Pareto-improving firing costs?

We examine self-enforcing contracts between risk-averse workers and risk-neutral firms (the ‘invisible handshake’) in a labor market with search frictions. Employers promise as much wage-smoothing as they can, consistent with incentive conditions that ensure they will not renege during low-profitability times. Equilibrium is inefficient if these incentive constraints bind, with risky wages for workers and a risk premium that employers must pay. Mandatory firing costs can help, by making it easier for employers to promise credibly not to cut wages in low-profitability periods. We show that firing costs are more likely to be Pareto-improving if they are not severance payments.     

Share contracts and macroeconomic externalities

Weitzman's analysis of the share economy contrasts fixed-wage and fixed-share contracts; this paper notes that neither is an optimal labor contract, rendering the comparison suspect. Given this comparison, though, share contracts may be superior to wage contracts in an economy characterized by a “macroeconomic externality,” whereby firm-level employment decisions affect the demand for other firms' goods.     

Welfare under friction and uncertainty: General equilibrium evaluation of temporary employment in the U.S.

Temporary contracts usually fall outside of employee protection litigation, thus they are often cheaper than permanent contracts and are offered on-demand by firms. In the last two decades, there has been a sharp growth in such contracts in the U.S. labor market. This paper investigates the welfare consequences of offering temporary contracts in the U.S., an environment with low employee protection litigation and high production risk for firms. Employee protection litigation creates firing rigidity in regular labor markets. Pairing firing rigidity with high production risk, firms reduce employment and output, which generates welfare loss. The inexpensive and flexible nature of temporary contracts offers firms a buffer strategy in making employment decisions under risk and navigating the firing rigidity of the regular labor sector, thereby reducing welfare loss. However, temporary contracts cannot fully compensate for the efficiency cost from rising firing rigidity and risk.     

Fear itself: How risk sensitive firms can give demand shocks bite

Many economists believe that recessions arise when aggregate demand is insufficient to support full employment. However, replicating this intuition within a real business cycle (RBC) model has proven surprisingly challenging. Rather than eliciting a contraction, lower consumer demand leads to greater household savings in many such models, fueling new investment and causing the economy to expand. The present paper proposes a novel way to resolve this apparent paradox: risk-averse firms. In the model to follow, cautious firms reduce their demand for investment prior to a recession. This contraction in the demand for capital overcomes the increased supply arising from consumer savings and restores intuitive business cycle behavior. In particular, the paper demonstrates that the model economy contracts when subjected to an uncertainty shock in consumer demand, mimicking a pre-recessionary environment in which firms, fearing a lack of orders, precipitate the downturn by reducing capital expenditures. These results are consistent with microeconomic evidence that uncertainty, particularly uncertainty about future demand, is the primary reason for firms shedding workers or scaling down operations in advance of an economic downturn. More generally, they imply that firm's attitudes towards risk shouldn't be ignored in modern macroeconomic models.     

Risk and regret aversions on optimal bank interest margin under capital regulation

This paper examines the bank's optimal loan rate (and thus the bank's interest margin) under more stringent capital regulation when the bank is not only risk-averse but also regret-averse. Risk-averse preferences are characterized by an option-based utility function that includes disutility from the dislike of bank equity risk. Regret-averse preferences feature an option-based utility function that includes disutility from having chosen ex-post suboptimal alternatives. We show that an increase in bank capital requirement results in an increased margin under risk aversion dominating regret aversion, whereas it results in a reduced margin under regret aversion dominating risk aversion. The former holds when risk aversion domination stems from increasing risk-averse preference, but not from decreasing regret-averse preference, while the latter holds when regret aversion domination results from either decreasing risk-averse or increasing regret-averse preference. Risk aversion, as such, makes the bank more prudent and less prone to risk-taking, while regret aversion, as such, makes the bank less prudent and more prone to risk-taking.     

Human capital and the private equity premium

When capital market is imperfect, an entrepreneur has to invest substantial personal funds to start a firm and has to bear large firm-specific risk. Furthermore, if a typical entrepreneur is risk averse, private equity should earn a premium for idiosyncratic risk. In this paper I explore the interaction of human capital with the decision to become an entrepreneur. I calibrate a model of entrepreneurial choice to illustrate a significant attenuating effect of human capital on the premium for firm-specific risk. When an entrepreneur can quit the business and work for hire, the firm-specific risk premium is order of magnitude lower than without this option. While an entrepreneur puts at risk a substantial fraction of financial wealth, she does not commit all human capital to the current business. At stake is only the labor income forgone while managing the firm and the rest of human capital is unaffected by the business risk. Empirical evidence suggests that private equity does not earn any significant premium over publicly traded equity. The model with human capital is consistent with this observation, assuming typical entrepreneur forgoes a small expected return (1.5%) in lieu of intangible benefits of entrepreneurship.     

Collective Choice and Control Rights in Firms

Recent writers have asserted that firms controlled by workers are rare because workers have diverse preferences over firm policies, while investors all support wealth maximization. However, the source of the asymmetry between capital and labor remains unclear. We resolve this puzzle by arguing that because financial capital is exceptionally mobile, capital markets induce unanimity. The lower mobility of human capital implies that labor markets are monopolistically competitive and hence that unanimity cannot be expected in labor‐managed firms. Moreover, such firms are vulnerable to takeover by investors, while capital‐managed firms are substantially less vulnerable to takeover by workers.     

Wage-vacancy contracts and coordination frictions

We consider a directed search model with risk-averse workers and risk-neutral entrepreneurs who can set up firms that post wage-vacancy contracts, i.e., contracts where firms can make payments to more than one applicant, and where the payments can be different for each applicant and be contingent on the number of applicants. We establish that the type of contracts the literature focuses on are not offered if firms can post wage-vacancy contracts. We show that there exists an equilibrium satisfying a Monotonic Expected Utility property which is efficient. Furthermore, we investigate the role of wage-vacancy contracts on welfare and competition.     

Does formality improve micro-firm performance? Evidence from the Brazilian SIMPLES program

This paper exploits an extensive Brazilian micro-enterprise survey and the 1996 introduction of a business tax reduction and simplification scheme (SIMPLES) to examine three questions. First, do high tax rates and complex tax regulations really constitute a barrier to the formalization of micro-firms? Second, does formalization improve firm performance measured along several dimensions, including revenues, employment and capital stock? Third, what are the channels through which this occurs? We find that SIMPLES led to a significant increase in formality in several dimensions. Moreover, newly created firms that opt for operating formally show higher levels of revenue and profits, employ more workers and are more capital intensive (only for those firms that have employees). The channel through which this occurs is not access to credit or contracts with larger firms. Rather, it appears that the lower cost of contracting labor leads to adopting production techniques that involve a permanent location and a larger paid labor force.     

Relevance or irrelevance of capital structure?

In this paper we examine the effects of asymmetric information on the nature of financial equilibrium and on the capital structure of firms. In the first model presented, the financial contracts on offer involve pooling equilibrium with no adverse selection. However, in the special case analyzed, where contracts are of mixed form, there may be a separating equilibrium and also equilibrium may not exist. Interesting result is that the separating equilibrium found is not economically efficient since aggregate investments falls short of first-best level. More importantly, capital structure does matter. The relative magnitude of outside equity makes a real difference to the quantity of aggregate investment in equilibrium.     

UNEMPLOYMENT INSURANCE AND EXPERIENCE RATING: INSURANCE VERSUS EFFICIENCY*

Unemployment insurance (UI) distorts firms' layoff decisions by reducing the cost of laying off workers. To dampen this increase, it has been suggested that UI should be financed with an experience‐rated tax. Despite the fact that increasing the level of experience rating can reduce unemployment, it can reduce the insurance coverage workers receive. With high experience rating, firms may reduce their severance payments by more than the UI benefit. We build a model where competitive firms offer contracts with severance payments to risk‐averse workers. Frictions in the labor market lead to incomplete insurance. This article shows that less than full‐experience rating enables the government to increase the insurance coverage workers receive. Welfare implications are also investigated.     

Enterprise performance and management turnover in the Czech Republic

We study the effect of management turnover on changes in enterprise performance, using a cross-section of 706 Czech firms over the 1993–1997 period. Controlling for initial conditions, equity holdings by managers, and firm- and sector-specific effects, we find that the appointment of new managers is associated with improvements in profit margins and labor productivity, particularly if those managers were selected by private owners. The results highlight the importance of human capital in transition economies in bringing about improvements in corporate performance.     

我国人力资本参与企业收益分配的制度分析

本文认为静态地、抽象地分析企业中人力资本所有权和物质资本所有权谁占支配地位抑或平等是没有意义的。在企业中，人力资本个人收益与企业的总体收益有不同的取向，而非简单地转换。人力资本需要“自己给自己定价”，即靠自身的才干、贡献大小通过有效的机制确定自己从企业收益和剩余收益中分割的多少。因此，设计能够释放人力资本能动性的产权制度和企业治理结构，是中国企业缩小与国外的劳动生产率差距、提高竞争力、加快创新的必然要求。     

Risk taking by banks and captial accumulation: A portfolio approach

This paper shows the risk taking role of banks within a continuous-time portfolio model. Banks are considered as risk-averse utility maximizers which differ from private investors and firms only by their degree of risk aversion. Since bankruptcy risk, described by a Poisson jump-process, restrains the capability of firms to mobilize funds from private investors, banks foster capital accumulation by investing in risk-bearing credits financed by risk-free deposits. The provision of collateral by the borrowing firms is found to be necessary for the viability of financial intermediation. This result adds to the explanation of collateral given by the theory of asymmetric information.I would like to thank Manfred Neumann, Thusnelda Tivig, two anonymous referees, and my husband for helpful comments. Financial support by the Deutsche Forschungsgemeinschaft is gratefully acknowledged.     

Incentives for firms to provide safety: Regulatory authority and capital market reactions

We investigate the relationship between the various incentives that firms have to act safely, focusing on the relationship between the equity losses experienced by a firm following a fatal, accident and the incentive effects created by government regulation. The major findings are that first, the capital market reactions vary dramatically by which agency has regulatory jurisdiction for the accident. And second, the capital market effects tend to be weak (equity values do not decline sizably) where federal agencies rely heavily on an ex ante inspection policy. On the other hand, where ex ante inspection policy is lax or nonexistent, capital market effects tend to be strong - up to an order of magnitude higher per fatality than willingness-to-pay estimates based on labor market data.     

Optimal Income Taxation with Endogenous Human Capital

This paper augments the theory of optimal linear income taxation by taking into account human capital accumulation as a dimension of labor supply. The distribution of earning potentials is endogenous because agents differ in the ability to learn. Taxation affects utilization rates of human capital through labor supply responses. The costs of education that are not deductible from the income tax distort the learning decision as well. We show theoretically that the trade‐off between efficiency and equity is worsened. Quantitative analysis shows that the distortionary costs of taxation increase substantially when human capital formation is endogenous.     

Asset Specificity,R&D Financing,And The Signalling Properties of The Firm's Financial Structure

Equity financing is the optimal strategy for innovating firms, which can use their financial structure as a signalling device to attract outside investors. This situation is likely to arise when the firm undertakes a specific purpose R&D project aimed at developing a certain product innovation. Typically, innovations of this kind draw on the firm's cumulative. idiosyncratic knowledge base and, accordingly, the innovation process involves an high degree of asset specificity. Under such circumstances, the terms of debt financing will be adjusted adversely, and equity financing will represent the most economically efficient solution.

These arguments are developed in standard static principal-agent models dealing with New Technology Based Firms and publicly held large firms undertaking an aggressive R&D strategy. In the case of NTBFs, two kinds of optimal venture capital contracts are considered, which render the sharing rules independent (a) of the agent's action and (b) of both the agent's action and the specific assets involved in the transaction. Regarding innovating large firms, it is argued that in this case, too, equity represents the optimal financing strategy, and that top executives use their equity share to signal the firm's expected return stream and value to outside investors.     

Investment and deposit contracts under costly intermediation and aggregate volatility

This paper examines how volatility affects investment and the form of deposit contracts in a three-period model where capital formation is financed by bank credit and lenders face state verification and enforcement costs. Firms face both idiosyncratic and aggregate shocks, and agents are initially risk neutral. We show that intermediation costs magnify the incidence of macroeconomic volatility on banks' expected losses and have an adverse effect on investment. With risk-averse consumers, the impact of banks' expected losses on investment is mitigated because the equilibrium deposit contract provides partial insurance against adverse macroeconomic shocks.     

Contracts payments for ecosystem services: the case of bio-pospecting

We examine the economics of royalties in bioprospecting contracts between a pharmaceutical and genetic resource supplier (local), with an eye to understanding the relative advantages of indexing royalty payments to gross revenue or net revenue. We show a risk-averse firm facing only production or only cost risks will index royalties to net revenue. When facing both types of risk, the choice of royalty type depends on the relative magnitudes of the production and cost risk. In each case, the risk-averse firm chooses the royalty type that shifts as much risk as possible to the local. When the local is risk neutral, the pharmaceutical's and local's preferences are compatible. If the local is risk averse and there is only one type of risk, it will prefer a gross revenue royalty, and shift as much risk as possible to the firm: here the local and firm preferences are compatible only if the firm is risk-neutral, Lastly, we show if the firm sets the terms of the contract, and both agents are risk averse, the firm will not likely volunteer to implement the socially optimal royalty arrangement as it prefers to shift as much risk to the local, who now also prefers a more certain return. This last outcome is at the heart of the benefit sharing discussion and suggests if risk sharing and equity are a concern in benefit sharing, then the choice of royalty type can be an important part of negotiations between pharmaceuticals and locals for the phytochemical from nature for new drug discovery.     

Wage settlements and wage setting: results from a multi-level model

Which dimensions of wage setting differ across establishments applying collective contracts and uncovered establishments? The empirical analysis reported here utilizes German linked employer–employee data for the years 1990, 1995 and 2001 and is restricted to workers without supervisory functions in larger manufacturing firms. Results show that the expected wage of an average worker is higher in firms applying collective contracts, while returns to human capital and the gender wage gap are reduced. Moreover, during the 1990s these effects became stronger.