

JEL Classification: J24, J33, J41, M52

July 2010

 

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SFB/TR 15 Discussion Paper No.

317

Thorsten Hansen
Exports and Productivity: An Empirical Analysis of German and Austrian Firm-Level Performance

Abstract:

This paper studies the relationship between export activities and firm-level productivity. Unique matching of German and Austrian micro data from 1994 to 2003 suggests that exporters are more productive by around 40 percent compared with non-exporters. Moreover, beside other analysis techniques,
instrumental variable estimations suggest that exporting causes a rise in firm-level productivity. That is, the annual average growth rate of an exporting firm's productivity is between about 1 and 1.5 percent higher than that of non-exporters. It allows the conclusion that, against other findings of existing studies, both directions hold: more productive firms self-select themselves into export markets and being active in foreign markets boosts firm-level productivity.

 

JEL Classification: D24; F13; F23; L22; L23; O47

April 2010

 

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SFB/TR 15 Discussion Paper No.

316

Thorsten Hansen
Tariff Rates, Offshoring and Productivity: Evidence from German and Austrian Firm-Level Data

Abstract:

This paper studies the impact of trade liberalization in terms of tariff cuts within the Eastern European enlargement on German and Austrian firm productivity. Unique matching of data from 1994 to 2003 suggests that tariff reductions raise parent firm productivity significantly. A ten percentage point decrease in tariff rates can lead to total factor productivity gains of up to 2 percent. The data allow distinction between three types of tariffs: output, intra-firm and input tariff rates. The size of the results strongly depends on the type of tariff and country analyzed.

 

JEL Classifi cation: F12; F13; F23; L22; L23; O14

April 2010

 

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SFB/TR 15 Discussion Paper No.

315

Thorsten Hansen
Innovation and the International Firm Structure: Theory and Evidence from German Firm-Level Data

Abstract:

This paper studies the impact of innovation on the organizational structure. The theoretical framework predicts that a larger parental pool of knowledge raises the probability of offshoring. This holds in a national as well as an international context. However, when the producer loses territorial protection, the changeover from non-integration to integration is delayed. Employing data on German firms investing in Eastern Europe finds empirical evidence for the theoretical predictions. The results are robust to different measurements and an instrumental variable regression.

 

JEL Classification: D23; D51; F23; L14; L21; L22; L23

April 2010

 

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SFB/TR 15 Discussion Paper No.

305

Petra Nieken, Michael Stegh
Incentive Effects in Asymmetric Tournaments Empirical Evidence from the German Hockey League

Abstract:

Following tournament theory, incentives will be rather low if the contestants of  a tournament are heterogeneous. We empirically test this prediction using a  large dataset from the German Hockey League. Our results show that indeed the intensity of a game is lower if the teams are more heterogeneous. This effect can be observed for the game as a whole as well as for the ?rst and last third. When dividing the teams in the dataset into favorites and underdogs, we only observe a reduction of effort provision from favorite teams. As the number of games per team changes between different seasons, we can also investigate the effect of a changing spread between winner and loser prize. In line with theory, teams reduce effort if the spread declines. Interestingly, effort is also sensitive to the total number of teams in the league even if the price spread remains unchanged.


Keywords: Tournaments, Heterogeneity, Incentives,Effort

JEL Classification: J33

January 2010

 

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SFB/TR 15 Discussion Paper No.

304

Basak Akbel, Monika Schnitzer
Creditor Rights and Debt Allocation within Multinationals

Abstract:

We analyze the optimal debt structure of multinational corporations choosing between centralized or decentralized borrowing. We identify how this choice is affected by creditor rights and bankruptcy costs, taking into account managerial incentives and coinsurance considerations. We find that partially centralized borrowing structures are optimal with either weak or strong creditor rights. For intermediate levels of creditor rights fully decentralized (centralized) borrowing structures are optimal if managers have strong (weak) empire building dencies. Decentralized borrowing is more attractive for companies focussing on short-term profitability. Credits are rather taken in countries with better creditor rights and more efficient insolvency systems.

 

Keywords: Multinational corporations, capital structure, creditor rights, coinsurance, internal capital markets

JEL Classification: G32, F23

November 2009

 

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SFB/TR 15 Discussion Paper No.

299

Maria Lehner
Group Lending versus Individual Lending in Microfinance

Abstract:

Microfinance is typically associated with joint liability of group members. However, a large part of microfinance institutions rather offers individual instead of group loans. We analyze the incentive mechanisms in both individual and group contracts. Moreover, we show that microfinance institutions offer group loans when the loan size is rather large, refinancing costs are high, and competition between microfinance institutions is low. Otherwise, individual loans are offered. Interestingly, our analysis predicts that individual lending in microfinance will gain in importance in the future if microfinance institutions continue to get better access to capital markets and if competition further rises.

 

Keywords: microfinance, group loans, individual loans

JEL Classification: G21, L13, O16

August 2009

 

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SFB/TR 15 Discussion Paper No.

286

Matthias Kräkel
Competitive Careers as a Way to Mediocracy

Abstract:

We show that incompetitive careers based on individual performance the least productive individuals may have the highest probabilities to be promoted to top positions. These individuals have the lowest fall-back positions and, hence, the highest incentives to succeed in career contests. This detrimental incentive effect exists irrespective of whether effort and talent are substitutes or complements in the underlying contest-success function. However, in case of complements the incentive effect may be be outweighed by a productivity effect that favors high    effort choices by the more talented individuals.

 

Key Words: career competition; contest; mediocracy
JEL Classification: D72; J44; J45; M51

November 2009

 

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SFB/TR 15 Discussion Paper No.

280

Iris Kesternich, Heiner Schumacher
On the Use of Information in Repeated Insurance Markets

Abstract:

We analyze the use of information in a repeated oligopolistic insurance market. To sustain collusion, insurance companies might refrain from changing their pricing schedules even if new information about risks becomes available. We therefore provide an explanation for the existence of "unused observables" that is information which

a) insurance companies collect or could collect,

b) is correlated with the risk experience, but

c) is not used by companies to set prices.

Furthermore, the existence of bulk discounts becomes rationalizable. These results also obtain if we include communication among companies and market entry to our framework.

 

Keywords: repeated games, insurance markets, oligopoly, unused observables

JEL Classification:C72, G22, L13

October 2009

 

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SFB/TR 15 Discussion Paper No.

272

Claudia M. Buch, Iris Kesternich, Alexander Lipponer, Monika Schnitzer
Financial Constraints and Foreign Direct Investment: Firm-Level Evidence

Abstract:

Recent literature on multinational firms has stressed the importance of low productivity as a barrier to the cross-border expansion of firms. But firms may also need external finance to shoulder the costs of entering foreign markets. We develop a model of multinational firms facing real and financial barriers to foreign direct investment (FDI), and we analyze their impact on the FDI decision (the extensive margin) and foreign affiliate sales (the intensive margin). We provide empirical evidence based on a detailed dataset of German multinationals which contains information on parent-level and affiliate-level financial constraints as well as on the location the foreign affiliates. We find that financial factors constrain firms’ foreign investment decisions, an effect  felt in particular by large firms. Financial constraints at the parent level matter for the extensive, but less  so for the intensive margin. For the intensive margin, financial constraints at the affiliate level are relatively more important.


Keywords: multinational firms, heterogeneity, productivity, financial constraints
JEL Classification: F2, G2

September 2009

 

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SFB/TR 15 Discussion Paper No.

266

Oliver Gürtler and Johannes Münster
Sabotage in dynamic tournaments

Abstract:

This paper studies sabotage in a dynamic tournament. Three players compete in two rounds. In the final round, a player who is leading in the race, but not yet beyond the reach of his competitors, gets sabotaged more heavily. As a consequence, if players are at the same position initially, they do not work productively or sabotage at all in the first round. Thus sabotage is not only directly destructive, but also depresses incentives to work productively. If players are heterogeneous ex ante, sabotage activities in the first round may be concentrated against an underdog, contrary to findings from static tournaments. We also discuss the robustness of our results in a less stylized environment.

 

Keywords: dynamic tournaments, contests, sabotage, heterogeneity

June 2009

 

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SFB/TR 15 Discussion Paper No.

265

Felix Bierbrauer
On the legitimacy of coercion for the nancing of public goods

Abstract:

The literature on public goods has shown that efficient outcomes are impossible if participation constraints have to be respected. This paper addresses the question whether they should be imposed. It asks under what conditions efficiency considerations justify that individuals are forced to pay for public goods that they do not value. It is shown that participation constraints are desirable if public goods are provided by a malevolent Leviathan. By contrast, with a Pigouvian planner, efficiency can be achieved. Finally, the paper studies the delegation of public goods provision to a profit-maximizing firm. This also makes participation constraints desirable.


Keywords: Public goods, Mechanism Design, Incomplete Contracts, Regulation

JEL Classification: D02, D82, H41, L51

May 2009

 

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SFB/TR 15 Discussion Paper No.

264

Matthias Kräkel and Anja Schöttner
Minimum Wages and Excessive Effort Supply

Abstract:

It is well-known that, in static models, minimum wages generate positive worker rents and, consequently, inefficiently low effort. We show that this result does not necessarily extend to a dynamic context. The reason is that, in repeated employment relationships, firms may exploit workers’ future rents to induce excessively high effort.

 

Keywords: bonuses; limited liability; minimum wages

JEL Classification: D82; D86; J33

June 2009

 

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SFB/TR 15 Discussion Paper No.

248

Jarko Fidrmuc, Christa Hainz (B5)
Integrating with Their Feet: Cross-Border Lending at the German-Austrian Border

Abstract:

The current economic policy discussion on financial integration in the European Union concentrates on cross-border mergers. We study the impact of cross-border lending in a theoretical model where banks acquire either hard or soft information on borrowing firms and predict that the closer firms are to the border the more likely banks are to offer them cross-border loans. This hypothesis is confirmed in the ifo Business Climate Survey that reports the perceptions of German firms on banks lending behavior between 2003 and 2006. In contrast to the policy of harmonization, differences in bank regulations may provide incentives for cross-border lending. Thus, we show that financial integration may take place from the bottom up.


Keywords: Financial Integration, SMEs, Banking Supervision, Business Surveys, Threshold Analysis
JEL Classification: TG18, G21, C25
August 2008

 

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SFB/TR 15 Discussion Paper No.

245

Matthias Kräkel, Anja Schöttner (B4)
Relative Performance Pay, Bonuses, and Job-Promotion Tournaments

Abstract:

Several empirical studies have challenged tournament theory by pointing out that (1) there is considerable pay variation within hierarchy levels, (2) promotion premiums only in part explain hierarchical wage differences and (3) external recruitment is observable on nearly any hierarchy level. We explain these empirical puzzles by combining job-promotion tournaments with higher-level bonus payments in a two-tier hierarchy. Moreover, we show that under certain conditions the firm implements first-best effort on tier 2 although workers earn strictly positive rents. The reason is that the firm can use second-tier rents for creating incentives on tier 1. If workers are heterogeneous, the firm strictly improves the selection quality of a job-promotion tournament by employing a hybrid incentive scheme that includes bonus payments.


Keywords: bonuses, external recruitment, job promotion, limited liability, tournaments
JEL Classification: D82, D86, J33
September 2008

 

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245_01.pdf

SFB/TR 15 Discussion Paper No.

244

Christa Hainz (B5)
Bank Competition - When is it Good?

Abstract:

The effects of bank competition and institutions on credit markets are usually studied separately although both factors are interdependent. We study the effect of bank competition on the choice of contracts (screening versus collateralized credit contract) and explicitly capture the impact of the institutional environment. Most importantly, we show that the effects of bank competition on collateralization, access to finance, and social welfare depend on the institutional environment. We predict that firms' access to credit increases in bank competition if institutions are weak but bank competition does not matter if they are well-developed.


Keywords: Bank competition, collateralization, screening, incentives
JEL Classification: D82, G21, K00
July 2008

 

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SFB/TR 15 Discussion Paper No.

237

Thomas Giebe, Oliver Gürtler (A7, B4)
Optimal Contracts for Lenient Supervisors

Abstract:

We consider a situation where an agent's effort is monitored by a supervisor who cares for the agent's well being. This is modeled by incorporating the agent's utility into the utility function of the supervisor. The first best solution can be implemented even if the supervisor's preferences are unknown. The corresponding optimal contract is similar to what we observe in practice: The supervisor's wage is constant and independent of his report. It induces one type of supervisor to report the agent's performance truthfully, while all others report favorably independent of performance. This implies that overstated performance (leniency bias) may be the outcome of optimal contracts under informational asymmetries.


Keywords: Subjective performance evaluation, leniency, supervisor, private infrmation
JEL Classification: D82, D86, J33, M52
June 2008

 

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SFB/TR 15 Discussion Paper No.

236

Georg Gebhardt, Felix Höffler (A4, B3)
How to Determine whether Regional Markets are Integrated? Theory and Evidence from European Electricity Markets

Abstract:

Prices may di er between regional markets if transport capacities are limited. We develop a new approach to determine to which extent such di erences stem from limited participation in cross-border trader rather than from bottlenecks. We derive a theoretical integration benchmark for the typical case where transportation markets clear before the product markets, using Grossman's (1976) notion of a rational expectations equilibrium. We compare the benchmark to data from European electricity markets. The data reject the integration hypothesis: Capacity prices contain too little information about spot price di erential; this indicates that well informed traders do not engage in cross-border trade.


Keywords: Market integration, electricity markets, interconnector,competition policy, rational expectations equilibrium
JEL Classification: G14, D84, L94
April 2008

 

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SFB/TR 15 Discussion Paper No.

234

Oliver Gürtler, Matthias Kräkel (B4)
Optimal Tournament Contracts for Heterogeneous Workers

Abstract:

We analyze the optimal design of rank-order tournaments with heterogeneous workers. Iftournament prizes do not differ between the workers(uniform prizes), as in the previous tournament literature, the outcome will be ineffcient. In the case of limited liability, the employer may benefit from implementing more than first-best effort. We show that the employer can use individual prizes that satisfy a self-commitment condition and induce effcient incentives at the same time, thus solving a fundamental dilemma in tournament theory. Individual prizes exhibit two major advantages - they allow the extraction of worker rents and the adjustment of individual incentives, which will be important for the employer if he cannot rely on handicaps.


Keywords: heterogenous workers, limited liability,rank-order tournaments, self commitment
JEL Classification: J33,M12, M52
May 2008

 

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SFB/TR 15 Discussion Paper No.

233

Matthias Kräkel, Petra Nieken, Judith Przemeck (B4)
Risk Taking in Winner-Take-All Competition

Abstract:

We analyze a two-stage game between two heterogeneous players. At stage one, common risk is chosen by one of the players. At stage two, both players observe the given level of risk and simultaneously invest in a winner-take-all competition. The game is solved theoretically and then tested by using laboratory experiments. We find three effects that determine risk taking at stage one - an effort effect, a likelihood effect and a reversed likelihood effect. For the likelihood effect, risk taking and investments are clearly in line with theory. Pairwise comparison shows that the effort effect seems to be more relevant than the reversed likelihood effect when taking risk.


Keywords: Tournaments, Competition, Risk-Taking, Experiment
JEL Classification: M51, C91, D23
March 2008

 

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SFB/TR 15 Discussion Paper No.

232

Jörg Budde, Matthias Kräkel (B4)
Limited Liability and the Risk-Incentive Relationship

Abstract:

Several empirical ?ndings have challenged the traditional view on the trade-off between risk and incentives. By combining risk aversion and limited liability in a standard principal-agent model the empirical puzzle on the positive relationship between risk and incentives can be explained. Increasing risk leads to a less informative performance signal. Under limited liability, the principal may optimally react by increasing the weight on the signal and, hence, choosing higher-powered incentives.


Keywords: moral hazard, limited liability, risk-incentive relationship
JEL Classification: D82, D86
March 2008

 

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SFB/TR 15 Discussion Paper No.

228

Markus Reisinger, Monika Schnitzer (A4, B5)
A Model of Vertical Oligopolistic Competition

Abstract:

This paper develops a model of successive oligopolies with endogenous market entry, allowing for varying degrees of product differentiation and entry costs in both markets. Our analysis shows that the downstream conditions dominate the overall profitability of the two-tier structure while the upstream conditions mainly affect the distribution of profits. We compare the welfare effects of upstream versus downstream deregulation policies and show that the impact of deregulation may be overvalued when ignoring feedback effects from the other market. Furthermore, we analyze how different forms of vertical restraints influence the endogenous market structure and show when they are welfare enhancing.


Keywords: Deregulation, Free Entry, Price Competition, Product Differentiation, Successive Oligopolies, Two-Part Tariffs, Vertical Restraints
JEL Classification: L13, D43, L40, L50
February 2008

 

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SFB/TR 15 Discussion Paper No.

227

Dalia Marin, Thierry Verdier (B5)
Corporate Hierarchies and the Size of Nations: Theory and Evidence

Abstract:

Corporate organization varies within a country and across countries with country size. The paper starts by establishing some facts about corporate organization based on unique data of 660 Austrian and German corporations. The larger country (Germany) has larger firms with flatter and more decentralized corporate hierarchies compared to the smaller country (Austria). Firms in the larger country change their organization less fast than firms in the smaller country. Over time firms have been introducing less hierarchical organizations by delegating power to lower levels of the corporation. We develop a theory which explains these facts and which links these features to the trade environment that countries and firms face. We introduce firms with internal hierarchies in a Krugman (1980) cum Melitz and Ottaviano (2007) model of trade. We show that international trade and the toughness of competition in international markets induce a power struggle in firms which eventually leads to decentralized corporate hierarchies. We offer empirical evidence which is consistent with the models predictions.


Keywords: international trade with endogenous firm organizations, endogenous congruence in the firm, corporate organization in similar countries, empirical test of the theory of the firm
JEL Classification: F12, F14, L22, D23
February 2008

 

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SFB/TR 15 Discussion Paper No.

222

Christa Hainz, Hendrik Hakenes (B5, B3)
The Politician and his Banker

Abstract:

Should the European Union grant state aid through an institution like the European Investment bank? This paper evaluates the efficiency of different measures for granting state aid. We use a theoretical model with firms that differ in their creditworthiness and compare different types of subsidies with indirect subsidization through public banks. We find that, in a large parameter range, the politician prefers public banks to direct subsidies because they avoid windfall gains to entrepreneurs and they economize on screening costs. For similar reasons, they may increase social welfare relative to subsidies. One important prerequisite for this result is that public banks must not be allowed to fully compete with private banks. However, from a welfare perspective, a politician uses public banks inefficiently often.


Keywords: public bank, development bank, state aid, subsidies, governance
JEL Classification: G21, G38, H25
November 2007

 

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SFB/TR 15 Discussion Paper No.

219

Oliver Gürtler, Christine Harbring (B4)
Feedback in Tournaments under Commitment Problems: The-ory and Experimental Evidence

Abstract:

In this paper, we analyze a principal's optimal feedback policy in tournaments. We close a gap in the literature by assuming the principal to be unable to commit to a certain policy at the beginning of the tournament. Our analysis shows that in equilibrium the principal reveals in-termediate information regarding the agents’ previous performances if these performances are not too different. Moreover, we investigate a situation where the principal is not able to credi-bly communicate her information. Having presented our formal analysis, we test these results using data from laboratory experiments. The experimental findings provide some support for the model.


Keywords: tournament, commitment problems, feedback, experiment
JEL Classification: C 91, D 83, J 33, M 52

October 2007

 

 

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SFB/TR 15 Discussion Paper No.

216

Christa Hainz (B5)
The Effect of Bank Competition on the Bank’s Incentive to Collateralize

Abstract:

It has been argued that competing banks make inefficiently frequent use of collateralization in situations where they are better able to evaluate a project’s risk than entrepreneurs. We study the bank’s choice between screening and collateralization in a model where banks do not have this superior screening skill. In particular, we study the effect of bank competition on this choice. We find that competing banks use collateral less often than a monopolistic bank because competition will intensify if both banks collateralize. Moreover, bank competition is welfare improving if collateralization is rather costly.


Keywords: collateralization, screening, incentives, bank competition
JEL Classification: D82, G21, K00
September 2007

 

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SFB/TR 15 Discussion Paper No.

214

Oliver Gürtler, Matthias Kräkel (B4)
Double-Sided Moral Hazard, Efficiency Wages and Litigation

Abstract:

We consider a double-sided moral hazard problem where each party can renege on the signed contract since there does not exist any verifiable performance signal. It is shown that ex-post litigation can restore incentives of the agent. Moreover, when the litigation can be settled by the parties the pure threat of using the legal system may suffice to make the principal implement first-best effort. As is shown in the paper, this .finding is rather robust. In particular, it holds for situations where the agent is protected by limited liability, where the parties have different technologies in the litigation contest, or where the agent is risk averse.


Keywords: double-sided moral hazard, efficiency wage, litigation, contest, settlement
JEL Classification: D86, J33, K41

September 2007

 

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214.pdf

SFB/TR 15 Discussion Paper No.

213

Iris Kesternich, Monika Schnitzer (B5)
Who is Afraid of Political Risk? Multinational Firms and their Choice of Capital Structure

Abstract:

This paper investigates how multinational firms choose their capital structure in response to political risk. We focus on two choice variables, the leverage and the ownership structure of the foreign affiliate, and we distinguish different types of political risk, like expropriation, corruption and confiscatory taxation, and In our theoretical analysis we find that as political risk increases the ownership share always decreases whereas leverage can both increase or decrease, depending on the type of political risk. Using the Microdatabase Direct Investment of the Deutsche Bundesbank, we find supportive evidence for these different effects.


Keywords: multinational Terms, political risk, capital structure, leverage, ownership structure
JEL Classification: F23, F21, G32
August 2007

 

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213.pdf

SFB/TR 15 Discussion Paper No.

212

Christian Arndt, Claudia M. Buch, Monika Schnitzer (B5)
FDI and Domestic Investment: An Industry-Level View

Abstract:

Previous empirical work on the link between domestic and foreign investment provides mixed results which partly depend on the level of aggregation of the data. We argue that the aggregated home country implications of foreign direct investment (FDI) cannot be gauged using firm-level data. Aggregated data, in turn, miss channels through which domestic and foreign activities interact. Instead, industry-level data provide useful information on the link between domestic and foreign investment. We theoretically show that the effects of FDI on the domestic capital stock depend on the structure of industries and the relative importance of domestic and multinational firms. Our model allows distinguishing intra-sector competition from inter-sector linkage effects. We test the model using data on German FDI. Using panel cointegration methods, we find evidence for a positive long-run impact of FDI on the domestic capital stock and on the stock of inward FDI. Effects of FDI on the domestic capital stock are driven mainly by intrasector effects. For inward FDI, inter-sector linkages matter as well.


Keywords: foreign direct investment, domestic capital stock
JEL Classification: F21, F23, E22
July 2007

 

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SFB/TR 15 Discussion Paper No.

211

Jianpei Li, Yanhui Wu (A7, B5)
Allocation of Authority when a Person is not a Robot

Abstract:

We formalize a conception of authority, which is commonly defined as the right of controlling a person’s actions embedded in human assets in sociology. Due to the inalienable property of human assets, the contractible formal authority is hard to verify and enforce, while real authority usually diverges from formal authority. Inefficiency tends to arise when a task is not routine or can not be done by a robot. Using a framework of incomplete contract, we show that allocation of formal authority, as an instrument to mitigate the inefficiency, is determined by features of tasks and specificity of assets, and the relationship between the resources. Monitoring is then introduced to fine tune value of delegation.


Keywords: Transaction of human assets, real authority, formal authority, delegation, monitor
JEL Classification: D23, J24, J41, L22.
July 2007

 

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SFB/TR 15 Discussion Paper No.

209

Dalia Marin, Verdier Thierry (B5)
Power in the Multinational Corporation in Industry Equilibrium

Abstract:

Recent theories of the multinational corporation introduce the property rights model of the firm and examine whether to integrate our outsource firm activities locally or to a foreign country. This paper focus instead on the internal organization of the multinational corporation by examining the power allocation between headquarters and subsidiaries. We provide a framework to analyse the interaction between the decision to serve the local market by exporting or FDI, market acces and the optimal mode of organization of the multinational corporation. We find that subsidiary managers are given most autonomy in their decision how to run the firm at intermediate levels of local competition. We then provide comparative statics for changes in fixed FDI entry costs and trade costs, information technology, the number of local competitors, and in the size of the local market.


Keywords: foreign direct investment, power allocation in the firm, international trade and the organization of production
JEL Classification: D23; F1; F2
May 2007

 

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SFB/TR 15 Discussion Paper No.

208

Oliver Gürtler (B4)
Short-term or long-term contracts? - A rent-seeking perspective

Abstract:

In this paper, .rms engage in rent seeking in order to be assigned a governmental contract. We analyze how a change in the contract length a¤ects the .rms. rent-seeking behavior. A longer contract leads to more rent seeking at a contract assignment stage, as the .rms value the contract higher. On the other hand, the contract has to be assigned less often, which of course leads to less rent seeking. Finally, a longer contract makes a possible cooperation between the .rms solving the rent-seeking problem more difficult to sustain.


Keywords: Contract length, rent seeking, cooperation, relational contract
JEL Classification: D72, D74

 

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SFB/TR 15 Discussion Paper No.

207

Dalia Marin, Thierry Verdier (B5)
Competing in Organizations: Firm Heterogeneity and International Trade

Abstract:

This paper develops a theory which investigates how firms’ choice of corporate organization is affecting firm performance and the nature of competition in international markets. We develop a model in which firms’ organisational choices determine heterogeneity across firms in size and productivity in the same industry. We then incorporate these organisational choices in a Krugman cum Melitz and Ottaviano model of international trade. We show that the toughness of competition in a market depends on who - headquarters or middle managers - have power in firms. Furthermore, we propose two new margins of trade adjustments: the monitoring margin and the organizational margin. International trade may or may not lead to an increase in aggregate productivity of an industry depending on which of these margins dominate. Trade may trigger firms to opt for organizations which encourage the creation of new ideas and which are less well adapt to price and cost competition.


Keywords: international trade with endogenous firm organizations and endogenous toughness of competition, firm heterogeneity, power struggle in the firm
JEL Classification: F12, F14, L22, D23
May 2007

 

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SFB/TR 15 Discussion Paper No.

206

Jörg Budde (B4)
Variance analysis and linear contracts in agencies with distorted performance measures

Abstract:

This paper investigates the role of variance analysis procedures in aligning objectives under the condition of distorted performance measurement. A riskneutral agency with linear contracts is analyzed, whereby the agent receives postcontract, pre-decision information on his productivity. If the performance measure is informative with respect to the agent’s marginal product concerning the principal’s objective, variance investigation can alleviate effort misallocation. These results carry over to a participative budgeting situation, but in this case the variance investigation procedures are less demanding.


April 2007

 

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SFB/TR 15 Discussion Paper No.

205

Jörg Budde (B4)
Bonus Pools, Limited Liability, and Tournaments

Abstract:

Tournaments have been objected as resulting from ad hoc restrictions to the contracting problem which are not easily justified. Taking into account that a performance measure might not be verifiable to a third party, however, a restriction to payments which sum up to a constant may be reasonable. The paper analyzes such fixed payment schemes with regard to their optimality and the relation to the special case of tournaments. It emerges that for a group of identical risk-neutral agents, the optimal fixed payment scheme is a tournament.

 

Keywords: bonus pools, relative performance evaluation, subjective performance evaluation, tournaments, verifiability
JEL classification: D82, M52, M54
March 2007

 

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SFB/TR 15 Discussion Paper No.

204

Jörg Budde (B4)
Performance measure congruity in linear agency models with interactive tasks

Abstract:

This note demonstrates how performance measure congruity and noise determine an agency’s total surplus within an linear agency framework with multiple tasks. It provides a decomposition of agency costs, leading back to a congruity index previously proposed in the literature. In addition, it generalizes this index to a more general cost function, thereby highlighting the context specificity of the original criterion. Finally, it suggests a redefinition of tasks under which the criterion prevails.


Keywords: incentives, multi-tasking, performance measurement
JEL classification: D82, M52
November 2006

 

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SFB/TR 15 Discussion Paper No.

203

Jörg Budde (B4)
Distorted performance measurement and relational contracts

Abstract:

This paper analyzes the use of alternative performance measures in an agency model in which contracting incorporates both formal and informal agreements. It is shown that under a proper use of verifiable and unverifiable performance measures, the two types of contracts are complements, regardless of the principal’s fallback position. The analysis therefore contrasts earlier results of the literature, and provides a rationale for the application of subjective performance information, as it is frequently incorporated in strategic performance measurement systems.

 

November 2006

 

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SFB/TR 15 Discussion Paper No.

201

Matthias Kräkel (B4)
Limited Liability and the Trade-off between Risk and Incentives

Abstract:

Several empirical findings have challenged the traditional trade-off between risk and incentives. By combining risk aversion and limited liability in a standard principal-agent model the empirical puzzle on the positive relationship between risk and incentives can be explained.


Keywords: limited liability, piece rates, risk aversion, risk-incentives trade-off
JEL classification: D01, D82, J3, M5
April 2007

 

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SFB/TR 15 Discussion Paper No.

200

Matthias Kräkel (B4)
Optimal Risk Taking in an Uneven Tournament Game with Risk Averse Players

Abstract:

We analyze the optimal choice of risk in a two-stage tournament game between two players that have different concave utility functions. At the first stage, both players simultaneously choose risk. At the second stage, both observe overall risk and simultaneously decide on effort or investment. The results show that those two effects which mainly determine risk taking — an effort effect and a likelihood effect — are strictly interrelated. This finding sharply contrasts with existing results on risk taking in tournament games with symmetric equilibrium efforts where such linkage can never arise. Hence, previous findings based on symmetry at the effort stage turn out to be nongeneric.

 

Keywords: asymmetric equilibria, rank-order tournaments, risk taking
JEL classification: C72, J3, L1, M5
April 2007

 

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SFB/TR 15 Discussion Paper No.

198

Felix Höffler, Klaus M. Schmidt (A4, B3)
Two Tales on Resale

Abstract:

In some markets vertically integrated firms sell directly to final customers hut also to independent downstream firms with whom they then compete on the downstream market. It is often argued that resellers intensify competition and benefit consumers, in particular when wholesale prices are regulated. However, we show that (i) resale may increase prices and make consumers worse off and that (ii) standard "retail minus X regulation" may increase prices and harm consumers. Our analysis suggests that this is more likely if the number of integrated firms is small, the degree of product differentiation is low, and/or if competition is spatial.


Keywords: Resale regulation, wholesale, spatial product differentiation, non-spatial product differentiation, vertical restraints
JEL Classification: D43, L11, L42, L51
March 2007

 

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SFB/TR 15 Discussion Paper No.

192

Ulrich Lossen (B2)
The Performance of Private Equity Funds: Does Diversification Matter?

Abstract:

This paper is the first systematic analysis of the impact of diversification on the performance of private equity funds. A unique data set allows the exact evaluation of diversification across the dimensions financing stages, industries, and countries. Very different levels of diversification can be observed across sample funds. While some funds are highly specialized others are highly diversified. The empirical results show that the rate of return of private equity funds declines with diversification across financing stages, but increases with diversification across industries. Accordingly, the fraction of portfolio companies which have a negative return or return nothing at all, increase with diversification across financing stages. Diversification across countries has no systematic effect on the performance of private equity funds.


Keywords: private equity, diversification, specialization, performance, rate of return, percentage of loss
JEL classification: G11, G24, M13
June 2006

 

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SFB/TR 15 Discussion Paper No.

188

Carolin Häussler, Hans-Martin Zademach (B2)
Cluster Performance reconsidered: Structure, Linkages and Paths in the German Biotechnology Industry, 1996-2003

Abstract:

This paper addresses the evolution of biotechnology clusters in Germany between 1996 and 2003, paying particular attention to their respective composition in terms of venture capital, basic science institutions and biotechnology firms. Drawing upon the significance of co-location of "money and ideas", the literature stressing the importance of a cluster's openness and external linkages, and the path dependency debate, the paper aims to analyse how certain cluster characteristics correspond with its overall performance. After identifying different cluster types, we investigate their internal and external interconnectivity in comparative manner and draw on changes in cluster composition. Our results indicate that the structure, i.e. to which group the cluster belongs, and the openness towards external knowledge flows deliver merely unsystematic indications with regard to a cluster's overall success. Its ability to change composition towards a more balanced ratio of science and capital over time, on the other hand, turns out as a key explanatory factor. Hence, the dynamic perspective proves effective illuminating cluster growth and performance, where our explorative findings provide a promising avenue for further evolutionary research.

 

Keywords: Cluster evolution, dynamic perspective, basic science, venture capital, biotechnology, Germany
JEL classification: O18, O32, L22
December 2006

 

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SFB/TR 15 Discussion Paper No.

185

Oliver Gürtler, Matthias Kräkel (B4)
Mergers, Litigation and Efficiency

Abstract:

We consider antitrust enforcement within the adversarial model used by the United States. We show that, under the adversarial system, the Antitrust Authority may try to prohibit mergers also in those cases in which litigation is inefficient. Even if market concentration and technological disadvantages lead to a significant welfare reduction after merger, from society’s perspective the agency’s lawsuit may be inefficient. We can show that these inefficiencies may be aggravated if the takeover is hostile.


Keywords: hostile takeover; litigation contest, merger
JEL Classification: D43, K21, L40
December 2006

 

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SFB/TR 15 Discussion Paper No.

184

Ralph Siebert, Georg von Graevenitz (B2)
Jostling for Advantage: Licensing and Entry into Patent Portfolio Races

Abstract:

Licensing in a patent thicket allows firms to either avoid or resolve hold-up. Firms' R&D incentives depend on whether they license ex ante or ex post. We develop a model of a patent portfolio race, which allows for endogenous R&D efforts, to study firms' choice between ex ante and ex post licensing. The model shows that firms' relationships in product markets and technology space jointly determine the type of licensing contract chosen. In particular, product market competitors are more likely to avoid patent portfolio races, since the threat of hold-up increases. On the other hand, more valuable technologies are more likely to give rise to patent portfolio races. We also discuss the welfare implications of these results.

 

Keywords: hold-up problem, licensing, innovation, patent race, patent thicket, research joint ventures
JEL Classification: L13, L49, L63
September 2006

 

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SFB/TR 15 Discussion Paper No.

183

Christa Hainz, Stefanie Kleimeier (B5)
Project Finance as a Risk-Management Tool in International Syndicated Lending

Abstract:

We develop a double moral hazard model that predicts that the use of project finance increases with both the political risk of the country in which the project is located and the influence of the lender over this political risk exposure. In contrast, the use of project finance should decrease as the economic health and corporate governance provisions of the borrower’s home country improve. When we test these predictions with a global sample of syndicated loans to borrowers in 139 countries, we find overall support for our model and provide evidence that multilateral development banks act as “political umbrellas”.


Keywords: project finance, syndicated loans, political risk, double moral hazard
JEL Classification: D82, F34, G21, G32
December 2006

 

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SFB/TR 15 Discussion Paper No.

182

Sophie Claeys, Christa Hainz (B5)
Acquisition versus greenfield: The impact of the mode of foreign bank entry on information and bank lending rates

Abstract:

Policy makers often decide to liberalize foreign bank entry but at the same time restrict the mode of entry. We study how different entry modes affect the interest rate for loans in a model in which domestic banks possess private information about their incumbent clients but foreign banks have better screening skills. Our model predicts that competition is stronger if market entry occurs through a greenfield investment and therefore domestic banks' interest rates are lower. We find empirical support for our results for a sample of banks from ten Eastern European countries for the period 1995-2003.


Keywords: banking, foreign entry, mode of entry, interest rate, asymmetric information
JEL Classification: G21, D4, L31
November 2006

 

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SFB/TR 15 Discussion Paper No.

169

Oliver Gürtler (B4)
Haggling for Rents, Relational Contracts, and the Theory of the Firm

Abstract:

In this paper, a formal rent-seeking theory of the firm is developed. The main idea is that integration (compared to non-integration) facilitates rent-seeking for the integrating party, but makes it harder for the integrated one. In a one-period model, this implies that the rent-seeking contest becomes more uneven and the parties rent-seek less. Here, integration is optimal. In the infinitely-repeated version of the model, it is also possible for the parties to enter a relational contract, under which each promises not to engage in rent-seeking. Such a contract must be self-enforcing, for it cannot be enforced by court. It is shown that integration makes the relational contract less easily sustainable, as, due to its cost advantage, the integrating party gains more from deviating than any party under non-integration. Hence, integration is preferred, if relational contracts are not sustainable, while, otherwise, non-integration may well be preferred. Moreover, it is shown that the model’s predictions are in line with many empirical facts on the choice of ownership structures.


Keywords: Integration, non-integration, relational contracts, rent seeking
JEL Classification: D23, D72, D74, L14, L22
October 2006

 

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SFB/TR 15 Discussion Paper No.

168

Matthias Kräkel (B4)
On the "Adverse Selection" of Organizations

Abstract:

According to New Institutional Economics, two or more individuals will found an organization, if it leads to a benefit compared to market allocation. A natural consequence will then be internal rent seeking. We discuss the interrelation between profits, rent seeking and the foundation of organizations. Typically, we expect that highly profitable firms are always founded but it is not clear whether the same is true for firms with less optimistic prospects. We will show that internal rent seeking may lead to a completely reversed result. The impact of internal rent seeking on overall investment and the implications of firm size and competition on the foundation of organizations are also addressed.


Keywords: contests, foundation of organizations, internal rent seeking
JEL Classification: D2, L2, M2
October 2006

 

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SFB/TR 15 Discussion Paper No.

167

Matthias Kräkel (B4)
Firm Size, Economic Situation and Influence Activities

Abstract:

This paper discusses the optimal firm size in the presence of influence activities, and the level of individual rent-seeking dependent on the economic situation of the firm. Since firm size has a discouraging effect on the level of individual rent-seeking but also a quantity effect as the number of rent-seekers increases, the interplay of both effects determines whether the employer chooses an inefficiently small or large firm size. In the given setting, a bad economic situation leads to both a higher probability of a substantial loss and a reduction of productivity. The productivity effect and the two other effects together determine the optimal level of individual rent-seeking.


Keywords: economic situation, firm size, influence activities, politicking, rent-seeking
JEL Classification: D2, L2, M2
October 2006

 

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SFB/TR 15 Discussion Paper No.

159

Felix Bierbrauer, Marco Sahm (B3)
Informative Voting and the Samuelson Rule

Abstract:

We study the classical free-rider problem in public goods provision in a large economy with uncertainty about the average valuation of the public good. Individual preferences over public goods are shaped by a skill and a taste parameter. We use a mechanism design approach to solve for the optimal utilitarian provision rule. The relevant incentive constraints for information aggregation ensure that individuals behave as if they were engaging in informative voting over the level of public good provision. It is shown that the use of information by an optimal provision rule is inversely related to the polarization of preferences which results from the properties of the skill distribution.


Keywords: information aggregation, informative voting, public goods, two-dimensional heterogeneity
JEL Classification: H41, D71, D72, D82
July 2006

 

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SFB/TR 15 Discussion Paper No.

155

Martin Hellwig (B3)
Market Discipline, Information Processing, and Corporate Governance

Abstract:

The paper reviews and assesses our understanding of the notion of “market discipline” in corporate governance. It questions the wholesale appeal to this notion in policy discussion, which fails to provide an account of the underlying mechanisms in terms of theory and empirical analysis. Discipline that is provided by the “market” must be compared to discipline that is provided by other institutions, e.g., intermediaries acting as “delegated monitors”. The comparative assessment depends on (i) the information technology, (ii) the role of strategic interactions, and (iii) the disciplinary mechanism itself. Concerning (i), the question is whether the benefits of multiple sources of information exceed the costs. Concerning (ii), strategic interactions concern the free-rider problem in acquiring information that benefits all financiers, as well as distributive externalities involved in exploiting an information advantage to the detriment of other financiers. Concerning (iii), the question is whether investors have explicit intervention rights or whether “discipline” results from managerial acquiescence. As for the acquisition and aggregation of information in organized markets, positive welfare effects arise only if the information is put to productive use, either through improvements in real investment and managerial incentives, or through changes in corporate control. Necessary conditions for such benefits to arise are fairly restrictive, especially if the changes that occur are based on managerial acquiescence rather than the legal intervention rights of investors. The expansion of market-based managerial incentives in the nineties had little to do with these theoretical accounts. The experience of moral hazard that has accompanied this expansion, on the side of gate-keeping institutions as well as corporate management, confirms the predictions of theory about the potential for shortfalls in market discipline and the agency costs of equity finance through the open market.


Keywords: Market Discipline, Financial Institutions, Information Processing, Corporate Governance
JEL Classification: G14, G20, G30
July 2006

 

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SFB/TR 15 Discussion Paper No.

154

Kira Börner, Silke Uebelmesser (B5)
Migration and the Welfare State: The Economic Power of the Non-Voter?

Abstract:

This paper investigates the impact of emigration on the political choice regarding the size of the welfare state. Mobility has two countervailing effects: the political participation effect and the tax base effect. With emigration, the composition of the constituency changes. This increases the political influence of the less mobile part of the population. The new political majority has to take into account that emigration reduces tax revenues and thereby affects the feasible set of redistribution policies. The interaction of the two effects has so far not been analyzed in isolation. We find that the direction of the total effect of migration depends on the initial income distribution in the economy. Our results also contribute to the empirical debate on the validity of the median-voter approach for explaining the relation between income inequality and redistribution levels.


Keywords: migration, redistribution, voting
JEL Classification: F22, H50, D31, D72
July 2005

 

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SFB/TR 15 Discussion Paper No.

152

Maria Lehner, Monika Schnitzer (B5)
Entry of Foreign Banks and their Impact on Host Countries

Abstract:

Foreign bank entry is frequently associated with spillover effects for local banks and increasing competition in the local banking market. We study the impact of these effects on host countries. In particular, we ask how these effects interact and how they depend on the competitive environment of the host banking market. An increasing number of banks is more likely to have positive welfare effects the more competitive the market environment, whereas spillovers are less likely to have positive welfare effects the stronger competition. Hence, competitive effects seem to reinforce each other, while spillovers and competition tend to weaken each other.


Keywords: foreign bank entry, multinational bank, competition in banking, spillover effects
JEL Classification: F37, G21, L13, O16
June 2006

 

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SFB/TR 15 Discussion Paper No.

135

Kira Boerner, Christa Hainz (B5)
The Political Economy of Corruption and the Role of Financial Institutions

Abstract:

In many developing countries, we observe rather high levels of corruption. This is surprising from a political economy perspective, as the majority of people generally suffers from high corruption levels. We explain why citizens do not exert enough political pressure to reduce corruption if financial institutions are missing. Our model is based on the fact that corrupt officials have to pay entry fees to get lucrative positions. The mode of financing this entry fee determines the distribution of the rents from corruption. In a probabilistic voting model, we show that a lack of financial institutions can lead to more corruption as more voters are part of the corrupt system. Thus, the economic system has an effect on political outcomes. Well-functioning financial institutions, in turn, can increase the political support for anti-corruption measures.


Keywords: Corruption, Financial Markets, Institutions, Development, Voting
JEL Classification: D73, D72, O17
June 2006

 

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SFB/TR 15 Discussion Paper No.

134

Richard Schmidtke (B5)
Private Provision of a Complementary Public Good

Abstract:

For several years, an increasing number of firms are investing in Open Source Software (OSS). While improvements in such a non-excludable public good cannot be appropriated, companies can benefit indirectly in a complementary proprietary segment. We study this incentive for investment in OSS. In particular we ask how (1) market entry and (2) public investments in the public good affects the firms' production and profits. Surprisingly, we find that there exist cases where incumbents benefit from market entry. Moreover, we show the counter-intuitive result that public spending does not necessarily lead to a decreasing voluntary private contribution.


Keywords: Open Source Software, Private Provision of Public Goods, Cournot-Nash Equilibrium, Complements, Market Entry
JEL Classification: C72, L13, L86
June 2006

 

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SFB/TR 15 Discussion Paper No.

133

Richard Schmidtke (B5)
Two-Sided Markets with Pecuniary and Participation Externalities

Abstract:

The existing literature on "two-sided markets" addresses participation externalities, but so far it has neglected pecuniary externalities between competing platforms. In this paper we build a model that incorporates both externalities. In our setup differentiated platforms compete in advertising and offer consumers a service free of charge (such as a TV program) that is financed through advertising. We show that advertising can exhibit the properties of a strategic substitute or complement. Surprisingly, there exist cases in which platforms benefit from market entry. Moreover, we show that from a welfare point of view perfect competition is not always desirable.


Keywords: two-sided markets, broadcasting, advertising, market entry, digital television.
JEL Classification: D43, L13, L82

June 2006

 

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SFB/TR 15 Discussion Paper No.

132

Hendrik Hakenes, Martin Peitz (B3, C6)
Umbrella Branding and the Provision of Quality

Abstract:

Consider a two-product firm that decides on the quality of each product. Product quality is unknown to consumers. If the firm sells both products under the same brand name, consumers adjust their beliefs about quality subject to the performance of both products. We show that if the probability that low quality will be detected is in an intermediate range, the firm produces high quality under umbrella branding whereas it would sell low quality in the absence of umbrella branding. Hence, umbrella branding mitigates the moral hazard problem. We also find that umbrella branding survives in asymmetric markets and that even unprofitable products may be used to stabilize the umbrella brand. However, umbrella branding does not necessarily imply high quality; the firm may choose low-quality products with positive probability.


Keywords: Umbrella branding, reputation transfer, signaling, experience goods.
JEL Classification: L14, L15, M37, D82
June 2006

 

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SFB/TR 15 Discussion Paper No.

131

Hendrik Hakenes, Martin Peitz (B3, C6)
Observable Reputation Trading

Abstract:

Is the reputation of a firm tradable when the change in ownership is observable? We consider a competitive market in which a share of owners must retire in each period. New owners bid for the firms that are for sale. Customers learn the owner’s type, which reflects the quality of the good or service provided, through experience. After observing an ownership change they may want to switch firm. However, in equilibrium, good new owners buy from good old owners and retain high-value customers. Hence reputation is a tradable intangible asset, although ownership change is observable.


Keywords: Reputation, ownership change, intangible assets, theory of the firm.
JEL Classification: D40, D82, L14, L15
June 2006

 

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SFB/TR 15 Discussion Paper No.

126

Dalia Marin, Monika Schnitzer (B5)
When is FDI a Capital Flow?

Abstract:

In this paper we analyze the conditions under which a foreign direct investment (FDI) involves a net capital flow across countries. Frequently, foreign direct investment is financed in the host country without an international capital movement. We develop a model in which the optimal choice of financing an international investment trades off the relative costs and benefits associated with the allocation and effectiveness of control rights resulting from the financing decision. We find that the financing choice is driven by managerial incentive problems and that FDI involves an international capital flow when these problems are not too large. Our results are consistent with data from a survey on German and Austrian investments in Eastern Europe.


Keywords: Multinational firms, Firm specific capital costs, Internal capital markets, International capital flows
JEL Classification: F23, F21, G32, L20, D23
June 2006

 

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SFB/TR 15 Discussion Paper No.

124

Christa Hainz (B5)
Business Groups in Emerging Markets - Financial Control and Sequential Investment

Abstract:

Business groups in emerging markets perform better than unaffiliated firms. One explanation is that business groups substitute some functions of missing institutions, for example, enforcing contracts. We investigate this by setting up a model where firms within the business group are connected to each other by a vertical production structure and an internal capital market. Thus, the business group’s organizational mode and the financial structure allow a self-enforcing contract to be designed. Our model of a business group shows that only sequential investments can solve the ex post moral hazard problem. We also find that firms may prefer not to integrate.


Keywords: Business groups, self-enforcing contract, institutions, internal capital market
JEL Classification: G31, G32, G34, K49, L22
June 2006

 

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SFB/TR 15 Discussion Paper No.

114

Oliver Gürtler, Christian Grund (B4)
The Effect of Reputation on Selling Prices in Auctions

Abstract:

In economic approaches it is often argued that reputation considerations influence the behavior of individuals or firms and that reputation influences the outcome of markets. Empirical evidence is rare though. In this contribution we argue that a positive reputation of sellers should have an effect on selling prices. Analyzing auctions of popular DVDs at eBay we, indeed, find support for this hypothesis. Secondary, we unmask the myth that it is promising for eBay sellers to let their auction end at the evening, when many potential buyers may be online.


Keywords: Reputation, eBay feedback system, auction
JEL Classification: D44, D82, K12, L81
May 2006

 

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SFB/TR 15 Discussion Paper No.

113

Oliver Gürtler (B4)
On Delegation under Relational Contracts

Abstract:

In this paper, a principal’s decision between delegating two tasks or handling one of the two tasks herself is analyzed. We assume that the principal uses both, formal contracts and informal agreements sustained by the value of future relationships (relational contracts) as incentive device. It is found that the principal is less likely to delegate both tasks in a dynamic setting than in a static one (where formal contracts are the only feasible incentive device), as handling one task herself enables a much wider use of relational contracts.


Keywords: Job design, relational contracts, formal contracts, delegation
JEL Classification: D82, J33, L23, M52, M54
May 2006

 

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SFB/TR 15 Discussion Paper No.

112

Oliver Gürtler (B4)
Job Promotion Tournaments and Imperfect Recall

Abstract:

In this paper, a promotion tournament is considered, where, at the beginning of the tournament, it is unknown how long the tournament lasts. Further, the promotion decision is based on the assessments of a supervisor with imperfect recall. In line with psychological research, the supervisor is assumed to either value early or recent impressions more strongly. It is shown that effort may increase or decrease, as the probability of promotion in a certain period gets higher. The single effects determining the sign of the effort change oftentimes depend on how the supervisor processes information.


Keywords: Promotion Tournament, Promotion Probability, Imperfect Recall
JEL Classification: J33, M51, M52
May 2006

 

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SFB/TR 15 Discussion Paper No.

110

Oliver Gürtler (B4)
Implicit Contracts: Two Different Approaches

Abstract:

In this paper, I compare two different approaches to model implicit contracting, the infinite-horizon approach typically used in the literature and afinite-horizon approach building on an adverse-selection model. I demonstrate that even the most convincing result of the infinite-horizon approach, namely that implicit contracting is improved, if the discountrate is lowered, does not carry over to the alternative modeling approach. Predictions of the first approach should therefore be handled with care and subject to athorough reinvestigation.


Keywords: Trust, finite horizon, infinite horizon, discounting, implicit contracting
JEL Classification: D82, D83, J33, M52
April 2006

 

Full text in pdf format:
110.pdf

SFB/TR 15 Discussion Paper No.

109

Dalia Marin, Thierry Verdier (B5)
Power Inside the Firm and the Market: A General Equilibrium Approach

Abstract:

Recent years have witnessed an enormous amount of reorganization of the corporate sector in the US and in Europe. This paper examines the role of market competition for this trend in corporate reorganization. We find that at intermediate levels of competition the CEO of the corporation decides to have less power inside the firm and to delegate control to lower levels of the firms’ hierarchy. Thus, workers empowerment and the move to flatter firm organizations emerge as an equilibrium when competition is not too tough and not too weak. The model predicts merger waves or waves of outsourcing when countries become more integrated into the world economy as the corporate sector reorganizes in response to an increase in international competition.


Keywords: monopolistic competition, international trade, corporate reorganisation, flattening firm hierarchies
JEL Classification: F12, D23, L22, L1
March 2006

 

Full text in pdf format:
109.pdf

SFB/TR 15 Discussion Paper No.

107

Hendrik Hakenes, Isabel Schnabel (B3)
The Threat of Capital Drain: A Rationale for Public Banks?

Abstract:

This paper yields a rationale for why subsidized public banks may be desirable from a regional perspective in a financially integrated economy. We present a model with credit rationing and heterogeneous regions in which public banks prevent a capital drain from poorer to richer regions by subsidizing local depositors, for example, through a public guarantee. Under some conditions, cooperative banks can perform the same function without any subsidization; however, they may be crowded out by public banks. We also discuss the impact of the political structure on the emergence of public banks in a political-economy setting and the role of interregional mobility.


Keywords: Public banks, cooperative banks, capital drain, credit rationing, financial integration, privatization.
JEL Classification: G21, F36, H11, L33.
April 2006

 

Full text in pdf format:
107.pdf

SFB/TR 15 Discussion Paper No.

105

Ralph Siebert, Georg von Graevenitz (B2)
How Licensing Resolves Hold-Up: Evidence from a Dynamic Panel Data Model with Unobserved Heterogeneity

Abstract:

In a patent thicket licensing provides a mechanism to either avoid or resolve hold-up. Firms' R&D incentives will differ depending on how licensing is used. In this paper we study the choice between ex ante licensing to avoid hold-up and ex post licensing to resolve it. Building on a theoretical model of a patent portfolio race, firms' choices of licensing contracts are modelled. We derive several hypotheses from the model and find support for these using data from the semiconductor industry. The empirical results show that firms' relationships in product markets and technology space jointly determine the type of licensing contract chosen. Implications for the regulation of licensing are discussed. We estimate a dynamic panel data model with unobserved heterogeneity and a lagged dependent variable. A method suggested by Wooldridge (2005) is employed to estimate a random effects probit model using conditional maximum likelihood.

 

Keywords: Hold-Up Problem, Licensing, Innovation, Patent Race, Patent Thicket
JEL Classification: L13, L49, L63
April 2006

 

Full text in pdf format:
105.pdf

SFB/TR 15 Discussion Paper No.

103

Oliver Gürtler (B4)
Optimal Ownership Structures in the Presence of Investment Signals

Abstract:

The property-rights approach to the theory of the firm is extended by introducing distorted signals of the parties.investments. Investment incentives are then given in two ways, by allocating ownership rights and by tying pay to the signal realization. Optimal incentive strength, that is, the weight that a signal is optimally given in a wage contract, depends on two distortions, namely the distortion of the signal from the realized and from the disagreement benefit. Under the optimal ownership structure, the deviations of both investments from their first-best levels are relatively small implying that the relative importance of investment matters. Further, it is shown that most of the Grossman-Hart-Moore results are not robust to an introduction of investment signals.


Keywords: Signal, Property rights, Integration, Distortion
JEL Classification: D2, L2
March 2006

 

Full text in pdf format:
103.pdf

SFB/TR 15 Discussion Paper No.

101

Christian Grund, Dirk Sliwka (B4)
Performance Pay and Risk Aversion

Abstract:

A main prediction of agency theory is the well known risk-incentive trade-off. Incentive contracts should be found in environments with little uncertainty and for agents with low degrees of risk aversion. There is an ongoing debate in the literature about the first trade-off. Due to lack of data, there has so far been hardly any empirical evidence about the second. Making use of a unique representative data set, we find clear evidence that risk aversion has a highly significant and substantial negative impact on the probability that an employee's pay is performance contingent.


Keywords: Agency theory, GSOEP, Incentives, Pay for performance, Performance appraisal, Risk, Risk aversion
JEL Classification: J33, M52, D80
March 2006

 

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101.pdf

SFB/TR 15 Discussion Paper No.

100

Oliver Gürtler (B4)
Contractual Incentive Provision and Commitment in Rent-Seeking Contests

Abstract:

In this paper, we consider a symmetric rent-seeking contest, where employees lobby for a governmental contract on behalf of firms. The only verifiable information is which firm is assigned the contract. We derive the optimal wage contracts of the employees and analyze, whether commitment by determining the wage contract prior to the competitor is profitable. This is indeed the case, i.e. firms prefer to move first in the wage-setting subgame. This complements previous work on rent-seeking contests emphasizing that commitment via rent-seeking expenditures is unprofitable in symmetric contests.


Keywords: Contest, First-Mover Advantage, Commitment, Wage Contract
JEL Classification: D72, M52
March 2006

 

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100.pdf

SFB/TR 15 Discussion Paper No.

099

Matthias Kräkel, Dirk Sliwka (B4)
Should You Allow Your Agent to Become Your Competitor? On Non-Compete Agreements in Employment Contracts

Abstract:

We discuss a principal-agent model in which the principal has the opportunity to include a non-compete agreement in the employment contract. We show that not imposing such an agreement can be beneficial for the principal as the possibility to leave the firm generates implicit incentives for the agent. The principal prefers to impose such a clause if and only if the value created is sufficiently small relative to the agent's outside option. If the principal can use an option con- tract for retaining the agent, she will never prefer a strict non-compete agreement.


Keywords: fine, incentives, incomplete contracts, non-compete agreements, option contract
JEL Classification: D21, D86, J3, K1, M5
March 2006

 

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99.pdf

SFB/TR 15 Discussion Paper No.

098

Christian Mugele, Monika Schnitzer (B5)
Organization of Multinational Activities and Ownership Structure

Abstract:

We develop a model in which multinational investors decide about the modes of organization, the locations of production, and the markets to be served. Foreign investments are driven by market-seeking and cost-reducing motives. We further assume that investors face costs of control that vary among sectors and increase in distance. The results show that (i) production intensive sectors are more likely to operate a foreign business independent of the investment motive, (ii) that distance may have a non-monotonous effect on the likelihood of horizontal investments, and (iii) that globalization, if understood as reducing distance, leads to more integration.


Keywords: Multinational firms, Joint ventures, Distance, Technology spillovers, Ownership structure
JEL Classification: F23, L24, L22, L23, D23
February 2006

 

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98.pdf

SFB/TR 15 Discussion Paper No.

097

Felix Bierbrauer (B3)
Optimal Income Taxation and Public Good Provision in a Two-Class Economy

Abstract:

This paper combines the problem of optimal income taxation with the free-rider problem in public good provision. There are two groups of individuals with private information on their earning ability and their valuation of a public good. Adjustments of the transfer system are needed to discourage the more productive from exaggerating the desirability of public good provision. Similarly, the less productive need to be prevented from understating their valuation. Relative to an optimal income tax, which focuses solely on earning ability, income transfers are increased whenever a public good is installed and are decreased otherwise.


Keywords: Income Taxation, Public Good Provision, Revelation of Preferences, Two-dimensional Heterogeneity
JEL Classification: D71, D82, H21, H41
January 2006

 

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97.pdf

SFB/TR 15 Discussion Paper No.

095

Sophie Claeys, Christa Hainz (B5)
Foreign Banks in Eastern Europe: Mode of Entry and Effects on Bank Interest Rates

Abstract:

Credit markets in many Eastern European countries are now dominated by foreign-owned banks. We analyze the development for foreign ownership and its impact on lending rate in ten Eastern European countries between 1995 and 2003. Currently, the majority of loans from foreign banks is granted by acquired banks. The presence of foreign acquired banks as measured by their relative number among the banks in our dataset increased somewhat slower than that of foreign de novo banks. However, since market entry through acquisition allows acquiring a credit portfolio and a customer base, acquired banks were able to expand their market share much faster than the foreign de novo banks. Our results also show that the interest rate decreased after foreign bank entry. Moreover, while the reduction in interest rates of domestic banks is more pronounced in the case of foreign entry through a de novo investment, foreign de novo banks charge higher interest rates than foreign acquired banks.


Keywords: SME, Banking, Foreign Entry, Mode of Entry, Interest Rate
JEL Classification: D4, G21
February 2006

 

Full text in pdf format:
95.pdf

SFB/TR 15 Discussion Paper No.

088

Hendrik Hakenes, Isabel Schnabel (B3)
Bank Size and Risk-Taking under Basel II

Abstract:

We analyze the relationship between bank size and risk-taking under the New Basel Capital Accord. Using a model with imperfect competition and moral hazard, we show that the introduction of an internal ratings based (IRB) approach improves upon flat capital requirements if the approach is applied uniformly across banks and if the costs of implementation are not too high. However, the banks’ right to choose between the standardized and the IRB approaches under Basel II gives larger banks a competitive advantage and, due to fiercer competition, pushes smaller banks to take higher risks. This may even lead to higher aggregate risk-taking.


Keywords: Basel II, IRB approach, bank competition, capital requirements, SME financing
JEL Classification: G21, G28, L11
February 2006

 

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88.pdf

SFB/TR 15 Discussion Paper No.

084

Thomas Müller, Monika Schnitzer (B5)
Technology Transfer and Spillovers in International Joint Ventures

Abstract:

It is often argued that multinationals are reluctant to transfer technology due to the fear of spillovers. We show that this need not be the case if host country policies like taxation are taken into account. Furthermore, we examine the incentives the multinational and the host country have to engage in an international joint venture. We show why a multinational may agree to enter a joint venture even though this gives rise to spillovers. Surprisingly, we find that a joint venture is sometimes not in the interest of a host country, despite the prospect of spillovers.


Keywords: Foreign Direct Investment, International Joint Ventures, Technology Transfer, Technology Spillovers, Multinational Firms
JEL Classification: D43, F21, F23, L13, P31, O12
October 2005

 

Full text in pdf format:
84.pdf

SFB/TR 15 Discussion Paper No.

083

Dalia Marin (B5)
The Vanishing Barter Economy in Russia: A Test of the Virtual Economy Hypothesis? Reply to Barry Ickes

Abstract:

This paper is a reply to Barry Ickes' critique of my paper “Trust versus Illusion: What is Driving Demonetization in Russia?” in which I show that the data reject Barry Ickes' Virtual Economy explanation of barter in Russia in favor of an institutional explanation based on the lack of trust.


Keywords: imperfect input and capital markets, the virtual economy, trade credit, trust, contract enforcement
JEL Classification: D20, G30, O10, P30
November 2004

 

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83.pdf

SFB/TR 15 Discussion Paper No.

082

J.Gual, M.Hellwig, A.Perrot, M.Polo, P. Rey, K.Schmidt, R.Stenbacka (A4, B3)
An Economic Approach to Article 82 - Report by the European Advisory Group on Competition Policy

Abstract:

This report argues in favour of an economics-based approach to Article 82, in a way similar to the reform of Article 81 and merger control. In particular, we support an effects-based rather than a form-based approach to competition policy. Such an approach focuses on the presence of anti-competitive effects that harm consumers, and is based on the examination of each specific case, based on sound economics and grounded on facts.


Keywords: Competition Policy, Abuse of Market Power, Article 82
JEL Classification: D4
July 2005

 

Full text in pdf format:
82.pdf

SFB/TR 15 Discussion Paper No.

080

Dalia Marin (B5)
A New International Division of Labor in Europe: Outsourcing and Offshoring to Eastern Europe

Abstract:

Europe is reorganizing its international value chain. I document these changes in Europe’s international organization of production with new survey data of Austrian and German firms investing in Eastern Europe. I show estimates of the share of intrafirm trade between Austria or Germany on the one hand and Eastern Europe on the other. Furthermore, I present empirical evidence of the drivers of the new division of labor in Europe. I find among other things that falling trade costs and reduced levels of corruption as well as improvements in the contracting environment in Eastern Europe are affecting the level of intrafirm imports from that region. These factors also favor outsourcing over offshoring. In contrast, low organizational costs of hierarchies and large costs of holdup (when there are no alternative investors in Old Europe or no alternative suppliers in Eastern Europe) favor offshoring over outsourcing. Tax holidays granted by host countries in Eastern Europe also mildly affect the organizational choice.


Keywords: the empirics of global sourcing, intrafirm trade, contract enforcement, comparative advantage in Eastern Europe, empirical test of the theory of the firm
JEL Classification: D23, D51, F11, L14, O11
September 2005

 

Full text in pdf format:
80.pdf

SFB/TR 15 Discussion Paper No.

079

Haizhou Huang, Dalia Marin, Chenggang Xu (B5)
Financial Crisis, Economic Recovery, and Banking Development in Russia, and other FSU Countries

Abstract:

This paper provides a unified analysis for the onset of the 1998 financial crisis and the strong economic recovery afterward in Russia and other former Soviet Union countries. Before the crisis a banking failure arose owing to the coexistence of a lemons credit market and high government borrowing. In a lemons credit market low credit risk firms switched from bank to nonbank finance, including trade credits and barter trade, generating an externality on banks’ interest rates. The collapse of the treasury bills market in the financial crisis triggered a change in banks’ lending behavior, providing initial conditions for banking development.


Keywords: banking development, institutional trap, financial crisis
JEL Classification: G3, G21, P34, O16, D82
June 2004

 

Full text in pdf format:
79.pdf

SFB/TR 15 Discussion Paper No.

078

Dalia Marin (B5)
Law in Transition and Development: The Case of Russia

Abstract:

The rise of barter and non-cash payments has become a dominant feature of the Russian transition to a market economy. This paper confronts with empirical evidence two approaches to explain barter in Russia: the ’illusion view’ and the ’trust view’ of barter. The ’illusion view’ suggests that barter allows the parties to pretend that the manufacturing sector in Russia is producing value added by enabling this sector to sell its output at a higher price than its market value. The ’trust view’ sees barter as an institution to deal with the absence of trust and liquidity in the Russian economy. We confront the prediction of both explanations with actual data on barter in Ukraine in 1997. The data reject the ’illusion view‘ in favor of the ‘trust view‘ of barter.


Keywords: imperfect input and capital markets, the virtual economy, trade credit, trust, contract enforcement
JEL Classification: D20, G30, O10, P30
April 2004

 

Full text in pdf format:
78.pdf

SFB/TR 15 Discussion Paper No.

077

Dalia Marin (B5)
‘A Nation of Poets and Thinkers’ - Less So with Eastern Enlargement? Austria and Germany

Abstract:

Many people in the European Union fear that Eastern Enlargement will lead to major job losses. More recently, these fears about job losses have extended to high skill labor and IT jobs. The paper examines with new firm level data whether these fears are justified for the two neighboring countries of Eastern Enlargement Austria and Germany. I find that Eastern Enlargement leads to surprising small job losses, because jobs in Eastern Europe do not compete with jobs in Austria and Germany. Low cost jobs of affiliates in Eastern Europe help Austrian and German firms to stay competitive in an increasingly competitive environment. However, I also find that multinational firms in Austria and Germany are outsourcing the most skill intensive activities to Eastern Europe taking advantage of cheap abundant skilled labor in Eastern Europe. I find that the firms’ outsourcing activities to Eastern Europe are a response to a human capital scarcity in Austria and Germany which has become particularly severe in the 1990s. Corporations’ outsourcing of skill intensive firm activity to Eastern Europe has helped to ease the human capital crisis in both countries. I find that high skilled jobs transferred to Eastern Europe account for 10 percent of Germany’s and 48 percent of Austria’s supply of university graduates in the 1990s. I then discuss what can be done to address the skill exodus to Eastern Europe. I show that R&D subsidies do not work in economies with a skill crisis and I suggest to liberalize the movement of high skill labor with Eastern Enlargement.


Keywords: human capital, intra-firm trade, multinationals and jobs, out-sourcing to Eastern Europe, R&D policy
JEL Classification: F21, F23, J24, J31, L24, O3, P33
March 2004

 

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77.pdf

SFB/TR 15 Discussion Paper No.

076

Andzelika Lorentowicz, Dalia Marin, Alexander Raubold (B5)
Is Human Capital Losing From Outsourcing? Evidence for Austria and Poland

Abstract:

Feenstra and Hanson (1997) have argued in the context of the North American Free Trade Agreement that US outsourcing to Mexico leads to an increase in the skill premium in both the US and Mexico. In this paper we show on the example of Austria and Poland that with the new international division of labor emerging in Europe Austria, the high income country, is specializing in the low skill intensive part of the value chain and Poland, the low income country, is specializing in the high skill part. As a result, skilled workers in Austria are losing from outsourcing, while gaining in Poland. In Austria, relative wages for human capital declined by 2 percent during 1995-2002 and increased by 41 percent during 1994-2002 in Poland. In both countries outsourcing contributes roughly 35 percent to these changes in the relative wages for skilled workers. Furthermore, we show that Austria’s R&D policy has contributed to an increase in the skill premium there.


Keywords: foreign direct investment, wage inequality, transition economy
JEL Classification: F21, F23, J31, P45
October 2005

 

Full text in pdf format:
76.pdf

SFB/TR 15 Discussion Paper No.

065

Julian Franks, Colin Mayer, Hannes F. Wagner (B2)
The Origins of the German Corporation – Finance, Ownership and Control

Abstract:

The ownership of German corporations is quite different today from that of Anglo-American firms. How did this come about? To what extent is it attributable to regulation? A specially constructed data set on financing and ownership of German corporations from the end of the 19th century reveals that, as in the UK, there was a high degree of activity on German stock markets with firms issuing equity in preference to borrowing from banks, and insider and family ownership declining rapidly. However, unlike in the UK, other companies and banks emerged as the main holders of equity, with banks holding shares primarily as custodians of other investors rather than on their own account. The changing pattern of ownership concentration was therefore very different from that of the UK with regulation reinforcing the control that banks exercised on behalf of other investors.

 

Keywords: Evolution of ownership, German stock markets, financial regulation
JEL Classification: G32, N23, N24
October 2005

 

Full text in pdf format:
65.pdf

SFB/TR 15 Discussion Paper No.

061

Oliver Gürtler (B4)
A Note on Sabotage in Collective Tournaments

Abstract:

In this paper a tournament between teams (a collective tournament) is analyzed, where each contestant may spend productive effort in order to increase his team's performance or sabotage the members of the opponent team. It is shown that sabotaging the weaker members of a team always decreases their team's performance more significantly than sabotaging stronger members does. As a consequence, sabotage activities are only directed at a team's weaker members. This finding is quite interesting, as previous results on individual tournaments indicate that oftentimes only the stronger participants should be sabotaged.


Keywords: Collective Tournament, Sabotage, Complementarities
JEL Classification: C72, J33, M52
October 2005

 

Full text in pdf format:
61.pdf

SFB/TR 15 Discussion Paper No.

047

Oliver Gürtler (B4)
Rent seeking in sequential group contests

Abstract:

In this paper, a group contest is analyzed, where the groups are allowed to determine their sharing rules either sequentially or simultaneously. It is found that in case the more numerous group determines its sharing rule prior to the smaller group, rent dissipation in the group contest is higher than in an individual contest. However, if the order of moves is endogenized, the smaller group will always act prior to the bigger group. Competition between the groups is in this way weakened and the groups are able to save on expenditures.


Keywords: Group contest, rent seeking, sequential choices, sharing rule
JEL Classification: D 72
May 2005

 

Full text in pdf format:
47.pdf

SFB/TR 15 Discussion Paper No.

046

Matthias Kräkel (B4)
Doping in Contest-Like Situations

Abstract:

Individuals who compete in a contest-like situation (for example, in sports, in promotion tournaments, or in an appointment contest) may have an incentive to illegally utilize resources in order to improve their relative positions. We analyze such doping within a tournament game between two heterogeneous players. Three major effects are identified which determine a player’s doping decision — a cost effect, a likelihood effect and a windfall-profit effect. Moreover, we discuss whether the favorite or the underdog is more likely to be doped, the impact of doping on overall performance, the influence of increased heterogeneity on doping, the welfare implications of doping, and possible prevention of doping.


Keywords: contest, doping, drugs, fraud in research, tournament.
JEL Classification: J3, K42, M5
May 2005

 

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46.pdf

SFB/TR 15 Discussion Paper No.

045

Matthias Kräkel (B4)
Emotions and the Optimality of Unfair Tournaments

Abstract:

We introduce a concept of emotions that emerge when workers compare their own performance with the performances of co-workers. Assuming heterogeneity among the workers the interplay of emotions and incentives is analyzed within the framework of rank-order tournaments which are frequently used in practice. Tournaments seem to be an appropriate starting point for this concept because the main idea of a tournament is inducing incentives by making workers compare themselves with their opponents. We differentiate between exogenous and endogenous tournament prizes and identify certain conditions under which the employer benefits from emotional workers. In this case, he clearly prefers unfair to fair tournaments. Furthermore, the concept of emotions is used to explain the puzzling findings on the oversupply of effort in experimental tournaments.


Keywords: anger, emotions, pride, tournaments
JEL Classification: J3, M5
May 2005

 

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45.pdf

SFB/TR 15 Discussion Paper No.

044

Oliver Gürtler (B4)
Are 18 holes enough for Tiger Woods?

Abstract:

This paper addresses the selection problem in promotion tournaments. I consider a situation with heterogeneous employees and ask whether an employer might be interested in repeating a promotion tournament. On the one hand, this yields a reduction in uncertainty over the employees’ abilities. On the other hand, there are costs if a workplace stays vacant.


Keywords: Promotion tournament, selection, heterogeneous employees, repetition
JEL Classification: D82, M51
May 2005

 

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44.pdf

SFB/TR 15 Discussion Paper No.

035

Georg von Graevenitz (B2)
Integrating competition policy and innovation policy: the case of R&D cooperation

Abstract:

I develop a model of R&D cooperation with uncertain research outcomes. In this model asymmetric outcomes of R&D competition emerge naturally. Therefore ex-ante and ex-post R&D cooperation can be studied as alternatives for firms. Using this model I compare welfare losses under ex-ante and ex-post R&D cooperation as the degree of product market competition varies. It emerges that the relative size of these welfare losses is monotonically related to the degree of product market competition and the degree of technological opportunity. The implications of these results for the interaction of competition policy and innovation policy are discussed.


Keywords: Competition Policy, Innovation Policy, R&D Cooperation, Licensing, Research Joint Venture, Oligopolistic R&D
JEL Classification: L13, L49, O31
February 2005

 

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35.pdf

SFB/TR 15 Discussion Paper No.

029

Georg von Graevenitz (B2)
Spillovers Reconsidered: Analysing Economic Welfare under complementarities in R&D

Abstract:

We analyse economic welfare in R&D intensive industries under varying assumptions on the spillover process. The focus lies on spillover processes with complementary R&D investments such as those modelling absorptive capacity. There spillovers give rise to both negative and positive externalities. We show that the rationale for public policy intervention is strengthened where spillovers also have positive effects. This conclusion is based on the supermodularity of the spillover process and the investment game. We characterise a large class of spillover processes with similar implications for public policy. We show that results of much empirical work on absorptive capacity extend to this class of models.


Keywords: spillovers, complementarity, absorptive capacity, supermodularity, oligopolistic R&D

JEL classification: L13, O31
November 2004

 

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SFB/TR 15 Discussion Paper No.

015

Matthias Kräkel (B4)
Tournaments versus Piece Rates under Limited Liability

Abstract:

Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004

The existing literature on the comparison of tournaments and piece rates as alternative incentive schemes has focused on the case of unlimited liability. However, in practice real workers’ wealth is typically restricted. Therefore, this paper compares both schemes under the assumption of limited liability. The results show that if the cost function is sufficiently convex, first-best effort will be more likely implemented under piece rates than under tournaments. Moreover, if first-best implementation is not achieved and workers earn positive rents, efforts and profits will be larger for piece rates than for tournaments given sufficiently convex costs. While tournaments offer a partial insurance due to their fixed prizes, piece rates may not work any longer if potential losses become prohibitively high. Finally, if risk is sufficiently high, piece rates will dominate tournaments despite the partial insurance effect of tournament compensation. Since effort costs and risk may depend on an individual worker’s characteristics, on the characteristics of his job and on his hierarchical position, these findings have important implications for the choice of incentive schemes and the allocation of workers in firms.


Keywords: incentives, limited liability, piece rates, rank-order tournaments
JEL Classification: J31, J33, M5
July 2004

 

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15.pdf

SFB/TR 15 Discussion Paper No.

014

Carolin Häussler (B2)
Does Partnering Pay Off? - Stock Market Reactions to Inter-Firm Collaboration Announcements in Germany

Abstract:

The dramatic increase in interorganizational partnering in the last two decades raises questions for scholars and managers regarding the value impact of inter-firm collaborations. Using event study methodology, this paper tests whether stock market reactions differ when a collaboration formation or termination is announced. In addition, the study provides an in-depth analysis of potential determinants of stock market reactions to collaboration formation announcements. The sample consists of 1037 announcements in German stock markets from 1997 to 2002. The results show that an unexpected termination announcement decreases firm valuation, and a formation announcement increases firm valuation. Further, certain collaborations are more favorable than others, depending on firm industry, age, size, collaboration constellations, and equity versus non-equity investment in partner firm. The results open avenues for further research on partnering strategies.


Keywords: Firm valuation, inter-firm collaboration, expectations, stock market reactions
JEL Classification: G 14, L 22, D 23
December 2004

 

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14.pdf

SFB/TR 15 Discussion Paper No.

008

Hendrik Hakenes, Isabel Schnabel (B3)
Banks without Parachutes - Competitive Effects of Government Bail-out Policies

Abstract:

Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004

The explicit or implicit protection of banks through government bail-out policies is a universal phenomenon. We analyze the competitive effects of such policies in two models with different degrees of transparency in the banking sector. Our main result is that the bail-out policy unambiguously leads to higher risk-taking at those banks that do not enjoy a bail-out guarantee. The reason is that the prospect of a bail-out induces the rotected bank to expand, thereby intensifying competition in the deposit market and depressing other banks’ margins. In contrast, the effects on the protected bank’s risk taking and on welfare depend on the transparency of the banking sector.


Keywords: Government bail-out, banking competition, transparency, opacity, “too big to fail", financial stability
JEL Classification: G21, G28, L11
June 2004

 

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8.pdf

SFB/TR 15 Discussion Paper No.

001

Dalia Marin, Thierry Verdier (B5)
Globalization and the Empowerment of Talent

Abstract:

Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004

Globalization has been identified by many experts as a new way firms organize their activities and as the emergence of talent as the new stakeholder in the firm. This paper examines the role of trade integration for the changing nature of the corporation. International trade leads to a ’war for talent’ which makes it more likely that an organizational equilibrium emerges in the integrated world economy in which control is delegated to lower levels of the firms’ hierarchy empowering human capital. Furthermore, trade integration is shown to lead to waves of outsourcing and to convergence in corporate cultures across countries.


Keywords: international trade with endogenous organizations, the rise of human capital, theory of the firm, Rybczynski Theorem of firm organization
JEL Classification: F12, F14, L22, D23
July 2004

 

Full text in pdf format:
1.pdf

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