Globalization and the provision of incentives inside the firm: The effect of foreign competition

This paper studies the effect of changes in foreign competition on the structureof compensation and incentives of U.S. executives. We measure foreign competitionas import penetration and use tariffs and exchange rates as instrumental variables toestimate its causal effect on pay. We find that higher foreign competition leads tomore incentive provision in a variety of ways. First, it increases the sensitivity of payto performance. Second, it increases whithin-firm pay differentials between executivelevels, with CEOs typically experiencing the largest wage increases, partly becausethey receive the steepest incentive contracts. Finally, higher foreign competition is alsoassociated with a higher demand for talent. These results indicate that increased foreigncompetition can explain some of the recent trends in compensation structures.

Gestión de la competencia en el sector público

Este trabajo analiza el papel de la competencia en la gestión pública, para lo cual toma como referencia la organización burocrática basada en centros de gasto que no cobran por sus servicios y suelen ser demasiado grandes e ineficientes. Para introducir competencia, se da libertad de elección a usuarios y productores, a la vez que se les responsabiliza de los costes que ocasionan sus decisiones. Se genera así un provechoso control mutuo entre usuarios y proveedores, que hace menos necesario el control jerárquico, de tipo vertical. Sin embargo, la eventual presencia de monopolios y asimetrías informativas puede ocasionar graves distorsiones y suele exigir una regulación activa, que es costosa y provoca búsqueda de rentas. Para corroborar la relevancia de este equilibrio de costes y beneficios, el trabajo analiza doce servicios públicos en los sectores de la sanidad, la educación y la justicia. Se constata la presencia de dificultades asociadas a monopolios, asimetrías informativas y búsqueda de rentas y se argumenta que, como consecuencia, se tienden a adoptar soluciones de naturaleza intermedia. Coherentemente con este argumento, se observa que en los servicios analizados o bien se emplean incentivos de baja intensidad o se restringen los derechos de decisión, de modo que no se aplican todos los elementos propios de la competencia pero tampoco se prescinde de ellos por completo. Por la moderación de los incentivos que genera, este uso incompleto de la competencia permite, además, que se puedan regular las actividades correspondientes mediante las fórmulas típicas de la Administración Pública, basadas en la reglamentación de decisiones recurrentes y la colegiación y supervisión jerárquica de un número pequeño de decisiones no regladas.

Is lumpy investment really irrelevant for the business cycle?

New-Keynesian (NK) models can only account for the dynamic effects of monetary policy shocks if it is assumed that aggregate capital accumulation is much smoother than it would be the case under frictionless firm-level investment, as discussed in Woodford (2003, Ch. 5). We find that lumpy investment, when combined with price stickiness and market power of firms,can rationalize this assumption. Our main result is in stark contrast with the conclusions obtained by Thomas (2002) in the context of a real business cycle (RBC) model. We use our model to explain the economic mechanism behind this difference in the predictions of RBC and NK theory.

The effect of intergroup competition on group coordination: An experimental study

We report an experiment on the effect of intergroup competition on group coordination in the minimal-effort game (Van Huyck et al., 1990). The competition was between two 7-person groups. Each player in each group independently chose an integer from 1 to 7. The group with the higher minimum won the competition and each of its members was paid according to the game s original payoff matrix. Members of the losing group were paid nothing. In case of a tie, each player was paid half the payoff in the original matrix. This treatment was contrasted with two control treatments where each of the two groups played an independent coordination game, either with or without information about the minimum chosen by the outgroup. Although the intergroup competition does not change the set of strict equilibria, we found that it improved collective rationality by moving group members in the direction of higher-payoff equilibria. Merely providing group members with information about the minimal-effort level in the other group was not sufficient to generate this effect.

Managing competition in professional services and the burden of inertia

Professional services require certain organizational patterns in order to avoid information asymmetries and external effects. These same patterns are used within production structures involving various degrees of monopoly. However, competitive restraints are justified today only when substantial external effects are clearly present, whereas information asymmetries hardly justify such restraints because reputational investments have become widespread in the economy and are relatively efficient in overcoming such asymmetries. As a consequence, innovation in the production of externalities can make competitive constraints unnecessary.

On the sources of business cycles in the G-7

This paper examines sources of cyclical movements in output, inflation and the term structure of interest rates. It employs a novel identification approach which uses the sign of the cross correlation function in response to shocks to catalog orthogonal disturbances. We find that demand shocks are the dominant source output, inflation and term structure fluctuations in six of the G-7 countries. Within the class of demand disturbances, nominal shocks are dominant, but their importance declined after 1982. Furthermore, there are no significant differences in the proportion of term structure variability explained by different structural sources at different horizons.

Disability, capacity for work and the business cycle: An international perspective

An important policy issue in recent years concerns the number of people claimingdisability benefits for reasons of incapacity for work. We distinguish between workdisability , which may have its roots in economic and social circumstances, and healthdisability which arises from clear diagnosed medical conditions. Although there is a linkbetween work and health disability, economic conditions, and in particular the businesscycle and variations in the risk of unemployment over time and across localities, mayplay an important part in explaining both the stock of disability benefit claimants andinflows to and outflow from that stock. We employ a variety of cross?country andcountry?specific household panel data sets, as well as administrative data, to testwhether disability benefit claims rise when unemployment is higher, and also toinvestigate the impact of unemployment rates on flows on and off the benefit rolls. Wefind strong evidence that local variations in unemployment have an importantexplanatory role for disability benefit receipt, with higher total enrolments, loweroutflows from rolls and, often, higher inflows into disability rolls in regions and periodsof above?average unemployment. Although general subjective measures of selfreporteddisability and longstanding illness are also positively associated withunemployment rates, inclusion of self?reported health measures does not eliminate thestatistical relationship between unemployment rates and disability benefit receipt;indeed including general measures of health often strengthens that underlyingrelationship. Intriguingly, we also find some evidence from the United Kingdom and theUnited States that the prevalence of self?reported objective specific indicators ofdisability are often pro?cyclical that is, the incidence of specific forms of disability arepro?cyclical whereas claims for disability benefits given specific health conditions arecounter?cyclical. Overall, the analysis suggests that, for a range of countries and datasets, levels of claims for disability benefits are not simply related to changes in theincidence of health disability in the population and are strongly influenced by prevailingeconomic conditions. We discuss the policy implications of these various findings.

Inequality over the business cycle: Estimating income risk using micro-data on consumption

We use CEX repeated cross-section data on consumption and income, to evaluate the nature of increased income inequality in the 1980s and 90s. We decompose unexpected changes in family income into transitory and permanent, and idiosyncratic and aggregate components, and estimate the contribution of each component to total inequality. The model we use is a linearized incomplete markets model, enriched to incorporate risk-sharing while maintaining tractability. Our estimates suggest that taking risk sharing into account is important for the model fit; that the increase in inequality in the 1980s was mainly permanent; and that inequality is driven almost entirely by idiosyncratic income risk. In addition we find no evidence for cyclical behavior of consumption risk, casting doubt on Constantinides and Duffie s (1995) explanation for the equity premium puzzle.

Bundling electronic journals and competition among publishers

Site licensing of e-journals has been revolutionizing the way academicinformation is distributed. However, many librarians are concerned aboutthe possibility that publishers might abuse site licensing by practicingbundling. In this paper, we analyze the private and social incentives forthe publishers to use bundling in the context of STM electronic journalmarket. In the short run in which the number of journals is exogenouslygiven, we find a strong conflict between the two incentives: each publisherfinds bundling optimal and bundling increases the industry profit butreduces social welfare. However, in the long run we find that publishersmight have higher incentives to introduce new journals under bundlingthan without bundling and, in this case, bundling can reduce the industryprofit while increasing social welfare. Finally, we examine publishers incentive to provide links to the websites of the rival publishers underbundling and show that even asymmetric publishers have incentive tointerconnect.

Crossing the Rio Grande: Migrations, business cycles and the welfare state

In this paper we study the macroeconomic effects of an inflow oflow-skilled workers into an economy where there is capital accumulation and two types of agents. We find that there are substantial dynamic effects following unexpected migrations with adjustments that resemble those triggered by a sudden disruption of the capital stock. We look at the interrelations between these dynamic effects and three different fiscal systems for the redistribution of income and find that these schemes can change the dynamics and lead to prolonged periods of adjustments. Theaggregate welfare implications are sensitive to the welfare system: while there are welfare gains without redistribution, these gains may be turned into costs when the state engages in redistribution.

Partisan competition, growth and the franchise

We present an argument for changes in the franchise in which an elite split along economic interests use the suffrage to influence implemented policies. Through the influence of these policies on the character of industrialization, we analyze the effects of franchise changes on economic growth. We identify in the social structure of society an explanation for the connection between enfranchisement and growth: When (1) there exist an economic conflict among the elite, (2) landed classes are not politically strong, and (3) there exists a critical mass of industrial workers, we observe both growth and democratization. The lack of conditions (1) or (2) resolves in stagnant autocracies while the absence of condition (3) drives growth-deterring democratic expansions. We provide historical support for our argument by analyzing the experience of 11 countries.

Strategic ambiguity in electoral competition

Many have observed that political candidates running for election areoften purposefully expressing themselves in vague and ambiguous terms. In thispaper we provide a simple formal model of this phenomenon. We model theelectoral competition between two candidates as a two--stage game. In thefirst stage of the game two candidates simultaneously choose their ideologies,and in the second stage they simultaneously choose their level of ambiguity.Our results show that ambiguity, although disliked by voters, may be sustainedin equilibrium. The introduction of ambiguity as a strategic choice variablefor the candidates can also serve to explain why candidates with the sameelectoral objectives end up ``separating'', that is, assuming different ideological positions.

Does money matter in shaping domestic business cycles? An international investigation (with appendices)

We study the contribution of money to business cycle fluctuations in the US,the UK, Japan, and the Euro area using a small scale structural monetary business cycle model. Constrained likelihood-based estimates of the parameters areprovided and time instabilities analyzed. Real balances are statistically importantfor output and inflation fluctuations. Their contribution changes over time. Models giving money no role provide a distorted representation of the sources of cyclicalfluctuations, of the transmission of shocks and of the events of the last 40 years.

Competition and cost overruns. Optimal misspecification of procurement contracts

Most cases of cost overruns in public procurement are related to important changes in the initial project design. This paper deals with the problem of design specification in public procurement and provides a rationale for design misspecification. We propose a model in which the sponsor decides how much to invest in design specification and awards competitively the project to a contractor. After the project has been awarded the sponsor engages in bilateral renegotiation with the contractor, in order to accommodate changes in the initial project s design that new information makes desirable. When procurement takes place in the presence of horizontally differentiated contractors, the design s specification level is seen to affect the resulting degree of competition. The paper highlights this interaction between market competition and design specification and shows that the sponsor s optimal strategy, when facing an imperfectly competitive market supply, is to underinvest in design specification so as to make significant cost overruns likely. Since no such misspecification occurs in a perfectly competitive market, cost overruns are seen to arise as a consequence of lack of competition in the procurement market.

Allocating ideas: Horizontal competition in tournaments

We develop a stylized model of horizontal and vertical competition intournaments with two competing firms. The sponsor cares about the qualityof the design but also about the design location. A priori not even thesponsor knows his preferred design location, which is only discoveredonce he has seen the actual proposals. We show that the more efficientfirm is more likely to be conservative when choosing the design location.Also, to get some differentiation in design locations, the cost differencebetween contestants can neither be too small nor too big. Therefore, ifthe sponsor mainly cares about the design location, participation in thetournaments by the two lowest cost contestants cannot be optimal for thesponsor.