Shareholders' choice

We address the question of which production decisions are reached via shareholder voting, if the firm's shareholders disagree. The median-voter approach is applied. Three dichotomies are explored: the one-man-one-vote versus the one-share-one-vote rule, naive versus sophisticated investors, before- versus after-trade voting. Novel asymptotic results are obtained.     

Consumption choice and asset pricing with a non-price-taking agent

Summary. This paper develops a pure-exchange model to study the consumption-portfolio problem of an agent who acts as a non-price-taker, and to analyze the implications of his behavior on equilibrium security prices. The non-price-taker is modeled as a price leader in all markets; his price impact is then recast as a dependence of the Arrow-Debreu prices on his consumption, allowing a tractable formulation. Besides the aggregate consumption, the endowment of the non-price-taker appears as an additional factor in driving equilibrium allocations and prices. Comparisons of equilibria between a price-taking and a non-price-taking economy are carried out. Received: March 29, 1996; revised version October 29, 1996     

Profit sharing and strike activity in Cournot oligopoly

Within an incomplete-information framework, we develop a model of wage determination in a unionized Cournot oligopoly. The assumption of incomplete information allows the possibility of strikes or lockouts, which waste industry potential resources, at equilibrium. Facing such deadweight loss, the government or the social planner may decide to adopt a policy, such as a profit-sharing scheme. Under two different bargaining structures (firm level vs. industry level), we investigate the effects of adopting profit sharing on the wage outcome and the strike activity. If the base-wage bargaining takes place at the industry level, then the introduction of a profit-sharing scheme increases the strike activity. But if the base-wage bargaining takes place at the firm level and the number of firms in the industry is greater than two, then the introduction of a profit-sharing scheme reduces the strike activity.     

Corporate merger,organizational form,and control of labor

This paper shows that, when two firms merge, the increase in the bargaining strength of the multiproduct firm arising from the merger when negotiating uniform wages with the workers is one of the reasons that account for corporate mergers. Moreover, there is a strategic variable that can be used to decrease union rents in the case of merging, namely, the organization of production decisions.     

Financial distress,bank debt restructurings,and layoffs

We develop a model of a financially distressed firm to analyze the implications of a bank debt restructuring when the operational characteristics of the firm's project for the post-distress period are endogenously determined as part of the workout. We establish a formal link between the debt restructuring and operational actions such as employee layoffs, and show how these actions are affected by the firm's capital structure, the ordering of absolute priorities, and the allocation of control rights and residual claims after reorganization. Finally, we discuss the implications of our analysis for the design of reorganization law.     

When does Learning by Doing generate current losses?

We study under which conditions a learning by doing effect in the industry causes a monopolist to operate at a loss for some initial periods. Those conditions involve a parameter of the learning process, the slope of inverse demand function and the discount parameter. In order to get results, we explore the analytical solution to a T-period learning by doing model, which is also a novelty. Numerical examples are presented.     

A comparison between the core and the monopoly solutions in a mixed exchange economy

Summary. Using a mixed market model for analyzing imperfectly competitive economies, we maximize the oligopolists' Welfare Function, given individual rationality and feasibility constraints. We prove that solutions belong to the core for a large class of economies. This class includes, in particular, every monopoly having a single type of small traders. Note that all such solutions yield the large trader, utility-wise, strictly more than at any monopoly solution, where the monopolist plays strategically, and the ocean of small traders act as being as price-takers. Received: March 4, 1996; revised version July 7, 1996     

Adaptability, productivity, and educational incentives in a matching model

We study the connections between the labour market and the education sector in a matching framework with ex-post wage bargaining. Workers have multidimensional skills and the search market is segmented by technology. Education is a time-consuming activity and determines jointly the scope - or adaptability - and intensity - or productivity - of individual skills. We establish three main results. First, unemployment provides incentives to schooling by raising the need for adaptability. Second, private returns to productivity are below social returns, but no hold-up phenomenon is involved. Third, due to wage and congestion externalities, private returns to adaptability exceed social returns. As a consequence, both over- and under-education may take place in equilibrium.     

Employment shifts, economic reform and the changes in public/private sector wages in Mexico: 1987–1997

Over the last decade, the public sector in Mexico experienced substantial fiscal reform, divestiture of public enterprises, and the elimination of many regulations affecting pay and employment. This study analyzes the changes in the public/private sector differences in wages during the 1987–1997 period. The results from analyzing microdata from the Encuesta Nacional de Empleo Urbano show that relative public sector wages increased from 1987 to 1997. Most of the relative wage increase in the public sector can be explained by increases in the price of skills and by changes in sorting across sectors. The results have important public policy implications since they suggest that public sector workers earn more and their wages have grown faster than those of their private sector counterparts. As such, policies contemplating public sector reform should take into account the effect of these measures on the inter-sectoral income distribution and the overall economic growth. First version received: April 2000/Final version received: December 2000     

Revealed group preferences on non-convex choice problems

Summary. This paper studies the conditions under which the basic results of the revealed preference theory can be established on the domain of choice problems which include non-convex feasible sets; the exercise is closely related to the works of Peters and Wakker (1991) and Bossert (1994). We show that while no continuous choice function can satisfy strong Pareto optimality over the class of all compact and comprehensive choice problems, strong Pareto optimality, Arrow's choice axiom, upper hemicontinuity and a weak compromisation postulate turn out to be necessary and sufficient to represent choice correspondences by continuous, strictly increasing and quasiconcave real-valued functions. Some applications of our main findings to axiomatic bargaining theory are also studied. Received: December 2, 1996; revised version: February 27, 1998     

Axioms for minimax regret choice correspondences

This paper unifies and extends the recent axiomatic literature on minimax regret. It compares several models of minimax regret, shows how to characterize the according choice correspondences in a unified setting, extends one of them to choice from convex (through randomization) sets, and connects them by defining a behavioral notion of perceived ambiguity. Substantively, a main idea is to behaviorally identify ambiguity with failures of independence of irrelevant alternatives. Regarding proof technique, the core contribution is to uncover a dualism between choice correspondences and preferences in an environment where this dualism is not obvious. This insight can be used to generate results by importing findings from the existing literature on preference orderings.     

WAGE BARGAINING AND MERGER INCENTIVES WITH ASYMMETRIC COSTS

This paper examines how wage bargaining within each firm influences the relationship between an equilibrium ownership structure and the most preferred ownership structure from the viewpoint of social welfare, in a unionized oligopoly of asymmetric firms with respect to productivity of capital. We consider the merger incentive of each firm’s owner when the wage level is determined through bargaining between the firm’s owner and union. We derive a condition for both the degree of cost asymmetry among existing firms and the relative bargaining power of each firm’s owner to her/his union such that each ownership structure can be observed in equilibrium. We also show that although the two types of ownership structures with the merger involving the least efficient firm can be equilibria and socially optimal, these structures are observed only when both the degree of cost asymmetry and the relative bargaining power of each firm’s owner are moderate. Finally, we analyse the relationship among the cooperative game approach employed in this paper and two non‐cooperative merger formation approaches, and examine the robustness of the results obtained in this paper against the change in the assumption regarding each firm’s cost function.     

An improved generalized moments estimator for a spatial moving average error model

Following Arnold and Wied (2010), we suggest an improved generalized moments estimator for the spatial moving average error model which takes explicitly into account that the moment conditions are based on OLS residuals rather than the true disturbances.     

Reforming Social Welfare in Germany: An Applied General Equilibrium Analysis

Abstract. In this paper, the effects of social assistance reform proposals are discussed for the case of Germany using a computable general equilibrium model that incorporates a discrete choice model of labour supply. This allows us to identify general equilibrium effects of the reforms on wages and unemployment. The simulation results show that general equilibrium wage reactions mitigate labour supply effects and that unemployment in fact decreases. Wage reactions are thus sufficiently strong to prevent additional labour supply from translating into higher unemployment. The simulations indicate that major cuts in welfare payments are necessary to produce substantial employment effects.     

Rent-Sharing And Wages: Product Demand Or Technology Driven Premia? 1

There is a renewed interest in non-competitive wage determination. Studies have shown that firms share rents with workers. How such rents are appropriated by firms to share, or why firms may wish to do so, is still an area of debate. Using a unique data set, where workers are matched directly to their workplace, we use instrumental variable estimation to examine which shocks create rent-sharing and the size of the rent-sharing effects. The results find rentsharing is strongest for establishments investing in new process technology, and for employers who wish to share their successes with their employees.     

Optimal risk sharing and borrowing constraints in a continuous-time model with limited commitment

We study a continuous-time version of the optimal risk-sharing problem with one-sided commitment. In the optimal contract, the agent?s consumption is a time-invariant, strictly increasing function of a single state variable: the maximal level of the agent?s income realized to date. We characterize this function in terms of the agent?s outside option value function and the discounted amount of time in which the agent?s income process is expected to reach a new to-date maximum. Under constant relative risk aversion we solve the model in closed-form: optimal consumption of the agent equals a constant fraction of his maximal income realized to date. In the complete-markets implementation of the optimal contract, the Alvarez–Jermann solvency constraints take the form of a simple borrowing constraint familiar from the Bewley–Aiyagari incomplete-markets models.     

Investment choices: Indivisible non-marketable assets and suboptimal solutions

Several investment decisions deal with non-marketable assets. Non-marketable assets are available only to one investor and are often indivisible. This has relevant consequences on investor investment opportunities. Adhering to a mean–variance representation of the investment space and considering a non-marketable asset (divisible or not), we derive some possible investment scenarios an investor may face. Furthermore, we show how a limited ability to gather and process information affects investor portfolio choices. Our results define a set of conditions under which the non-marketable asset represents a good investment and show that, under certain assumptions, the efficient frontier exhibits non-linearities and intervals of discontinuity.     

Are small employers more cyclically sensitive? Evidence from Brazil

An important issue facing policymakers is the degree to which fluctuations in economic activity affect employment in large and small businesses across sectors and regions. This issue is particularly relevant for developing countries as it matters for the understanding of the labour market dynamics, and for devising national, sectoral, and regional labour policies that aim at dampening employment fluctuations, particularly during recessions. Using a unique monthly dataset of 27 states and eight industries from 2000:1 to 2009:7, this paper evaluates the sensitivity of businesses of different sizes to business cycle conditions in Brazil. The behaviour of the difference in employment growth rates between large and small firms is counter-cyclical and suggests that small firms are more sensitive to business cycle conditions. In addition, the SVAR impulse response analysis suggests the existence of the effect of small firms hiring cheaply from unemployment proportionally more than large ones. On the other hand, credit constraints seem to hit small firms harder and help to explain the empirical regularity that small firms are more cyclically sensitive than large ones for the Brazilian case.     

Duality of welfare and profit maximization

Many economists are aware that the conditions for the efficiency and monopolization in a partial equilibrium framework are the extremes of the Ramsey–Boiteux formula when the Lagrange multiplier for the budget varies. We formalize the duality existing between the welfarist and monopolist constrained maximization programs by proving the following “folk theorem”: