Pension Reform, Capital Markets and the Rate of Return

Abstract. This paper discusses the consequences of population aging and a fundamental pension reform – that is, a shift towards more pre‐funding – for capital markets in Germany. We use a stylized closed‐economy, overlapping‐generations model to compare the effects of the recent German pension reform with those of a more decisive reform that would freeze the current pay‐as‐you‐go contribution rate and thus result in a larger funded component of the pension system. We predict rates of return to capital under both reform scenarios over a long horizon, taking demographic projections as given. Our main finding is that the future decrease in the rate of return is much smaller than often claimed in the public debate. Our simulations show that the capital stock will decrease once the baby‐boom generations enter retirement, even if there were no fundamental pension reform. The corresponding decrease in the rate of return, the direct effect of population aging, is around 0.7 percentage points. While the capital market effects of the recent German pension reform are marginal, the rate of return to capital would decrease by an additional 0.5 percentage points under the more decisive reform proposal.     

Entrepreneurial finance and economic growth

This paper develops a theory of the centralization of firms engaged in multi-market collusive agreements. A centralized organization (called the unitary or U-form) allows price coordination across several markets, whereas with decentralized (the multidivisional or M-form) firms the probability that the antitrust authority will find evidence of collusion on one market while investigating the other is lower. We show that the firm’s choice of internal structure depends to a large extent on product substitutability and the instruments used by the antitrust authority.     

Dynastic entrepreneurship,entry, and non-compete enforcement

We investigate entry in a dynastic entrepreneurship (overlapping generations) environment created by employee spinoffs. Contracting failures, caused by non-verifiability of profits from new activities in original firms and overall profits from subsequent entrants, may lead respectively to implementation of new employee ideas in spinoffs and constraints on borrowing to buy out non-compete agreements. If borrowing constraints are not binding, enforcement of non-compete agreements unambiguously improves social welfare outcomes, increasing the entry of both original firms and subsequent generations of spinoffs. However, if employees are unable to buy out their non-compete covenants, enforcement of these agreements shuts down socially profitable spinoff firms. Non-enforcement sacrifices entry of original firms that would be marginally profitable in the absence of employee spinoffs, but otherwise clearly improves social welfare outcomes over enforcement in the presence of binding finance constraints.     

In search of advice for participants in matching markets which use the deferred-acceptance algorithm

Many centralized entry-level labor markets use the firm-proposing deferred-acceptance (DA) algorithm to compute the matching that is implemented among workers and firms. We propose a definition of the strategic options a worker faces in the DA-algorithm. Then we develop a theory to advise workers who distinguish between the firms from which they believe not to receive a proposal, the firms from which they might receive a proposal, and the firms from which they certainly receive a proposal. If a worker is not able to deduce which new proposals she receives after having rejected others, then it is not profitable for her to submit a list that reverses the true ranking of any two acceptable firms. Furthermore, it is not beneficial for her to include a firm in her submitted list that is unacceptable to her.     

Market Sharing Agreements and Collusive Networks*

We analyze reciprocal market sharing agreements by which firms commit not to enter each other's territory in oligopolistic markets and procurement auctions. The set of market sharing agreements defines a collusive network. We characterize stable collusive networks when firms and markets are symmetric. Stable networks are formed of complete alliances, of different sizes, larger than a minimal threshold. Typically, stable networks display fewer agreements than the optimal network for the industry and more agreements than the socially optimal network. When firms or markets are asymmetric, stable networks may involve incomplete alliances and be underconnected with respect to the social optimum.     

GOVERNANCE AND VERTICAL INTEGRATION IN TEAM SPORTS

Antitrust law distinguishes vertical and horizontal restraints. A horizontal restraint is one which exists between competing firms supplying rival products in a market, and a vertical restraint is one which exists between firms that jointly contribute to supplying a particular product in a market. Horizontal agreements receive much closer antitrust scrutiny because they often enable firms to limit competition at the expense of consumers, while vertical restraints may be legal or illegal depending on whether they tend to enhance or reduce competition or the exploitation of market power. This paper argues that there are important vertical restraints that operate in sports leagues which have been mostly neglected in the literature but have a significant impact. We focus on intraleague restraints, where member clubs of a league agree to control the organization of league competition, and interleague restraints, where horizontal agreement such as the Reserve Clause relies on agreements not to compete for players competing in senior or junior leagues. ( JEL L83, L42, L44)     

Evaluating the Impact of a Working Time Regulation on Capital Operating Time: The French 35‐hour Work Week Experience

In this article, we evaluate the impact of diminishing weekly working hours on capital operating time using the French 35‐hour working week experience. We merge the French survey on Capital Operating Time (COT, Banque de France, Central Bank of France; 1989–2004) and administrative Working Time Reduction agreements files (WTR, DARES, French Ministry of Labour; May 2003). We construct shift‐work‐based capital operating time indicators. Using differences‐in‐differences econometric models, we show that the implementation of the 35‐hour work week did not induce any reduction in COT. Hence, firms increased shift‐work to compensate for the decrease in working hours.     

Coexistence of long-term and short-term contracts

We study the length of agreements in a market in which infinitely-lived firms contract with agents that live for two periods. Firms differ in the expected values of their projects, as do workers in their abilities to manage projects. Worker effort is not contractible and worker ability is revealed during the relationship. The market dictates the trade-off between sorting and incentives. Short- and long-term contracts often coexist: The best firms always use short-term contracts to hire high-ability senior workers, firms with less profitable projects use short-term contracts to save on the cost of hiring junior workers, whereas intermediate firms use long-term agreements to provide better incentives to their workers. We relate our results to the optimal assignment literature that follows Becker (1973).     

Reforms and confidence

We examine the choice of economic reforms when policymakers have present-biased preferences and can choose to discard information (maintain confidence) to mitigate distortions from excess discounting. The decisions of policymakers and firms are shown to be interdependent. Confident policymakers carry out welfare-improving reforms more often, which increases the probability that firms will invest in restructuring. While policymakers in different countries can be equally irrational, the consequences of bounded rationality are less severe in economies with beneficial initial conditions. We also examine how present-biased preferences influence the choice between big bang versus gradualist reform strategies. Our findings help explain differences in economic reform success in various countries.     

Staggered wages,unanticipated shocks and firms’ adjustments

This paper empirically investigates the employment and wage effects of contract staggering, i.e., the asynchronous and infrequent way in which wages adjust to changes in the economic environment. Using an identification strategy based on exogenous start dates of collective agreements around the Great Recession, we estimate the effect of increases in base wages on firms’ labor cost adjustments. Our analysis is based on a large employers-employees dataset merged to collective agreements in the Netherlands, a country in which collective bargaining is dominant and contract staggering is relatively pervasive. The main result is that staggered wage setting has no real effect on employment. We find significant employment losses only in sectors covered by contracts with much longer durations than those normally assumed in macroeconomic models featuring staggered wages. Instead, we show that firms adjust labor costs by curbing other pay components such as bonuses and benefits and incidental pay. The overall result supports the idea that wage rigidities are not the main source of employment fluctuations.     

(Un)stable vertical collusive agreements

In this paper, we extend the concept of stability to vertical collusive agreements involving downstream and upstream firms, using a setup of successive Cournot oligopolies. We show that a stable vertical agreement, the unanimous vertical agreement involving all downstream and upstream firms, always exists. Thus, stable vertical collusive agreements exist even for market structures in which horizontal cartels would be unstable. We also show that there are economies for which the unanimous agreement is not the only stable one. Furthermore, the Stigler statement according to which the only ones who benefit from a collusive agreement are the outsiders need not be valid in vertical agreements.     

What drives the choice of the type of partner in R&D cooperation? Evidence for Spanish manufactures and services

We analyse the heterogeneity in firms’ decisions to engage in R&D cooperation, taking into account the type of partner (competitors, suppliers or customers, and research institutions) and the sector to which the firm belongs (manufactures or services). We use information from the Technological Innovation Panel (PITEC) for Spanish firms and estimate multivariate probit models corrected for endogeneity which explicitly consider the interrelations between the different R&D cooperation strategies. We find that placing a higher importance to publicly available information (incoming spillovers), receiving public funding and firm size increase the probability of cooperation with all kind of partners but the role is much stronger in the case of cooperative agreements with research institutions and universities. Our results also suggest that R&D intensity and the importance attributed to the lack of qualified personnel as a factor hampering innovation are key factors influencing positively R&D cooperation activities in the service sector but not in manufactures.     

Intervention, Corruption and Capture: The Nexus between Enterprises and the State

We study the nexus between enterprises and the state in transition countries, using new enterprise survey data. We examine the quality of governance, state intervention in enterprise decision-making, state benefits to firms, and corruption payments. The quality of governance varies both across countries and across different dimensions of governance within countries. Economic reform improves governance in countries with a low degree of 'state capture' by vested interests, but not in high-capture countries. Despite reform, state intervention in firm decisions continues, but it varies substantially across firms. At the micro level (within a country), there is clear substitution between the degree of state intervention, state benefits to firms, and corruption payments, which is consistent with a bargaining model of politicians and firms. But at the macro level (across countries) these elements are complementary, suggesting that politicians, perhaps under pressure from captor firms, have some control over the scope of regulation and intervention.     

环境规制对现存企业迁移行为的影响研究

在城市化发展过程企业渐渐由中心区迁往外围区域,鲜有研究从这一视角观察企业迁移行为。本文从环境规制的角度对现存企业的迁移行为进行了探讨。实证分析发现在省级层面,废水污染费征收率提升显著减少企业在城市之间迁移的数量,废气污染费征收率提高增加企业城市之间迁移的数量。在企业层面环境规制增强显著提升企业在县区之间迁移的概率。利用国家贫困县名录,进一步发现废气污染费率增加显著提升企业往县和贫困县迁移的概率。进一步分析发现加入WTO、2003年污染费征收改革后污染费上升时企业显著提高向贫困县迁移的概率。最后本文发现环境规制提高了企业的创新水平以规避环境规制成本从而降低了迁移的概率。     

Capacity investment and green R&D in a dynamic oligopoly under the potential shift in environmental damage

We develop a differential oligopoly game to investigate firms’ capacity investment and green R&D efforts in the presence of the potential shift in environmental damage and under the spillover effect of R&D activities among firms. We find that when both the probability of potential shift in environmental damage and the efficacy of R&D activities are high, the spillover effect will discourage the R&D effort but encourage the capacity investment. Otherwise, the spillover effect will encourage the R&D effort but discourage the capacity investment. Moreover, the potential shift in environmental damage can significantly impact the capacity and green R&D decisions as well as the Pigouvian tax, especially in the case of a large number of firms, a high profitability of the product, a high level of interest rate, and a high level of R&D spillover among firms.     

Operating lease decision and the impact of capitalization in a bank-oriented country

This article explores the reasons why firms engage in operating leases and examines the potential impact of a change in the related accounting rules. We focus on the accounting advantage of off-balance financing, which does not affect the typical accounting-based covenants especially important in bank-oriented countries. However, we also consider other economically based arguments. Using manually collected operating lease data for Spanish listed firms, we use the constructive capitalization method to measure as-if liabilities. The results confirm that not only size and industry affect the decision but that firms closer to breaching their covenants are also more inclined to choose operating leases. Consequently, it is argued that such firms will be more affected by the accounting change; indeed, the inclusion of liabilities in the balance sheet might tighten financial covenants in loan agreements as evidenced in the paper. Not surprisingly, firms are strongly opposed to the accounting change.     

Trade Agreements in the Shadow of Lobbying

This paper presents a model of international trade agreements in which the executive branches of each government negotiate agreements while the legislative branches, subject to political pressure from firms, can disrupt them. Lobbying is in the style of Grossman and Helpman's ‘Protection for Sale’ model with a new feature: all actors face uncertainty arising from the complexity of the legislative process. I demonstrate that the higher the executives set tariffs in a trade agreement, the less effort lobbies put forth to prevent its ratification. Thus trade agreements act as a domestic political commitment device: executives set relatively high tariffs to discourage lobbying and increase the chance that the agreement will be ratified. The model sheds light on the empirical puzzle surrounding governments’ welfare weights in the Grossman and Helpman model and provides a new explanation for failures to ratify trade agreements.     

环境管制:从管理到治理的转变

环境管制旨在应对因资源环境消费而产生的外部性问题,它通过三种不同类型政策工具的运用得以实施,即:命令与控制型、基于市场型以及自愿型。对政府而言,这意味着三种具有不同交易成本发生和负担机制的管制手段选择。环境管制的发展沿革包含了一种政府在管制过程中不断减少交易成本的尝试,这种努力使得在最新的环境管制形态——自愿环境协议中,企业、非政府组织等多元社会主体共同形成决策并参与管制的实施,分担改善环境质量的社会责任与成本投入,环境管制因而实现了从管理到治理的转变。     

BILATERALISM AND FREE TRADE*

We study a setting with many countries; in each country there are firms that can sell in the domestic as well as foreign markets. Countries can sign bilateral free‐trade agreements that lower import tariffs and thereby facilitate trade. We allow a country to sign any number of bilateral free‐trade agreements. A profile of free‐trade agreements defines the trading regime. Our principal finding is that, in symmetric settings, bilateralism is consistent with global free trade. We also explore the effects of asymmetries across countries and political economy considerations on the incentives to form trade agreements.     

Strategic timing in R&D agreements

We study the endogenous formation of R&D agreements in a R&D/Cournot duopoly model with spillovers where also the timing of R&D investments is endogenous. This allows us to consider the incentives for firms to sign R&D agreements over time. It is shown that, when both R&D spillovers and investment costs are sufficiently low, firms may find difficult to maintain a stable agreement due to the strong incentive to invest noncooperatively as leaders. In this case, the stability of an agreement requires that the joint investment occurs at the initial stage, thus avoiding any delay. When spillovers are sufficiently high, the coordination of R&D efforts becomes a profitable option, although firms may also have an incentive to sequence noncooperatively their investment over time. Finally, when spillovers are asymmetric and knowledge mainly leaks from the leader to the follower, investing as follower may become extremely profitable, making R&D agreements hard to sustain unless firms strategically delay their joint investment in R&D.