inflation targeting what can the ecb learn from the recent experience of the bank of england establishment of the european central bank presents a rare opportunity to define the operations of a central bank without a prior track record this paper asks what might be learnt from the recent experience of inflation targeting at the bank of england before the ecb specifies an as yet undefined operational target we consider whether there should be single or multiple targets and which inflation measure should be used if at all if inflation is targeted then a forecast of its value becomes the intermediate variable this raises an issue of transparency and the compensating supply of information necessary to fill the gap but too much openness can also be problematic the ecb must be accountable and the contracting approach may be useful although being seen to say and do the same thing is ultimately most important opportunity presents itself to define the provisions for the structure and operation of a central bank without a prior historical track record some of these are already written into the statutes of the maastricht treaty which for example defines the ecb s primary statutory duty to be that of the pursuit of price stability and it has been the remit of the european monetary institute emi to make recommendations on other aspects critically however the terms of reference for the ecb in relation to an operational target for its monetary policy are yet to be resolved and although a statement from the ecb is expected to clarify the issue by september after this paper was finalised this need not be the end of the matter circumstances could well call for a subsequent recommendation the emi 1997 provisionally narrowed the choice to one between monetary targets and inflation targets since inflation targeting is the latest game in town it seems important to take stock of the experience of those newly independent central banks which have adopted it it is rather too soon to reach a definitive conclusion on the performance of inflation targeting central banks so what we consider are the lessons to be learnt from the mechanisms and structures that have been adopted by various inflation targeting central banks focusing in particular on the policies of the

a review of wta wtp studies abstract willingness to accept wta is usually substantially higher than willingness to pay wtp these constructs have been studied for roughly 30 years and with a wide variety of goods this paper reviews those studies we find that the less the good is like an ordinary market good the higher is the ratio the ratio is highest for non market goods next highest for ordinary private goods and lowest for experiments involving forms of money a generalization of this pattern holds even when we account for differences in survey design ordinary goods have lower ratios than non ordinary ones we also find that ratios in real experiments are not significantly different from hypothetical experiments and that incentive compatible elicitation yields higher ratios

the disaggregation of corporations selective intervention high powered incentives and molecular units a vast array of organizational innovations and changes are transforming us corporations large firms have dramatically downsized refocused and vertically disaggregated they increasingly obtain goods and services pursue complex development efforts and exploit horizontal synergies without the aid of formal hierarchy large firms are also internally disaggregating into smaller more autonomous units that are treated much like external subcontractors the authors argue that these organizational innovations share an important underlying commonalty economic activity is converging toward exchange involving either internal within firm or external between firm networks of small autonomous production or service units small units and small firms have become the basic building block the molecular units of these new forms further exchange among the small autonomous units is commonly a mix of both market like and hierarchical features the authors develop a theoretical explanation for these trends the

individual risk attitudes measurement determinants and behavioral consequences this paper studies risk attitudes using a large representative survey and a complementary experiment conducted with a representative subject pool in subjects homes using a question asking people about their willingness to take risks in general we find that gender age height and parental background have an economically significant impact on willingness to take risks the experiment confirms the behavioral validity of this measure using paid lottery choices turning to other questions about risk attitudes in specific contexts we find similar results on the determinants of risk attitudes and also shed light on the deeper question of stability of risk attitudes across contexts we conduct a horse race of the ability of different measures to explain risky behaviors such as holdings stocks occupational choice and smoking the question about risk taking in general generates the best all round predictor of risky behavior

inflation proof currency the feasibility of variable commodity standards under a proposal by robert l greenfield and leland b yeager 1989 the value of currency is tied to the value of a defined basket of goods by indirect convertibility the note issuing bank offers to redeem its currency for sufficient gold to buy the basket in the market the authors find that this arrangement cannot be applied to the currency that is the medium of account for quoting prices of goods and that it would imply unlimited change in the gold price when the price of the basket deviates from unity a feedback rule with slower price adjustment may however be feasible copyright 1993 by ohio state university press

the economics of small business finance the roles of private equity and debt markets in the financial growth cycle abstract this article examines the economics of financing small business in private equity and debt markets firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle we show the sources of small business finance and how capital structure varies with firm size and age the interconnectedness of small firm finance is discussed along with the impact of the macroeconomic environment we also analyze a number of research and policy issues review the literature and suggest topics for future research

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

accountability transparency and inflation targeting inflation targeting regimes define a performance measure for the central bank a regime that places a large small weight on achieving the target is analogous to a high low powered incentive scheme high powered incentive structures promote accountability but may distort stabilization policy the optimal power under inflation targeting is derived under perfect and imperfect information the fundamental trade off between accountability and stabilization depends on the degree of transparency defined as the ability to monitor the central bank s performance multiplicative uncertainty increases the optimal weight to place on achieving an inflation target

ambiguity aversion and comparative ignorance decisions under uncertainty depend not only on the degree of uncertainty but also on its source as illustrated by ellsberg s observation of ambiguity aversion in this article we propose the comparative ignorance hypothesis according to which ambiguity aversion is produced by a comparison with less ambiguous events or with more knowledgeable individuals this hypothesis is supported in a series of studies showing that ambiguity aversion present in a comparative context in which a person evaluates both clear and vague prospects seems to disappear in a noncomparative context in which a person evaluates only one of these prospects in isolation

job matching and on the job training conventional analysis predicts that workers pay part of their on the job training costs by accepting a lower starting wage and subsequently realize a return to this investment in the form of greater wage growth missing from the conventional treatment of on the job training is a discussion of the process by which heterogeneous workers are matched to jobs requiring varying amounts of training this matching process constitutes a key feature of the on the job training model presented in this article and tested with a unique data set containing extensive information concerning on the job training employer search wages and wage and productivity growth

industrial specialization and the returns to labor comparative advantage and the division of labor make geographic concentration of production within a nation profitable and cause many cities to be specialized in one or a few main industries specialized cities however suffer greater unemployment risk the theory of compensating wage differentials predicts that individuals living in more specialized cities will be compensated in the form of higher wage rates we study the effects of specialization on wages and unemployment in the united states we find evidence of compensating wage differentials that firms choose to locate in more specialized higher wage cities is indirect evidence of the gains to specialization

holding on for too long an experimental study on inertia in entrepreneurs and non entrepreneurs disinvestment choices abstract disinvestment in the sense of project termination and liquidation of assets including the cession of a venture is an important realm of entrepreneurial decision making this study presents the results of an experimental investigation modeling the choice to disinvest as a dynamic problem of optimal stopping in which the patterns of decisions are analyzed with entrepreneurs and non entrepreneurs our experimental results reject the standard net present value approach as an account of observed behavior instead most individuals seem to understand the value of waiting their choices are weakly related to the disinvestment triggers derived from a formal optimal stopping benchmark consistent with real options reasoning we also observe a pronounced psychological inertia i e most individuals hold on to a losing project for even longer than real options reasoning would predict the study provides evidence for entrepreneurs and non entrepreneurs being quite similar in their behavior

exchange rate versus price level targets and output stability two alternative targets for monetary policy are considered stability of the price level or the rate of inflation and stability of the exchange rate the interest rate is the main instrument of the central bank credibility requires low output variability the advantages of the alternative policy rules from the point of view of output stability are considered in the simplest possible model conditions favoring a price level rule are high volatility of aggregate demand low volatility of aggregate supply high volatility of the foreign price level a low price elasticity of aggregate demand and a high price elasticity of aggregate supply copyright 1996 by the editors of the scandinavian journal of economics

portfolio choice in the presence of background risk in this paper we focus on how the presence of background risks from sources such as labour and entrepreneurial income influences portfolio allocations this interaction is explored in a theoretical model that is calibrated using cross sectional data from a variety of sources the model is shown to be consistent with some but not all aspects of cross sectional observations of portfolio holdings the paper also provides a survey of the extensive theoretical and empirical literature on portfolio choice

the price of unobservables and the employer size wage premium abstract this paper estimates the employer size wage effect on returns to unobservable skills and measured human capital variables using a novel methodology that allows us to estimate a high number of interactions between unobserved effects and firm size our results show that in large firms returns to ability tend to be smaller than in small firms

the law of one price and a theory of the firm a ricardian perspective on interindustry wages i use a hierarchical perspective to explain the pattern of interindustry wages and capital intensities industries that have more productive technologies pay more than less productive ones and are more capital intensive as well results on size of the hierarchy effort levels and span of control are presented as well the key insight is that supervisors both monitor and coordinate their subordinates and time spent on one of these activities reduces the time available for the other several stylized facts are explained thereby

the roots of entrepreneurship and labour demand individual ability and low risk aversion the topic of entrepreneurship currently experiences a revived interest as is shown by the research agenda of today s empirical researchers there are few issues in economics which are backed up by such a rich historical knowledge base as is the case with entrepreneurship this paper aims to give an overview of some important classic contributions relating to today s and tomorrow s empirical research subjects the overview consists of answers to six research questions by six historical contributors to entrepreneurship research together these questions give some insight into the determinants of successful entrepreneurship the classic contributors considered are cantillon say marshall schumpeter knight and kirzner their views are compared to each other as well as to some recent results of empirical research into the determinants of successful entrepreneurship

firm size wage differentials in the netherlands an unsolved problem in modern labor economics is the positive relation between the size of the firm in which a worker is employed and his wage one line of research that has been developed quite recently in this field is the application of endogenous switching regression models in this paper we utilize such a model to investigate firm size wage differentials in the netherlands the principal findings are that larger firms pay higher returns on schooling whereas smaller firms tend to reward iq combined with the finding that high iq workers are sorted into the largest firms the results are consistent with a model of job screening furthermore we find that employed sons of self employed fathers are more likely to work in small firms and that wage prospects for all types of workers are indeed most favorable in larger firms

supervision and effort in an intertemporal efficiency wage model the role of the solow condition abstract the solow condition is examined in an intertemporal model that blends the shirking and the turnover models of efficiency wages with managerial supervision it is shown that the solow condition does not hold when shirking and turnover costs are considered the solow condition can be a possible outcome when managerial productivity offsets shirking and turnover costs

occupational sorting of school graduates the role of economic preferences we relate risk attitudes and patience of young graduates from high school college and university measured around the time that they start their labor market career in a large representative survey to the riskiness and timing of earnings in the occupations they choose to work in we find a systematic positive and significant relation between willingness to take risks and measures of occupational earnings risks and employment risk that we derive from a large administrative data set patient individuals are significantly more likely to choose for occupations with a steep earnings profile individuals whose economic preferences are not well aligned with the riskiness and timing of earnings in their initial occupation are more likely to change to an occupation that better matches their economic preferences

distinguishing panics and information based bank runs welfare and policy implications in this paper we contrast panics and information based bank runs in an effort to provide a robust and empirically plausible model of how bank runs are triggered the model of information based runs is characterized by two sided asymmetric information the bank cannot observe the true liquidity needs of the depositors while depositors are asymmetrically informed about bank asset quality we also examine the relative degrees of risk sharing provided by bank deposit contracts and traded equity contracts we show that the choice of deposit or equity depends on the attributes of and information about the underlying investment returns

inflation forecast targeting implementing and monitoring inflation targets abstract inflation targeting is shown to imply inflation forecast targeting the central bank s inflation forecast becomes an explicit intermediate target inflation forecast targeting simplifies both implementation and monitoring of monetary policy the weight on output stabilization determines how quickly the inflation forecast is adjusted towards the inflation target money growth or exchange rate targeting is generally inferior than inflation targeting and leads to higher inflation variability commitment to target rules may be better than commitment to instrument rules

are risk aversion and impatience related to cognitive ability is the way that people make risky choices or tradeoffs over time related to cognitive ability this paper investigates whether there is a link between cognitive ability risk aversion and impatience using a representative sample of the population and incentive compatible measures we conduct choice experiments measuring risk aversion and impatience over an annual time horizon for a randomly drawn sample of roughly 1 000 german adults subjects also take part in two different tests of cognitive ability which correspond to sub modules of one of the most widely used iq tests interviews are conducted in subjects own homes we find that lower cognitive ability is associated with greater risk aversion and more pronounced impatience these relationships are significant and robust to controlling for personal characteristics educational attainment income and measures of credit constraints we perform a series of additional robustness checks which help rule out other possible confounds

employer size wage effects evidence from matched employer employee survey data in the uk this paper employs a random sample of matched employer employee data from the uk to test seven possible explanations for the positive relationship between employer size and pay individual wage equations show a large employer size wage premium we then control for a range of establishment level variables based on seven hypotheses typically advanced to explain this premium each establishment level factor reduces the wage premium but a sizeable premium nonetheless remains in adjudicating on these hypotheses we find a strong association between the internal labour market and the employer size wage premium this finding supports the theory that the employer size wage effect may be due to the higher costs of turnover or monitoring in larger firms however we find contrasting effects for public versus private sector establishments

explaining organizational diseconomies of scale in r d agency problems and the allocation of engineering talent ideas and effort by firm size the comparative efficiency and success of small firms in r d remains largely unexplained this paper empirically examines scale diseconomies in offering employment contracts as an explanation for diseconomies of scale in r d the paper argues that small firms more efficiently resolve the severe agency problems of hidden information and hidden behavior in r d small firms more efficiently offer contracts that reward performance than large firms and consequently small firms attract and retain engineers with higher ability and skill further small firms through these more performance contingent contracts induce higher levels of effort than large firms the study tests and generally confirms these hypotheses using data collected from 912 current and former engineering employees of two large high technology companies

the neoclassical firm under moral hazard we develop a model of the neoclassical firm under moral hazard with endogenous capital and employment and perfectly competitive capital labor and product markets we assume that effort becomes harder to measure as the firm gets larger and the exogenous parameters are affiliated the model explains why incentives decline but wages rise with firm size the mixed evidence on the risk reward tradeoff and the positive correlation between wages and profits in the long run incentives are increasing in risk via endogenous capital finally the model makes novel predictions about the relationship between incentives and labor market conditions

human capital and information this paper examines the issue of the establishment size wage effect it analyzes a cross section for the year 1979 with information on 607 individuals and the 60 private sector establishments where they work it discusses four theories of the establishment size wage effect and uses empirical proxies to test them it shows that when a dummy variable on computer access in the establishment is introduced as a regressor the establishment size variable is an insignificant regressor this result and other evidence supports the contention that the establishment size coefficient captures the effect of unobserved human capital accumulation

who are china s entrepreneurs it has been increasingly recognized that entrepreneurship plays a crucial role in successful economies the schumpeterian approach to growth aghion and howitt 1997 advances the view that entrepreneurial dynamism is the key to innovation and growth a growing body of policy work emphasizes the important role of entrepreneurs in economic development world bank 2003 yet research on entrepreneurship in economics is rather limited there are three distinct perspectives on entrepreneurship in social sciences the first perspective focuses on the role of economic political and legal institutions in fostering or restricting entrepreneurship institutional problems are seen in credit constraints that make it impossible to borrow and set up businesses insecurity of property rights that provides insufficient incentives for entrepreneurs and regulatory burdens that make setting up new enterprises difficult the second perspective focuses on the sociological variables shaping entrepreneurship for example sociologists study the role of values and social networks in promoting or discouraging entrepreneurial activities social networks may work through a variety of channels such as family friends or ethnic groups the third perspective emphasizes individual characteristics of entrepreneurs psychologists have studied the traits associated with entrepreneurship such as a personal need for achievement belief in the effect of personal effort on outcomes attitudes towards risk and individual self confidence although there are studies on each perspective little work looks at each of these factors taking the other into account this is precisely what we do in this paper using a new data set of chinese entrepreneurs and a matching sample of non entrepreneurs with similar age gender and educational characteristics the survey covers both entrepreneurs and non entrepreneurs in order to understand how they differ in individual characteristics family background social networks values and beliefs and perceptions of the institutional environment the data further allow us to separate chinese entrepreneurs into two groups by necessity and by opportunity and to differentiate non entrepreneurs in three groups those who never thought to be entrepreneurs those who thought but never became entrepreneurs and those who became entrepreneurs but eventually failed this is a richer data set than a previous survey in russia

did henry ford pay efficiency wages we examine henry ford s introduction of the five dollar day in 1914 in an effort to evaluate the relevance of efficiency wage theories of wage and employment determination we conclude that the ford experience strongly supports the relevance of these theories ford s decision to increase wages dramatically is most plausibly the consequence of labor problems of the kind efficiency wage theorists stress the structure of the five dollar day program is consistent with the predictions of efficiency wage theories there is vivid evidence that the introduction of the five dollar day resulted in substantial queues for ford jobs significant increases in ford productivity and profits accompanied the new regime

the employer size wage gap evidence for britain university of edinburgh and university of sussexfinal version received 5 may 1992 this paper presents estimates for the employer plant size wage gap for britain using anordered probit model selectivity corrected wage equations are estimated for three plant sizecategories in a comparison between plants with more than 500 workers and those with lessthan 100 a wage gap estimate of over 17 per cent is detected the wage effects of unionizationin plants with more than 500 workers is reported as insignificant in contrast to evidenceprovided by idson and feaster 1990 for the united states no evidence of non randomsorting of workers across plant size is detected

toward a theory of affordable loss although dozens of empirical studies have been published on effectuation as a whole much work remains to be done on elaborating each principle in more depth based on an exploratory study of seven ventures from the caribbean island of curacao this paper develops an elaborated process model of the affordable loss heuristic in effectuation the model breaks affordable loss into two components ability and willingness and connects these to the concept of loss aversion from prospect theory furthermore these components are encapsulated in a process involving identity affect and resourcefulness leading to the entry stage entrepreneurial investment decision

wage determination of registered nurses in proprietary and nonprofit nursing homes this study explores why registered nurses employed in nonprofit nursing homes earn higher wages than those employed in proprietary facilities previous studies have explained this finding in a property rights context where higher wages were posited to result from the weaker incentives for cost minimization accompanying nonprofit status this paper tests an alternative explanation of sectoral wage differences which is predicated on the reason for the coexistence offor profit and nonprofit firms in a given industry informational constraints concerning the quality of care are posited to cause the long term health care market to fail to provide care at the upper levels of a quality of care continuum nonprofits are viewed as a response to this form of market failure acting to fulfill customers demand for higher quality and higher cost long term care with attendant demand for higher quality nurses than in for profit homes both the observed sectoral pattern in selectivity and wage decompositions based on selectivity corrected wage regressions call into question the property right explanation yet are consistent with an asymmetric information explanation

why do smaller firms pay less this paper uses data from the national longitudinal survey of young men and the current population survey for 1983 to examine the relationships among wages firm size and plant size we reach three key findings first plant size has little independent effect on wages once we have controlled for firm size for firms with fewer than 1 000 employees second we find evidence of sorting on observed and unobserved ability characteristics across firm sizes better educated and more stable workers are in larger firms third results from a first difference estimator indicate that about 60 percent of the wage size effect is due to unobserved heterogeneity when all firms are considered and about 100 percent when firms with 25 or more employees are considered

who pays the price of brokerage transferring constraint through price setting in the staffing sector this article analyzes how a broker s ability to affect prices and extract superior value from its position has economic consequences for the actors tied to it i argue that intermediaries may exercise partial control in price setting by transferring the price constraints imposed on them by the actors on one side of the market to those on the other side in so doing they generate unequal returns for the brokered parties who then receive different prices due to the nature of the tie between the broker and its other exchange partners i investigate this argument using a novel mix of quantitative and qualitative data gathered from an intermediary in the staffing sector the results show that the broker is able to transfer discounts offered to valued buyers clients on to the sellers workers matched with them instead of reducing its own margins as a result actors with the same resource endowments receive different prices depending on the relationships among other exchange partners in a given triadic ne

the sales agent problem effort leisure allocation under performance pay as behavior towards risk the choice between safe and risky assets represents behavior towards risk more risk averse investors buy more safe assets we develop and test a general model that applies this intuition to the time allocation between risky effort and risk free leisure under linear incentives when risk increases with effort risk averse agents choose less effort but when risk is independent of effort effort choice is unaffected by risk preferences in many incentive contracts income risk is multiplicative with rather than additive to effort sales commissions being one example in such cases lower effort by the risk averse is a hitherto undocumented behavior towards risk jel c91 m52 j33

perceiving and managing business risks differences between entrepreneurs and bankers abstract we compared entrepreneurs with bankers in their perception and management of a variety of risks problems included financial risk risk to human life and health and risk of a natural disaster cluster analysis and content analysis of think aloud protocols revealed surprising details entrepreneurs accept risk as given and focus on controlling the outcomes at any given level of risk they also frame their problem spaces with personal values and assume greater personal responsibility for the outcomes bankers focus on target outcomes attempting to control risk within structured problem spaces and avoiding situations where they risk higher levels of personal responsibility

firms choice of method of pay using data from the bls industry wage survey the author tests the theory that firms choose their methods of pay by balancing the gains from more precise links between performance and pay against m

sectoral shifts and interindustry wage differentials the observed differences in wages across industries may arise from a lack of worker mobility particularly among experienced workers allowing the effects of industry shocks to persist for some time although young workers arbitrage wage shocks they will have little effect on the dispersion of experienced workers wages if young and old workers are poor substitutes in production this explanation is investigated using the five censuses of population between 1940 and 1980 the evidence strongly suggests that differences in pay are not temporary phenomena the data provide some support for the role of human capital and ability

aspiring to succeed a model of entrepreneurship and fear of failure fear of failure can dominate the choices of individuals we model its role in the decision to become an entrepreneur and subsequent investments made in pursuit of success using the framework of loss aversion we show that when an individual s threshold for success is sufficiently high fear of failure motivates additional investment when the threshold for success is equal to the foregone outside option on the other hand fear of failure is always de motivating finally regardless of the success threshold fear of failure is negatively associated with entry into entrepreneurship our findings highlight the importance of the interaction between the degree of fear of failure and the aspirations of the would be entrepreneur

risk tolerance and entrepreneurship a theoretical tradition argues that more risk tolerant individuals are more likely to become entrepreneurs but perform worse we test and confirm these predictions with several risk tolerance proxies using investment data for 400 000 individuals we find that common stock investors are around 50 more likely to subsequently start up a firm firms started up by common stock investors have about 25 lower sales and 15 lower return on assets the results are similar using personal leverage and other risk tolerance proxies we do not find support for alternative explanations such as unobserved wealth or behavioral effects

centralised wage setting inflation contracts and the optimal choice of central banker the paper examines the appropriate design of central banking institutions in an economy in which the nominal wage is set by an inflation averse monopoly union as a positive mark up over its market clearing value the analysis considers both the optimal choice of central banker and the potential role for a linear inflation contract the optimal set of arrangements is a central banker who attaches less significance to inflation than does society combined with an inflation contract where the value of the contract parameter is related to the union s degree of inflationaversion following the important contribution of rogoff 1985 the appointment of a conservative central banker has been widely accepted as a potential albeit partial solution to the time inconsistency problem associated with discretionary policy making in placing a greater weight on inflation than does the government and society as a whole in the setting of monetary policy the central bank s temptation to create inflation surprises is reduced this then leads to a lower inflation rate in equilibrium than would otherwise prevail whilst in rogoff s stochastic framework this reduction in the inflationary bias has to be weighed against an increase in output variability the appropriate choice of central banker ensures a net improvement in welfare an important feature of rogoff s model is the assumption of an atomistic labour market in which nominal wages embodied in single period contracts reflect interaction between agents who hold no market power such a representation of the labour market also characterises most subsequent extensions of rogoff s analysis e g lohmann 1992 and waller 1992 however a number of recent papers in considering the time inconsistency issue have employed the assumption of unionised wage setting assuming either an allencompassing monopoly union or alternatively a number of individual unions each of which has a non negligible impact on macroeconomic variables examples include agell and ysander 1993 bleaney 1996 cubitt 1992 1995 horn and persson 1988 hutchison and walsh 1998 and skott 1997 these contributions have examined the implications of the assumed labour market imperfection from a variety of perspectives but only those of bleaney and skott directly consider its consequences for the appropriate specification of central bank objectives in what follows we explore the significance of unionised wage setting for

establishment size job satisfaction and the structure of work this paper empirically investigates a the relationship between establishment size and the degree of flexibility in the work environment and b the extent to which establishment size differences in workers satisfaction with their jobs can be accounted for by differences in their work environment the main findings are that large establishments do organize production in a less flexible fashion than do smaller establishments and that observed lower levels of job satisfaction in larger establishments net of wage and fringe benefit effects can largely be explained by the inflexibility in the work environment

selection of workers and firm heterogeneity a model based on differences between workers regarding their preferences for wage and leisure drives the heterogeneity of firms result the more industrious workers are driven to small firms due to free riding in large firms an industry consisting of small and large firms turns out to produce more output than an industry consisting of only large firms some comparative statics results are derived with respect to the size of large firms the productivity difference between firms and monitoring capabilities

experimental tests of the endowment effect abstract the endowment effect which predicts undertrading and a willingness to accept greater than willingness to pay is studied using responses that remove all reference to buying or selling and focuses only on choice tasks the results significantly lower the willingness to pay willingness to accept discrepancy but the latter is still significant a high efficiency open display uniform price auction is used to exchange mugs for money since mugs are randomly assigned to half of 2n subjects n 2 mugs are predicted to trade less than n 2 mugs trade on average but more than previously reported the phenomenon exists but is less prominent than reported previously

eliciting von neumann morgenstern utilities when probabilities are distorted or unknown this paper proposes a new method the gamble tradeoff method for eliciting utilities in decision under risk or uncertainty the elicitation of utilities to be used in the expected utility criterion turns out to be possible even if probabilities are ambiguous or unknown a disadvantage of the tradeoff method is that a few more questions usually must be asked to clients also the lotteries that are needed are somewhat more complex than in the certainty equivalent method or in the probability equivalent method the major advantage of the tradeoff method is its robustness against probability distortions and misconceptions which constitute a major cause of violations of expected utility and generate inconsistencies in utility elicitation thus the tradeoff method retains full validity under prospect theory rank dependent utility and the combination of the two i e cumulative prospect theory the tradeoff method is tested for monetary outcomes and for outcomes describing life duration we find higher risk aversion for life duration but the tradeoff method elicits similar curvature of utility apparently the higher risk aversion for life duration is due to more pronounced deviations from expected utility

wage levels and method of pay the traditional literature on method of pay distinguishes workers who are paid time rates from those who are paid piece rates the theory predicts that the piece rate workers will earn more and empirically they do a simple generalization is to divide time rate workers into two groups those whose wage depends on their supervisor s ratings and those whose wage does not theory predicts that the workers whose pay is linked to supervisor ratings will earn more than the other time rate workers wage data for workers in over 3 000 manufacturing establishments show they do not and several simple explanations fail to resolve this empirical puzzle

a proclivity for entrepreneurship abstract despite intensive inquiry relatively little is known about the entrepreneur the central figure in entrepreneurship the question of how an individual who operates his or her own business differs from a corporate manager remains unanswered in addressing this question the primary purpose of this study was to investigate the potential of psychological constructs to predict a proclivity for entrepreneurship the research model includes three classic themes in the literature achievement motivation risk taking propensity and preference for innovation a survey of 767 small business owner managers and corporate managers was assembled from a 20 state region primarily the southeastern united states the participants completed a questionnaire composed of the achievement scale of the personality research form the risk taking and innovation scales of the jackson personality inventory and questions pertaining to numerous individual and organizational variables respondents were first divided into two groups managers and small business owner managers subsequently due to the often cited variations in entrepreneurs the owner managers were further categorized as either an entrepreneur or small business owner using the widely cited carland et al 1984 theoretical definitions entrepreneurs are defined by their goals of profit and growth for their ventures and by their use of strategic planning alternatively small business owners focus on providing family income and view the venture as an extension of their personalities in this study both groups of owner managers were simultaneously compared with managers using hierarchical set multinomial logit regression the results indicated that the psychological constructs are associated with small business ownership but with some important caveats as hypothesized those labeled entrepreneurs were higher in achievement motivation risk taking propensity and preference for innovation than were both the corporate managers and the small business owners this profile of the entrepreneur as a driven creative risk taker is consistent with much of the classic literature concerning the entrepreneur nonetheless not all of the owner managers fit this profile when compared with managers the small business owners demonstrated only a significantly higher risk taking propensity in terms of the constructs studied the small business owners were more comparable to managers than to entrepreneurs in addition to theoretical and methodological implications the results presented here have important implications for small business owner managers of both types a major issue is the connection between the owner s psychological profile and the characteristics of the venture including performance it would appear that psychological antecedents are associated with owner goals for the venture some owners will be more growth oriented than will others and performance should be assessed in light of the owner s aspirations for the venture moreover owners should be aware of their own personality sets including risk preferences which may be more or less suited to different venture circumstances including those with relatively high levels of risk planning in small businesses appears to enhance venture performance research has demonstrated the connections between psychological factors and planning behaviors in small businesses those labeled entrepreneurs in this study have goals of profit and growth and tend to engage in more planning an awareness of these psychological preferences and concomitant attention to planning behaviors have the potential to improve the performance of the venture irrespective of owner aspirations venture teaming is becoming more popular among entrepreneurs balanced venture teams appear to improve the chances of entrepreneurial success timmons 1990 but a common source of conflict among venture team members is inconsistent or ambiguous motives for the new venture awareness of venture partners psychological predispositions in areas such as risk taking could be used to identify and reconcile areas of potential conflict and enhance the planning process in the small firm in sum an individual s awareness of his or her psychological profile provides a number of advantages not only to existing entrepreneurs but also to aspiring entrepreneurs who should assess their perceived entrepreneurial opportunities against the backdrop of their psychological proclivity for entrepreneurship

incentives in experiments a theoretical analysis experimental economists currently lack a convention for how to pay subjects in experiments with multiple tasks we provide a theoretical framework for analyzing this question assuming statewise mo

debt contingent inflation contracts and targets abstract this paper analyzes fiscal and monetary policy interaction in a simple policy game with debt and output shocks seigniorage provides revenue for the government but results in an inflation bias we analyze three mechanisms designed to eliminate some or all of the biases in monetary policy an inflation performance contract inflation target both contingent on the stock of debt and a zero inflation rule the performance contract and inflation target result in higher interest rate remove all biases in monetary policy and achieve the pre commitment policy hence they are equivalent the first two solutions also yield a higher expected welfare than a zero inflation policy

employer size and labor turnover the role of pensions the well documented lower labor turnover in large firms than in smaller firms has been cited as evidence that large firms pay workers above their opportunity wage this study investigates whether t

should workers care about firm size the authors analyze how firms of different sizes reward measured skills and unmeasured ability the empirical methodology based on nonlinear instrumental variable estimation permits direct estimation of the returns to unmeasured ability by firm size an analysis of panel data from the canadian survey of labour and income dynamics for two periods 1993 1998 and 1996 2001 reveals statistically significant differences between firms of different sizes in particular returns to unmeasured ability are higher in medium sized firms than in either small firms or large firms the authors find that the firm size wage gap and the differential in returns to unmeasured ability between small and medium sized firms is mainly explained by ability sorting the fact that larger firms reward ability less than medium sized firms is consistent with an explanation based on monitoring costs when firms become too large monitoring costs may prevent them from rewarding ability directly through wages

an index of loss aversion to a considerable extent risk aversion as it is commonly observed is caused by loss aversion several indexes of loss aversion have been proposed in the literature the one proposed in this paper leads to a clear decomposition of risk attitude into three distinct components basic utility probability weighting and loss aversion the index is independent of the unit of payment the main theorem shows how the indexes of different decision makers can be compared through observed choices

is bigger still better the decline of the wage premium at large firms author affiliation william e even evenwe muohio edudavid a macpherson david macpherson trinity edu acknowledgment we thank daniel becker christopher bollinger and barry hirsch for helpful comments 1 introductionlarge firms pay higher wages than small firms this fact was first documented nearly 100 years ago and has been confirmed by myriad studies since then considerable effort has been directed toward testing different theoretical explanations for the size premium these include the fact that larger firms employ a more skilled work force and provide them with more and better capital pay efficiency wages to deal with greater monitoring costs pay compensating differences for less pleasant working conditions or greater risk that results from the type of human capital that is acquired or share rents with workers because of union threats or monopoly profits while there has been extensive research attempting to determine the importance of these different explanations of the size premium a recent trend has gone unnoticed namely the firm size premium has fallen substantially over the past 20 years for example we show that workers in firms with over 500 workers earned 55 more than workers in firms with fewer than 25 workers in the early 1990s our most recent data indicate that the size premium dropped by 15 percentage points over the past 20 years we also show that the size premium fell much more rapidly among less educated workers for example among workers with less than a high school degree the size premium fell by 30 percentage points this study documents the trends in the size premium and explores some possible explanations for the trends section 2 provides an overview of the theoretical explanations and empirical evidence on the size premium in section 3 we discuss our data and review the evidence on trends in the size premium empirical analysis of the trends is provided in section 4 our main conclusions are as follows first the size premium dropped over the past 20 years for two primary reasons i the type of worker employed by large and small firms has become more similar over time and ii large and small firms have become more similar in terms of the ways in which they reward workers holding observed characteristics constant in addition while the size premium has diminished over time it remains quantitatively significant particularly among highly educated workers 2 backgroundoi and idson 1999 provide a wide ranging summary of the extant research on the size premium their review points out that the size premium was first documented nearly 100 years ago among female workers at textile firms their summary of empirical studies shows that the largest firms e g firms with 500 or more employees pay wages that are 30 50 higher than those of the smallest firms e g firms with fewer than 25 employees numerous theories for the size premium have been proposed and no single theory is capable of providing an empirical explanation for the entire size premium the more prominent theories for the size premium are based upon size related differences in monitoring costs capital technology working conditions monopoly power or union effects the monitoring costs explanation for the size premium first proposed by oi 1983 argues that greater monitoring costs at large firms cause them to hire more able workers to conserve on monitoring costs because larger firms hire more able workers wages increase with firm size in addition because of greater monitoring costs large firms may be more likely to pay efficiency wages or deferred pay to reduce monitoring problems and utilize higher capital labor ratios to conserve on the number of workers empirical evidence indicates that the greater use of advanced technology by large firms explains part of the size premium dunne and schmitz 1995 reilly 1995 tan and batra 1997 troske 1999 yu et al

tenure unions and the relationship between employer size and wages the unionization rate in a worker s industry and the worker s tenure are interacted with employer size in wage regressions using current population survey data the results provide insight into the relatively small size wage relationship in the union sector nonunion tenure profiles steepen sharply with establishment size while union profiles flatten also the effect of industry unionization increases with firm size in the nonunion sector a pattern indicative of threat effects a separate analysis of nonunion wages indicates that size wage relationships are stronger in occupations associated with high monitoring costs

internal labour markets causes and consequences the paper analyzes the causes and consequences of internal labor market rules that yield long tenure promotion from within seniority pensions and due process in dismissals about half the workforce are estimated to be in such markets competitive reasons for internal labor markets as a response to specific training and arms length relationships between workers and firms are surveyed these reasons are found to be consistent with the pattern of internal labor markets among non union firms however some internal labor markets e g among small unionized firms are probably a response to union pressure and government regulations in these circumstances low labor mobility could pose problems for policy copyright 1991 by oxford university press

the benefits of lending relationships evidence from small business data this paper empirically examines how ties between a firm and its creditors affect the availability and cost of funds to the firm we analyze data collected in a survey of small firms by the small business administration the primary benefit of building close ties with an institutional creditor is that the availability of financing increases we find smaller effects on the price of credit attempts to widen the circle of relationships by borrowing from multiple lenders increases the price and reduces the availability of credit in sum relationships are valuable and appear to operate more through quantities rather than prices

project characteristics incentives and team production we develop a model to show how agency conflicts free rider effects and monitoring costs interact to affect optimal team size and workers incentive contracts team size increases with project risk decreases with profitability and decreases with monitoring costs as a proportion of output our predictions are consistent with empirical evidence that firm specific risk has increased over time average corporate earnings have declined and firms organizational structures have also flattened the predicted effects of monitoring costs on team size are supported by evidence that improvements in information technology likely to lower monitoring costs lead to larger teams further firms with relatively more intangible assets where monitoring costs are likely to be higher are smaller optimal incentive intensities decrease with risk and increase with profitability the endogenous determination of team size accentuates the positive effects of a decline in risk and an increase in profitability on incentives

what should central banks do what should be their macroeconomic objectives and operations before turning to the normative question of what central banks hereafter cbs should do we need to deal with the contentious issue of what cbs actually can do in the field of monetary control one might think that this should be a relatively straightforward matter of fact instead there is a yawning chasm of mutual misunderstanding which has persisted for decades between economists and those working in cbs which has bedevilled the subject virtually every monetary economist believes that the cb can control the monetary base hereafter mo and subject to errors in predicting the monetary multiplier the broader monetary aggregates as well after all mo apart from some relatively unimportant qualifications about coins from the mint represents the liabilities of the cb and the cb should be able to control its own liabilities by open market operations hence the normal assumption is that mo is controllable within a narrow margin if the central bank should fail to do so it must be because it has chosen some alternative operational guide for its open market operations e g holding interest rates constant at some level which operational rule is frequently decried as sub optimal assuming that cbs can almost perfectly control mo economists have constructed several simulated schemes of how an optimal rule for so doing might be set up mccallum i993a b provides good recent examples almost all those who have worked in a cb believe that this view is totally mistaken in particular it ignores the implications of several of the crucial institutional features of a modern commercial banking system notably the need for unchallengeable convertibility at par between currency and deposits and secondly that commercial bank reserves at the cb receive a zero or belowmarket rate of interest the first means that fluctuations in the public s demand for cash which are both strongly seasonal and somewhat unpredictable must be accommodated the second means that commercial banks will not willingly hold free reserves at the end of each day assuming for this purpose that a stated reserve ratio has to be held on each day rather than averaged over say a couple of weeks beyond that needed to meet late fluctuations in the demand for cash after the money market has closed or become thin only if interest rates fall to the very low levels of the i930s and or risks of interest rate variability or late in the day cash runs increase would commercial banks increase their desired free reserves thus given the

risk uncertainty and entrepreneurship evidence from a lab in the field experiment theory predicts that entrepreneurs have distinct attitudes toward risk and uncertainty but empirical evidence is mixed to better understand the unique behavioral characteristics of entrepreneurs and the causes of these mixed results we perform a large lab in the field experiment comparing entrepreneurs to managers a suitable comparison group and employees n 2 288 the results indicate that entrepreneurs perceive themselves as less risk averse than managers and employees in line with common wisdom however when using experimental incentivized measures the differences are subtler entrepreneurs are only found to be unique in their lower degree of loss aversion and not in their risk or ambiguity aversion this combination of results might be explained by our finding that perceived risk attitude is not only correlated to risk aversion but also to loss aversion overall we therefore suggest using a broader definition of risk that captures this unique feature of entrepreneurs their willingness to risk losses this paper was accepted by uri gneezy behavioral economics

firm size earnings and displacement risk rudolf winter ebmer analogous to the well documented firm size wage differential there also exists a differential in layoff risk according to firm size using austrian data i discuss several reasons for this puzzle including on the job training and workers heterogeneity if less stable and also less able workers select themselves into small unstable and low paying firms predicted layoff risk of workers can be used as a proxy for heterogeneity of workers and therefore be included in wage regressions doing this one half of the size earnings premium can be explained jel j31 j63 i introduction large employers pay more numerous empirical studies have documented this relationship 1 but they have not been able to explain it in a very careful study brown and medoff 1989 1056 look at ten possible reasons for this puzzle only to conclude our bottom line is that the size wage differential appears to be both sizable and omnipresent our analysis leaves us uncomfortably unable to explain it or at least the part of it that is not explained by observable indicators of labor quality neither compensating differentials for working conditions nor product market power or the threat of unionization were able to explain the size premium brown and medoff 1989 also found size effects for piece rate workers for unionized workers 2 and in longitudinal samples 3 where they controlled by first differencing for unobserved heterogeneity of the individuals given this wide interest in the effects of employer size on earnings very little research has been done concerning size differentials in turnover are the jobs in big firms not only higher paid but also more stable this would reinforce the puzzle of firm size once more anderson and meyer 1994 look at separation rates without distinguishing between quit and layoff and find highly decreasing turnover rates with firm size for permanent separations but no size effect on temporary separations 4 brown and medoff 1989 as well as others find quit rates to decline with firm size which speaks against compensating wage differentials arguments idson 1996 explicitly looks at the issue of long term employment relationships in large establishments which may be possibly due to the greater capacity of large employers to provide job mobility within the enterprise and the lower probability of business failure facing larger firms rebitzer 1986 argues that the observed higher job tenure in large plants is in a ccordance with labor market segmentation theory the aim of this article is to provide further evidence for a size layoff relationship using austrian data i try to consider several explanations for this regularity especially on the job training and the hypothesis of selective recruitment of workers into large and small firms following one hypothesis small employers attract less stable and capable employees a pattern that would cause only a spurious size layoff relationship on the other hand if workers with a relatively low stock of human capital sort themselves into relatively inefficient firms with unstable employment prospects then the size wage effect itself may be upwardly biased which was noted by mayo and murray 1991 the plan of the article is as follows section ii presents institutional details on wage bargaining and employment protection legislation in austria the data for the empirical study are discussed in section iii results for size wage and size layoff relationships are presented in section iv section v looks at the interaction between firm size layoff risk and wage determination section vi concludes ii wage bargaining institutions and job security legislation in austria wage bargaining in austria is very centralized even though only about 60 of workers are organized in unions bargaining outcomes are extended to all workers unionized or not a works council has to be established under the austrian labor law in all establishments employing at least five adult workers but usually the actual existence of a works council is positively determined by both firm size and firm age

growing apart the changing firm size wage premium and its inequality consequences wage inequality in the united states has risen dramatically over the past few decades prompting scholars to develop a number of theoretical accounts for the upward trend this study argues that large firms have been a prominent labor market institution that mitigates inequality by compensating their low and middle wage employees with a greater premium than their higher wage counterparts large u s firms reduced overall wage dispersion yet broader changes to employment relations associated with the demise of internal labor markets and the emergence of alternative employment arrangements have undermined large firms role as an equalizing institution using data from the current population survey and the survey of income and program participation we find that in 1989 although all private sector workers benefited from a firm size wage premium the premium was significantly higher for individuals at the lower end and middle of the wage distribution compared to those at the higher end between 1989 and

using founder status age of firm and company growth rate as the basis for distinguishing entrepreneurs from managers of smaller businesses abstract this article examined the empirical implications of definitions that distinguish entrepreneurs from managers of smaller businesses based on their founder nonfounder status and their firms ages and growth rates the best distinctions were created using 1 founders 2 younger companies and 3 the combination of founders and younger companies growth indicators did not discriminate well the two founder based distinctions shared a profile of entrepreneurs as running smaller companies with higher return on assets roa than nonentrepreneurial managers having shorter tenure in their positions having previous work experience in the same industry and having higher risk taking propensity the distinction based on age of firm also showed strong ability to discriminate among respondents the field of entrepreneurship has few longer standing controversies than the one surrounding the question of what distinguishes entrepreneurs from nonentrepreneurial managers in trying to separate entrepreneurs from managers of smaller businesses in particular questions exist concerning the key defining differences definitions of entrepreneurship have utilized founder versus nonfounder status company age and company growth rates as distinguishing elements entrepreneurs have been defined by one or more of the following elements being a company founder running a young company and running or desiring to run a high growth company this article tests these elements to see if they provide a clearly differentiated profile of entrepreneurs it uses the founder nonfounder distinction for example to see if this distinction functions well in identifying a number of company financial and personal attributes that associate with founders rather than nonfounders the approach advocated here borrows from configurational theory as it has emerged in the fields of strategic management and organizational theory meyer tsui and hinings 1993 to look for a constellation of variables that group together in depicting entrepreneurs if founder status company age and growth rate are useful definitions of entrepreneurship they should point to a configuration of factors that together comprise a profile of an entrepreneur in predicting what configuration of factors will emerge this article adopts a strategic adaptation perspective low and macmillan 1988 to argue that differences between entrepreneurs and nonentrepreneurs spring from divergent thought processes and personal attributes of individuals who face the question of whether and how to enter business for themselves using the founder nonfounder distinction we view individuals who decide to start a new business rather than buy or manage an existing one as more likely to have previously founded a business have experience in the same industry be higher in risk taking show more type a behavior and be more growth oriented findings from a sample of ceos in the smaller business association of new england indicated that neither of the two tests based on high growth as a definition of entrepreneurial firms proved adept at creating a distinct entrepreneurial profile distinctions based on founder status younger firm status and founder of a younger firm status on the other hand proved effective in creating such profiles dimensions shared by the two founder based definitions of entrepreneurship included company attributes of smaller size and higher roa and ceo attributes of shorter tenure on the job previous experience in the same industry and higher risk taking propensity additional attributes showed in the younger company founder group including company attributes of lower liquidity and higher sales growth and personal attributes of having previously founded a business ranking roa as a high priority and external locus of control the distinction based on younger firm status performed well in discriminating among respondents in this study in addition to sharing several variables with the founder based distinctions it alone identified younger firms ceos as having lower education and type a tendencies and higher expectations of children succeeding them in the business as one implication of these findings knowledge of the profiles may help people who deal with these groups to have a better sense of how to interact with and respond to them the young company founder profile for example presents a picture of a relatively small company experiencing high rates of sales growth squeezing all it can from its assets in the face of high comparative liabilities because the company is young its founder has relatively short tenure but may well have had previous experience in the industry and have previously founded a company personally the founder is a risk taker who is external in locus of control and places high priority on roa if this configuration holds firm in future research those who deal frequently with entrepreneurs such as bankers venture capitalists consultants accountants and lawyers will be able to use a few identifying factors such as founder status and age of firm to draw reasonable inferences about a host of other characteristics of their clients the attempt to profile the entrepreneur in recent years thought to be futile may yet prove viable

worker heterogeneity job screening and firm size a model of job screening is developed in which firms make wage offers to workers based on an imperfect evaluation of their abilities if large firms have higher costs of acquiring information about workers they screen workers with less accuracy and choose a wage compensation scheme different from the one small firms choose this generates the often observed positive correlation between firm size and wages the model also predicts that wage structure and perhaps wage dispersion will differ by firm size and that individuals who acquire more schooling will also choose to work in a larger firm these hypotheses are tested and supported using data from the national longitudinal survey

loss aversion under prospect theory a parameter free measurement agrowing body of qualitative evidence shows that loss aversion a phenomenon formalized in prospect theory can explain a variety of field and experimental data quantifications of loss aversion are however hindered by the absence of a general preference based method to elicit the utility for gains and losses simultaneously this paper proposes such a method and uses it to measure loss aversion in an experimental study without making any parametric assumptions thus it is the first to obtain a parameter free elicitation of prospect theory s utility function on the whole domain our method also provides an efficient way to elicit utility midpoints which are important in axiomatizations of utility several definitions of loss aversion have been put forward in the literature according to most definitions we find strong evidence of loss aversion at both the aggregate and the individual level the degree of loss aversion varies with the definition used which underlines the need for a commonly accepted definition of loss aversion

gender firm size industry and estimates of the value of life two national probability samples are used to investigate four empirical questions associated with estimating the value of life using coefficients from wage regressions the four questions pertain to whether wage regression coefficients on fatality rate variables are sensitive to 1 including or excluding women from the sample 2 definitions of the fatality rate which include estimates of either male only or female only deaths 3 removing the influence of firm size from the fatality rate or the wage rate 4 respondents inaccuracies in reporting their three digit industry problems associated with 3 and 4 are found to be minimal problems associated with 1 and 2 also appear to be small if the goal is to estimate the value of life for men