Why are Small Firms Different? Managers’ Views

Do incentives differ between large and small organizations? Results from a representative survey of compensation managers are used to shed light on the issues. I find that (i) small establishments rely less on pecuniary incentives, and have a significantly more hostile attitude towards incentive schemes based on competition and relative rewards; (ii) large units are more vulnerable to mechanisms of efficiency wages, effects that remain even after controlling for differences in monitoring ability; (iii) large units are more prone to indicate that negative reciprocity is important, and that their employees care about relative pay. I argue that these findings fit with behavioral stories of incentives and motivation, in particular those stressing group interaction effects, inequity aversion and gift exchange.     

Growth effects of government expenditure and taxation in rich countries: A comment

Fölster and Henrekson (European Economic Review 45 (2001), 1501-1520) argue that “...the more the econometric problems that are addressed, the more robust the relationship between government size and economic growth appears”. But in failing to control for simultaneity and in ignoring issues of sample-selection bias, the regressions reported by Fölster/Henrekson are flawed. Using theoretically valid instruments, we find that the estimated partial correlation between size of the public sector and economic growth is statistically insignificant and highly unstable across specifications. Moreover, since instruments are weak, all hypothesis tests are unreliable. We conclude that cross-country growth regressions are unlikely to come up with a reliable answer to the question of the growth effects of government spending and taxation.     

Efficiency and Equality in the Labour Market

I review theoretical arguments suggesting that certain labourmarket institutions can be justified for economic efficiencyreasons. In models with intrinsic market failures, "rigidities"like employment protection legislation and institutional wagecompression may push the economy closer to the efficient frontier.I discuss recent empirical evidence on income inequality, povertyand income mobility in OECD countries, and I conclude that thewelfare states of Northern Europe score relatively well on allcounts. Finally, I discuss labour market reforms that may improveefficiency without violating European voters' preference forequality.(JEL H30, J30, J50)     

On the Determinants of Labour Market Institutions: Rent Seeking vs. Social Insurance

What determines the structure of labour market institutions? I argue that common explanations based on rent seeking are incomplete. Unions, job protection and egalitarian pay structures may have as much to do with social insurance of otherwise uninsurable risks as with rent seeking. In support of this more benign complementary hypothesis the paper presents a range of historical, theoretical and cross‐country evidence. The social insurance perspective changes substantially the positive analysis of the future of European labour market institutions. It is not clear that globalization and the ‘new economy’ will force countries to make their labour markets more flexible. These phenomena will probably increase the efficiency costs of existing institutions, but they may also make voters more willing to pay a high premium to preserve institutions that provide insurance.     

The effects of tax reform on labor supply, tax revenue and welfare when tax avoidance matters

We examine how tax avoidance in the form of trade in well-functioning asset markets affects the study of labor supply. We discuss the implications for tax policy analysis, and we show that a failure to account for avoidance responses may lead to huge errors when analyzing how tax reform affects labor supply, tax revenue and the welfare cost of taxation. Our model may explain a number of otherwise hard to understand dimensions of taxpayer response.     

Survey Evidence on Wage Rigidity and Unemployment: Sweden in the 1990s*

We document the results of a repeat survey, which updates Agell and Lundborg (1995) , on wage rigidity in a sample of 159 Swedish manufacturing firms, conducted during the severe Swedish recession of the 1990s. It is found that not even a prolonged period of very high unemployment and quite low inflation softened workers’ resistance to wage cuts. We discuss possible reasons for this. In addition, we report new evidence on underbidding, efficiency‐wage mechanisms, and unemployment persistence.     

Using AI Techniques in the Grocery Industry: Identifying the Customers Most Likely to Defect

The food retailing market has reached a mature stage where companies need to be competitive if they are to survive. Customers are ever more demanding and retailers need to design and introduce new ways of learning about their customers if they are to retain them (Leeflang & Van Raaij ). This article examines the efficiency of the LAMDA classifier (Learning Algorithm Machine for Data Analysis) (Aguado ; Aguado et al. ) in identifying customer's behaviour; specifically examining which customers are most likely to defect when a new retailer appears on the scene. The study carried out in this project is based on data gathered from a Spanish grocery chain: Supermercats Pujol, SA – ‘Plus Fresc’, winner of the 1998 Global Electronic Marketing Award, www.plusfresc.es     

On the Benefits From Rigid Labour Markets: Norms, Market Failures, and Social Insurance

The common view that far-reaching labour market deregulation is the only remedy for high European unemployment is too simplistic. First, the evidence suggests that deeply rooted social customs are an important cause of wage rigidity, going beyond the legal constraints emphasised in the political debate. Second, in a second-best setting, a compressed wage structure may generate an efficiency gain. Finally, based on simple plots of the relation between labour market institutions and openness in OECD countries, I conclude that the globalisation of economic activity may lead to increased demand for various labour market rigidities.