Outsourcing,Product Quality,and Contract Enforcement

Does outsourcing compromise product quality? Does sound contract enforcement alleviate this concern? We offer a simple model to illustrate how outsourcing leads to lower product quality and how contract enforcement helps mitigate this problem. These theoretical predictions are borne out of a survey of 2,400 firms in China conducted by the World Bank in 2003.     

Identifying and Estimating the Distributions of Ex Post and Ex Ante Returns to Schooling

This paper surveys a recent body of research by Carneiro, Hansen, and Heckman [Carneiro, P., K. Hansen, and J.J. Heckman, 2001, Fall. Removing the veil of ignorance in assessing the distributional impacts of social policies. Swedish Economic Policy Review 8 (2), 273–301., Carneiro, P., K. Hansen, and J.J. Heckman, 2003, May. Estimating distributions of treatment effects with an application to the returns to schooling and measurement of the effects of uncertainty on college choice. International Economic Review 44 (2), 361–422. 2001 Lawrence R. Klein Lecture], Cunha and Heckman [Cunha, F. and J.J. Heckman, 2006. The evolution of earnings risk in the US economy. Presented at the 9th World Congress of the Econometric Society, London], Cunha, Heckman, and Navarro [Cunha, F., J.J. Heckman, and S. Navarro, 2004, March. Separating heterogeneity from uncertainty in an aiyagari–laitner economy. Presented at the Goldwater Conference on Labor Markets, Arizona., Cunha, F., J.J. Heckman, and S. Navarro, 2005, April. Separating uncertainty from heterogeneity in life cycle earnings, The 2004 Hicks Lecture. Oxford Economic Papers 57 (2), 191–261., Cunha, F., J.J. Heckman, and S. Navarro, 2006. Counterfactual analysis of inequality and social mobility. In S.L. Morgan, D.B. Grusky, and G.S. Fields (Eds.), Mobility and Inequality: Frontiers of Research in Sociology and Economics, Chapter 4, pp. 290–348. Stanford, CA: Stanford University Press], Heckman and Navarro [Heckman, J.J. and S. Navarro, 2007, February. Dynamic discrete choice and dynamic treatment effects. Journal of Econometrics 136 (2), 341–396] and Navarro [Navarro, S., 2005. Understanding Schooling: Using Observed Choices to Infer Agent's Information in a Dynamic Model of Schooling Choice When Consumption Allocation is Subject to Borrowing Constraints. Ph.D. Dissertation, University of Chicago, Chicago, IL] that identifies and estimates the ex post distribution of returns to schooling and determines ex ante distributions of returns on which agents base their schooling choices. We discuss methods and evidence, and state a fundamental identification problem concerning the separation of preferences, market structures and agent information sets. For a variety of market structures and preference specifications, we estimate that over 50% of the ex post variance in returns to college are forecastable at the time agents make their schooling choices.     

The return to schooling: Estimates from a sample of young Australian twins

This study uses a sample of young Australian twins to examine whether the findings reported in [Ashenfelter, Orley and Krueger, Alan, (1994). ‘Estimates of the Economic Return to Schooling from a New Sample of Twins’, American Economic Review, Vol. 84, No. 5, pp.1157–73] and [Miller, P.W., Mulvey, C and Martin, N., (1994). ‘What Do Twins Studies Tell Us About the Economic Returns to Education?: A Comparison of Australian and US Findings’, Western Australian Labour Market Research Centre Discussion Paper 94/4] are robust to choice of sample and dependent variable. The economic return to schooling in Australia is between 5 and 7 percent when account is taken of genetic and family effects using either fixed-effects models or the selection effects model of Ashenfelter and Krueger. Given the similarity of the findings in this and in related studies, it would appear that the models applied by [Ashenfelter, Orley and Krueger, Alan, (1994). ‘Estimates of the Economic Return to Schooling from a New Sample of Twins’, American Economic Review, Vol. 84, No. 5, pp.1157–73] are robust. Moreover, viewing the OLS and IV estimators as lower and upper bounds in the manner of [Black, Dan A., Berger, Mark C., and Scott, Frank C., (2000). ‘Bounding Parameter Estimates with Nonclassical Measurement Error’, Journal of the American Statistical Association, Vol. 95, No.451, pp.739–748], it is shown that the bounds on the return to schooling in Australia are much tighter than in [Ashenfelter, Orley and Krueger, Alan, (1994). ‘Estimates of the Economic Return to Schooling from a New Sample of Twins’, American Economic Review, Vol. 84, No. 5, pp. 1157–73], and the return is bounded at a much lower level than in the US.     

Gender earnings gap: the role of firm specific effects

The gender earnings differential is an intensely studied issue in labour economics. However, existing studies do not examine how the wage policies of firms affect gender earnings differentials. This paper uses employer–employee linked data to address this issue. The Juhn et al. [Juhn, C., Murphy K., Pierce, B., 1991. Accounting for the slowdown in black–white wage convergence, in M.H. Kosters, ed. Workers and Their Wages, AEI Press, 107–143] decomposition methodology is extended to incorporate the decomposition of firm fixed effects. It is found that, on average, firms' wage policies are associated with a significant narrowing of the gender earnings gaps. Further analysis indicates that firms which are more likely to have narrower gender earnings gaps are those subject to strong market competition, find it easy to identify labour productivity at the individual level, and with no enterprise level wage bargaining.     

Semiparametric efficient estimation of dynamic panel data models

This paper extends the semiparametric efficient treatment of panel data models pursued by Park and Simar [Park, B.U., Simar, L., 1994. Efficient semiparametric estimation in stochastic frontier models. Journal of the American Statistical Association 89, 929–936] and Park et al. [Park, B.U., Sickles, R.C., Simar, L., 1998. Stochastic frontiers: a semiparametric approach. Journal of Econometrics 84, 273–301; Park, B.U., Sickles, R.C., Simar, L., 2003. Semiparametric efficient estimation of AR(1) panel data models. Journal of Econometrics 117, 279–309] to a dynamic panel setting. We develop a semiparametric efficient estimator under minimal assumptions when the panel model contains a lagged dependent variable. We apply this new estimator to analyze the structure of demand between city pairs for selected U.S. airlines during the period 1979 I–1992 IV.     

Linking strategy and human resource practices: How employee and customer contracts are created

Organizations implement their business strategies through the human resource (HR) practices they use. These practices are major determinants of employees' psychological contracts. How employees interpret the terms of their employment impacts motivation, innovation, and customer service. This article describes four common types of psychological contracts in US firms and the HR practices that create them. It develops a framework for understanding how each contract shapes employee performance, retention, cooperation with fellow employees and customer responsiveness. It presents recommendations for more effectively managing the link between business strategy and the psychological contract of employees. © 1994 by John Wiley & Sons, Inc.     

New evidence on the dynamic wage curve for Western Germany: 1980–2004

Blanchflower and Oswald [Blanchflower, David G. and Oswald, Andrew J., 1994a, The Wage Curve, (Cambridge, MA, MIT Press), Blanchflower, David G. and Oswald, Andrew J., 1994b, Estimating a Wage Curve for Britain 1973–90, The Economic Journal 104, 1025–1043. Eine praktische Einführung, Nürnberg] reported that they have found an ‘empirical law of economics’ — the Wage Curve. Our paper reconsiders the western German Wage Curve using disaggregated regional data and is based on almost one million employees drawn from the Federal Employment Services of Germany over the period 1980–2004. We find that the wage equation is highly autoregressive but far from unit root. The unemployment elasticity is significant but relatively small: only between ? 0.02 and ? 0.04. We also check the sensitivity of this elasticity for different population groups (young versus old, men versus women, less educated versus highly educated, German native versus foreigner), confirming that it is stronger the weaker the bargaining power of the particular group.     

An examination of ISO 9000:2000 and supply chain quality assurance

ISO 9000:2000 is the latest version of the quality standard developed by the International Organization for Standardization (ISO). The standard aims to evaluate a firm's ability to effectively design, produce, and deliver quality products and services. This version of the standard tries to enhance customer satisfaction by including more top-management involvement and continual improvement. Despite widespread international acceptance, the new standard is surrounded by controversy similar to that surrounding its predecessor, the 1994 version. The literature is clearly divided in its assessment of ISO 9000:2000, which is viewed as either a quality management (QM)-based system or as another paper-driven process that increases risk, uncertainty, and costs. This study utilizes case-based research to address the competing views of the ISO 9000:2000 standard in an attempt to see if a sample of firms in the automotive industry can be positioned within the Miles and Snow [Miles, R.E., Snow, C.C., 1978. Organizational Strategy, Structure and Process. McGraw-Hill, New York] strategic typology. We compare different amounts of quality standard integration and quality assurance in the supply chain of firms with ISO 9000:2000 registration while positing several research propositions.     

Collectivism versus individualism in Dutch employment relations

From a very centralistic and collectivistic tradition after World War Two, Dutch employment relations now show a trend towards radical decentralisation and individualisation. What might be the consequences of this trend for labour relations? Do developments still fit within a movement towards ‘organised decentralisation’ or will the existing system of labour relations be hollowed out and destroyed? And what will be the consequences for ER management at company level? We present empirical data on how companies deal with their decentralised and individualised employment relations. It appears that, in the main areas such as labour contracts, working time arrangements, reward systems and development plans, decentralisation and individualisation are taking place. It has also become clear that management as well as workers support this and that a new form of negotiation between them is developing at workplace level, resulting in what we call ‘third contracts’ that are additional to the initial labour contract and the collective agreement. Our results also highlight the pragmatic way in which companies deal with these decentralised and individualised employment relations, which, nevertheless, remain linked to the national and collective levels of bargaining. Within the multilevel system of Dutch employment relations a new balance between collectivism and individualism is emerging.     

Federal budget deficits and long-term interest rates in USA

We investigate whether the emergence of high inflation rates after 1965 and large budget deficits after 1980s caused the financial market agents to become more sensitive to the outlooks for inflation and budget deficits. Our approach is parametric and our models fully account for possible presence of ARCH effects in the data.Our results show a statistically significant positive link between the budget deficits and the slope of the yield curve which is more pronounced in the later sub-sample period. These results are in line with Reinhard and Sack [Reinhard, V., & Sack, B. (2000). The economic consequences of disappearing government debt. Brooking Papers of Economic Activity, 163–209] but in sharp contrast with Evans [Evans, P. (1985). Do large deficits produce high interest rates? American Economic Review, 7, 68–87] and Evans [Evans, P. (1987). Do budget deficits raise nominal interest rates? Journal of Monetary Economics, 20, 281–300].     

The World Bank and Poverty: The Plight of the World's Impoverished Is Still a Major Concern of the International Agency.

Abstract . Since the early 1980s, the World Bank has taken on new tasks in addition to its regular development finance function: preventing economic collapse in borrower countries, helping heavily indebted countries cope with their international payments difficulties, and encouraging basic economic policy reform and structural adjustment in developing countries. Many critics worry that, as the World Bank has taken on these new responsibilities, it has lessened its concern about poverty. The Bank and its friends argue that poverty alleviation remains a central element of the Bank's agenda, but the world situation is different than it was during the 1970s and new kinds of action are needed today. The Bank believes that economic reform and structural adjustments are crucial elements of a modern anti-poverty program. Many critics believe that structural adjustment programs may seriously hurt the poor. Exploring the arguments and reporting the ways the World Bank has sought to respond to this controversy, the author concludes that the issue is a fundamental disagreement about whether the new modes of Bank lending and the Bank's new policy emphasis will have a positive or negative effect on the poor.     

A reconsideration of the link between vertical externality and managerial incentives

Previous research revealed that the strategic role of delegation contracts disappears if two quantity‐setting firms outsource input production to a monopolistic supplier. I show that this role is restored if the assumption of a downstream duopoly is relaxed. Thus, delegation contracts allow downstream profit‐maximizing owners to commit their firms to a behavior that differs from their preferences. This behavior varies nonmonotonically with the number of firms in the downstream market. Corresponding deviations from profit maximization are larger if the upstream monopolist makes a price precommitment. But little to no deviation occurs if the number of firms is large.     

Worker absenteeism and incentives: evidence from Italy

In Italy, employees are fully insured against earning losses due to illness. Since worker's health is not easily verifiable, absenteeism due to illness is considered an empirical proxy for employee shirking. The Bank of Italy Household Survey (SHIW) provides individual data on days of absence. Controlling for personal characteristics and potential determinants of health status and family responsibilities (age, gender, education, marital status, children at home), we show that the nature of employment contracts affects workers' incentives to provide effort: sickness absences, at least partially, hide opportunistic behaviours. The type of occupation and the labour contracts affects workers' behaviour in that more protected and difficult to monitor jobs show significantly higher levels of absenteeism: employees in public sector or in large firms, with permanent contracts or with longer tenure, individuals living in regions with low unemployment rates. Copyright © 2010 John Wiley & Sons, Ltd.     

Creating psychological and legal contracts through human resource practices: A signaling theory perspective

Despite the surge in research on the psychological contract over the past two decades, there has been little integrative research that has examined psychological contracts in conjunction with legal contracts. We address this shortcoming by presenting a framework for understanding the differences between psychological contracts and legal contracts in the United States. This is done by presenting definitions and examples of psychological contracts (i.e., relational and transactional) and the two forms of legal contracts: (a) express (written and oral), and (b) implied (quasi-contract and promissory estoppel). In addition, by utilizing signaling theory [Rynes, S.L. (1991). Recruitment, job choice, and post-hire consequences: A call for new research directions. In M. D. Dunnette & L. M. Hough (Eds.), Handbook of industrial and organizational psychology, (pp. 399–444). Palo Alto, CA: Consulting Psychologists Press.], we describe the means by which human resource practices such as recruitment, training, performance appraisal, compensation, and employee handbooks can create psychological and legal contracts. We conclude by proposing directions for future research and implications for practicing managers.     

Estimating the structural credit risk model when equity prices are contaminated by trading noises

The transformed-data maximum likelihood estimation (MLE) method for structural credit risk models developed by Duan [Duan, J.-C., 1994. Maximum likelihood estimation using price data of the derivative contract. Mathematical Finance 4, 155–167] is extended to account for the fact that observed equity prices may have been contaminated by trading noises. With the presence of trading noises, the likelihood function based on the observed equity prices can only be evaluated via some nonlinear filtering scheme. We devise a particle filtering algorithm that is practical for conducting the MLE estimation of the structural credit risk model of Merton [Merton, R.C., 1974. On the pricing of corporate debt: The risk structure of interest rates. Journal of Finance 29, 449–470]. We implement the method on the Dow Jones 30 firms and on 100 randomly selected firms, and find that ignoring trading noises can lead to significantly over-estimating the firm’s asset volatility. The estimated magnitude of trading noise is in line with the direction that a firm’s liquidity will predict based on three common liquidity proxies. A simulation study is then conducted to ascertain the performance of the estimation method.     

Diversification discount,information rents,and internal capital markets

While many existing studies report that corporate diversification destroys shareholder value, several recent studies challenge these findings. Schoar [Schoar, A. (2002). Effects of corporate diversification on productivity. The Journal of Finance, 57, 2379?2403] finds that plants in conglomerates are more productive than those in comparable single-segment firms, although conglomerates are traded at discounts. Villalonga [Villalonga, B. (2004a). Diversification discount or premium? New evidence from the business information tracking services. The Journal of Finance, 59, 479–506; Villalonga, B. (2004b). Does diversification cause the “diversification discount”. Financial Management, 33, 5?27] employs a more comprehensive database and statistical techniques than those used in the prior studies, and shows that there is a diversification premium, rather than discount. This paper develops a model that highlights the costs and benefits of corporate diversification. The diversified firm trades off the benefits of more efficient resource allocation through its internal capital market against the costs of information rents to division managers, which are necessary for effective workings of the internal capital market. We provide an argument supporting Schoar's findings, and identify conditions under which there can be a diversification discount or a premium.     

The Economic Effects Of The End Of The Cold War

The end of the Cold War and the dissolution of the Warsaw Pact have raised a host of new questions. Will there be a Peace Dividend: more security and more money to spend on other things, or a Peace Penalty: mass unemployment in the arms industry and financial difficulty for many leading high-technology firms? Will there even be Peace at all or will there be instead a new ‘Second World War’ as the old Second World of the Centrally Planned Economies relapses into internecine nationalist conflict? Many of these questions are unanswerable, but this paper reviews what is known about the likely trend in military spending and its economic impact on Western Economies. It examines the strategic context which will determine the size of the reductions in military expenditure; the policy response which will determine how governments adjust their budgetary stance to reduced military outlays; and the macroeconomic and industrial impact of these changes.     

Relational retention

This paper uses a repeated-game model to study the retention of talented workers in the face of competition for talent. When the job benefits that workers value are non-contractible, retention cannot be achieved by a sequence of spot contracts, but must be based on self-enforcing long-term agreements, which we call relational retention contracts. Retention then is successful only if workers trust their employers' promises. We demonstrate that relational contracts are valuable even if there are no incentive problems inside firms and that firms with a relatively low valuation for talent may be able to retain talented workers.     

Managing work-life policies: disruption versus dependency arguments. Explaining managerial attitudes towards employee utilization of work-life policies

What factors shape managerial attitudes towards the utilization of work-life policies? The influence of disruptiveness (Powell and Mainiero 1999) and dependency (Klein, Berman and Dickson 2000) arguments on managerial attitudes is examined using a vignette design. In this study, managers in four financial firms in the UK and the Netherlands were asked to judge hypothetical requests from employees to utilize work-life policies. Findings indicate that managers are mainly interested in the performance of their department or work unit, and work-life policies are often seen as disruptive. However, when the least disruptive request is considered (short-term leave), we find that dependency arguments also play an important role and managers are more likely to respond to their employees' personal and family needs.