EBS Research Paper Series

Incentive Contracts and Institutional Labor Market Design
Martina N. Gogova and Jens Uhlenbrock
No. 13-02
March 2013
Abstract | Full Paper

Gaining talent while damaging reputation among clients? Antecedents and consequences of introducing flexible career structures in law firms
Anna Christina Littmann and Ansgar Richter
No. 13-01
Abstract | Full Paper

Antecedents of Attitudes Towards Risky Career Choices
Verena Jung, Sascha L. Schmidt and Benno Torgler
No. 12-10
Abstract | Full Paper

What Shapes Young Elite Athletes' Perception of Chances in an Environment of Great Uncertainty?
Verena Jung, Sascha L. Schmidt and Benno Torgler
No. 12-09
Abstract | Full Paper

Corporate Adoption of Social Computing: A Process-based Analysis
Philip Räth, Nils Urbach, Stefan Smolnik and Brian Butler
No. 12-08
Abstract | Full Paper

The Influence of Superstars on Organizational Identification of External Stakeholders: Empirical Findings from Professional Soccer
Daniel Högele, Sascha L. Schmidt and Benno Torgler
No. 12-07
Abstract | Full Paper

The Antecedents and Outcomes of Environmental Innovation: Lessons from Russia
Anna Grobecker, Julia Wolf and Richard Germain
No. 12-06
Abstract | Full Paper

Hit-Or-Miss: What Leads Decision Makers to Take Advice for Long Term Judgments?
Philipp Ecken and Richard Pibernik
No. 12-04
Abstract | Full Paper

Mapping the Various Meanings of Social Innovation: Towards a Differentiated Understanding of an Emerging Concept
Dominik Rüede and Kathrin Lurtz
No. 12-03
Abstract | Full Paper

How to Steer the IT Outsourcing Provider: Development and Validation of a Reference Framework of IT Outsourcing Steering Processes
Nils Urbach and Tobias Würz
No. 12-02
Abstract | Full Paper

Wage Floors, Imperfect Performance Measures, and Optimal Job Design
Jenny Kragl and Anja Schöttner
No. 12-01
Abstract | Full Paper

A Jackknife-Type Estimator for Portfolio Revision
Roland Füss, Felix Miebs and Fabian Trübenbach
No. 11-14
Abstract | Full Paper

On The Relationship among Partisan Effects, Electoral Probability, and Economic Uncertainty
Roland Füss and Jana Lenz
No. 11-13
Abstract | Full Paper

Price Discovery and Information Transmission among Asset Markets: A High-Frequency Perspective
Roland Füss, Ferdinand Mager and Lu Zhao
No. 11-12
Abstract | Full Paper

Spurious Dynamic Conditional Correlation
Roland Füss and Thorsten Glück
No. 11-11
Abstract | Full Paper

Configurations and Performance: The Role of Complementarities in the Design of Law Firms
Edgar Ennen, Ansgar Richter and Klaus Uhlenbruck
No. 11-09
Abstract | Full Paper

Scattered Trust - Did the 2007-08 Financial Crisis Change Risk Perceptions?
Roland Füss, Thomas Gehrig and Philipp B. Rindler
No. 11-06
Abstract | Full Paper

Should We Have or Should We Have Not, and Who Should Have Paid?
Benjamin Bental and Dominique Demougin
No. 11-05
Abstract | Full Paper

Individual vs. Relative Performance Pay with Envious Workers and Non-verifiable Performance
Jenny Kragl
No. 11-04
Abstract | Full Paper

Merchant Fee Determination in Unitary Networks with Price Competition among Merchants
Markus Langlet and Jens Uhlenbrock
No. 11-03
Abstract | Full Paper

Wage Floors and Optimal Job Design
Jenny Kragl and Anja Schöttner
No. 11-02
Abstract | Full Paper

Who will Survive? A Competing Risks Analysis of Interdependent Top Executive Turnover Events
Stefan Hilger, Ansgar Richter and Utz Schäffer
No. 11-01
Abstract | Full Paper

Who Invests in Home Equity to Exempt Wealth from Bankruptcy?
Stefano Corradin, Reint Gropp, Harry Huizinga and Luc Laeven
No. 10-15
Abstract | Full Paper

Does Supply Chain Integration Pay? Mediating Effects of External Integration and the Contribution of Internal Integration to Performance
Heiko Woehner, Inga-Lena Darkow and Gernot Kaiser
No. 10-14
Abstract | Full Paper

Job Matching when Employment Contracts Suffer from Moral Hazard
Dominique Demougin and Carsten Helm
No. 10-13
Abstract | Full Paper 

Modeling Spillover Effects among Financial Institutions: A State-Dependent Sensitivity Value-at-Risk (SDSVaR) Approach
Zeno Adams, Roland Füss and Reint Gropp
No. 10-12
Abstract | Full Paper

The Impact of Macroeconomic Announcements on Implied Volatility
Roland Füss, Ferdinand Mager, Holger Wohlenberg and Lu Zhao
No. 10-11
Abstract | Full Paper

The Impact of Public Guarantees on Bank Risk Taking: Evidence From a Natural Experiment
Reint Gropp, Christian Gründl and André Güttler
No. 10-10
Abstract | Full Paper

Secure Collaborative Supply Chain Planning and Inverse Optimization - The JELS Model
Richard Pibernik, Yingying Zhang, Florian Kerschbaum and Axel Schröpfer
No. 10-09
Abstract | Full Paper

Determinants of the Demand for Healthy Food: Does Stress Suppress Health Orientation in On-the-go Consumption?
Tabea Huneke, Sabine Möller and Tobias Schäfers
No. 10-08
Abstract | Full Paper

Alternative Objective Functions for Quasi-shrinkage Portfolio Optimization
Andre Güttler and Fabian Trübenbach
No. 10-07
Abstract | Full Paper

Are European Corporate Bond Markets Integrated?
A Macro-Finance Term Structure Model Approach
Roland Füss, Dirk Schiereck and Arne Wilkes
No. 10-04
Abstract | Full Paper

What Drives CEOs to Take on More Risk? Some Evidence from the Laboratory of REITs
Roland Füss, Nico Rottke and Joachim Zietz
No. 10-03
Abstract | Full Paper

Bank Owners or Bank Managers: Who is keen on Risk?
Evidence from the Financial Crisis
Reint Gropp and Matthias Köhler
No. 10-02
Abstract | Full Paper

Ownership Concentration Beyond Good and Evil: Is there an Effect on Corporate  Performance?
Christian Weiss and Stefan Hilger
No. 10-01
Abstract | Full Paper

Incentive Contracts and Institutional Labor Market Design
Martina N. Gogova and Jens Uhlenbrock
No. 13-02
March 2013
Full Paper

Abstract
This paper analyzes a labor market, where firms offer workers incentive contracts and make decisions about irreversible capital investments. The state authority regulates the institutional framework by choosing the level of unemployment benefits and the workers' bargaining power. Our results suggest that unemployment benefits reduce workers' incentives to exert effort, thereby decreasing capital investments by the firm, and thus, output. The workers' bargaining power, in contrast, has ambiguous effects, as it raises the workers' share of the quasi-rent. On that account, it increases effort incentives, but reduces capital investment. We find that overall welfare is maximized by reducing the unemployment benefits and setting a positive bargaining power of labor.

Keywords: incentives, bargaining power, unemployment benefits, irreversible investment, labor market

JEL Classification: D02, E24, J65, J41

Gaining talent while damaging reputation among clients? Antecedents and consequences of introducing flexible career structures in law firms
Anna Christina Littmann and Ansgar Richter
No. 13-01
Full Paper

Abstract
In recent years, many professional service firms (PSFs) have moved away from the strict
application of tournament principles in their career systems, while others have retained these classical structures. In this paper, we provide an assessment of the importance of two types of reputation of a PSF - the reputation as an employer and its reputation among clients - as antecedents of the introduction of flexible career systems, such as non-equity partnership and permanent positions. We argue that while flexible career systems may increase the attractiveness of a firm in the talent market, they can also negatively impact its reputation among clients. Hence, a firm with a high reputation as an employer and a high reputation among clients is less likely to introduce more flexible career structures. Furthermore, we propose that the effect of introducing more flexible career structures on financial performance depends on a firm's initial reputation. We test our arguments using a sample of 159 firm-year observations of 43 large and medium-size PSFs active in Germany. The results provide support for the idea that reputation is an important determinant of the effectiveness of flexible career structures in PSFs.

Keywords: Tournament, professional service firms, law firms, reputation, employer attractiveness

Antecedents of Attitudes towards Risky Career Choices
Verena Jung, Sascha L. Schmidt and Benno Torgler
No. 12-10
Full Paper

Abstract
We explore the attitude towards risky career choices of young people in highly competitive environments. We empirically test which factors influence young elite athletes' tendency towards choosing a high-risk career option over a lower risk one; looking at the attitudes, of close to 1000 soccer players in the German "Bundesliga" professional clubs' Youth Academies, towards making real- life decisions. Generally, they face the decision early on as to whether or not they should risk quitting school to solely focus on a professional soccer career. Our study confirms that elements of expected utility, assessment of the likelihood of achievement of the aspired career as well as the potential benefit derived from this decision, explain risk-taking in competitive environments. The longer an individual survives the continuous selection process in the competitive environment, the more he thinks that he will eventually succeed - despite the increasing opportunity costs of quitting a low-risk alternative career. Initial success in the selection processes is a key trigger for the tendency to choose a career in winner-take-all markets.

Keywords: Career choices, risk attitude, risk perception, professional athletes

What Shapes Young Elite Athletes' Perception of Chances in an Environment of Great Uncertainty?
Verena Jung, Sascha L. Schmidt and Benno Torgler
Full Paper

Abstract
Unrealistic optimism is a commonly observed bias in the perception of chances. In this paper, we examine whether the bias is also present among young elite soccer players (10 to 23 years old) who receive regular objective feedback through external assessments. Utilising a large unique data set of almost 1600 individuals allows us to explore the empirical validation of the ipsative theory of human behaviour. In particular, we analyse how factors such as age or experience, education, peer group performance, and the level of integration into culture exert influence over young elite athletes' perceived chance of becoming a professional player. Working with a homogeneous dataset of individuals possessing similar characteristics and professional goals allows us to control for and isolate (unobserved) factors that may shape perceptions.

Keywords: Perception of chances, unrealistic optimism, ipsative possibility set, integration effects, soccer

Corporate Adoption of Social Computing: A Process-based Analysis
Philip Räth, Nils Urbach, Stefan Smolnik and Brian Butler
No. 12-08
Full Paper

Abstract
Digital natives - the generation for whom the Internet has always existed - have embraced the medium as one of choice. They use social computing applications as a medium for many activities, including receiving and giving product advice (ratings, comments), meeting with and talking to friends (social networking, chat), organizing events (social networking), learning (Wikipedia, weblogs), and communication with the general public (Youtube, weblogs). Facebook, a social networking service, has reached an audience of approximately 800 million users; young Iranians organize protests against their government via social networks, while amateur journalists and artists are viewed by millions on Youtube and weblogs. Inspired by these developments, corporations now seek to adopt social computing applications and derive similar benefits for their organizations. However, despite their growing interest, many firms report significant problems with the implementation and acceptance of social computing applications. We describe how three companies solved significant communication and collaboration issues by incorporating social computing applications into their intranets. Particular attention is paid to the deployment and adoption processes. Based on these case analyses, a common understanding of corporate social computing adoption is outlined and recommendations are derived.

Keywords: Social computing applications, social software, corporate adoption, business value of IT, process theory, IS adoption, Wiki, weblog

The Influence of Superstars on Organizational Identification of External Stakeholders: Empirical Findings from Professional Soccer
Daniel Högele, Sascha L. Schmidt and Benno Torgler
No. 12-07
Full Paper

Abstract
This paper examines the effect of superstars on external stakeholders' organizational identification through the lens of sport. Drawing on social identity theory and the concept of organizational identification, as well as on role model theories and superstar economics, we develop several hypotheses regarding the influence of soccer stars on their fans' degree of team identification. Using a proprietary dataset including archival data on professional German soccer players and clubs as well as survey data of more than 1,400 soccer fans, we find evidence for a positive effect of superstar characteristics and role model perception. We further find that players who measure up to the definition of a superstar are more important to fans of established teams than to fans of unsuccessful teams. The player's club tenure, however, seems to have no influence on fans' team identification. We argue that the effect of soccer stars on their fans is comparable to that of CEOs on their organizations' external stakeholders and consequently apply our results to the business domain. Our results contribute to organizational identification research by extending the list of determinants related to individual persons.

Keywords: Organizational identification, superstars, role model, fans, soccer

The Antecedents and Outcomes of Environmental Innovation: Lessons from Russia
Anna Grobecker, Julia Wolf and Richard Germain
No. 12-06
Full Paper

Abstract
The preservation of the natural environment has become of central concern for research and practice alike. To date, research has concentrated on investigating external factors that trigger sustainable corporate behaviour such as stakeholder pressure or regulation while less attention has been paid to specific organization-internal characteristics as drivers. An organization's entrepreneurial orientation may be one relevant factor to examine in this context. Sustainability with its three dimensions and multiple challenges if, oftentimes, difficult to understand and may be facilitated by an organizational culture that fosters risk taking and innovativeness. Therefore, this study argues that organization's level of entrepreneurial orientation supports the adoption of pollution prevention and product stewardship initiatives to, ultimately, improve financial performance. Drawing on empirical data from survey based research among Russian organizations the study finds that innovativeness significantly and positively relates to pollution prevention and product stewardship initiatives, while risk taking does not. This finding contributes to our understanding of why some organizations adopt more comprehensive sustainability strategies than others - even though exposed to similar levels of external institutional pressure.

Keywords: Waste reduction, product stewardship, entrepreneurial orientation, innovation, performance, structural equation modelling

Hit-Or-Miss: What Leads Decision Makers to Take Advice for Long Term Judgments?
Philipp Ecken and Richard Pibernik
No. 12-04
Full Paper

Abstract
When decision makers face crucial strategic decisions they frequently have to rely on judgments about events in the far future. These judgments are typically characterized by very high uncertainty and the absence of experience from previous good or bad judgments. Judgments of other experts are oftentimes an important - sometimes the only - source of additional information to reduce uncertainty and improve judgment accuracy. However, decision makers have very limited means to evaluate the quality of such "advice" from other experts and could tend to ignore this valid source of information. In this paper we study what leads decision makers to take advice from an expert panel when judging the probability of far future events with high economic impact. Our analysis is based on a unique dataset that comprises more than 15,000 advice taking decisions made by almost 1,000 experts from different industries. We find that decision makers' general tendency to ignore advice is particularly strong in the domain of long term judgments and pronounces even further when conicts in terms of beliefs, past experiences, or desires arise.

Mapping the Various Meanings of Social Innovation: Towards a Differentiated Understanding of an Emerging Concept
Dominik Rüede and Kathrin Lurtz
No. 12-03
Full Paper

Abstract
With a growing and especially fragmented body of literature on social innovations, the demand for categorizing the field increases. This study analyzes the current use of the concept social innovation. Following a systematic conceptual literature review methodology, the authors reviewed articles and books. The elements were then grouped in coherent categories. The authors found seven categories of social innovation that are linked to a distinct understanding of the concept. After presenting the categories and major themes which are discussed within each category, the different categories are set in context with each other. Subsequently, the authors discuss how the most prominent conceptualizations meet the criteria of concept clarity. Finally, the authors point to some aspects that are necessary in the future in order to strengthen the clarity of the social innovation concept.

Keywords: Social innovation, conceptual literature review, concept clarity

How to Steer the IT Outsourcing Provider: Development and Validation of a Reference Framework of IT Outsourcing Steering Processes
Nils Urbach and Tobias Würz
No. 12-02
Full Paper

Abstract
IT executives entering into information technology (IT) outsourcing arrangements seek various strategic, economic, and technological benefits. However, although several cases of IT outsourcing are considered successful, cases of failure can also be observed. Problems and challenges associated with IT outsourcing often not only relate to the strategic decision whether or not to outsource, but to the operational level as well. Especially organizations with little experience of implementing larger IT outsourcing programs face problems with the steering of external outsourcing providers. In this paper, we propose a reference framework that structures the required processes for an effective steering of IT outsourcing relationships. The research is based on the design science paradigm in information systems research. In a first step, we derive a framework from related literature and knowledge in this particular area. We then undertake extensive fieldwork, including expert interviews and field studies to evaluate our framework and to develop it further. The suggested framework proves to be a viable instrument to support the systematic analysis of current processes and the definition of suitable target processes for the steering of IT outsourcing programs. This paper's primary contribution therefore lies in providing an applicable instrument for practitioners as well as in extending the existing body of knowledge on IT outsourcing governance.

Keywords: IT outsourcing, steering processes, IT outsourcing governance, design science

Wage Floors, Imperfect Performance Measures, and Optimal Job Design
Jenny Kragl and Anja Schöttner
No. 12-01
Full Paper

Abstract
We analyze the effects of lower bounds on wages on optimal job design within firms. In our model, two tasks affect firm value and an imperfect performance measure. Due to cost advantages of specialization, assigning the tasks to different agents is effcient. Yet a sufficiently large wage floor induces the principal to distort incentives if not dismiss one agent. While imperfect performance measures are always harmful under multitasking, they may in fact increase profit under specialization. We further show that variations in the wage floor and the agents' reservation utility have significantly different effects on efficiency and optimal job design.

JEL Classification: M51, M52, M54, D82, D86

Keywords: Job Design, Limited Liability, Minimum Wage, Moral Hazard, Multitasking

A Jackknife-Type Estimator for Portfolio Revision
Roland Füss, Felix Miebs and Fabian Trübenbach
No. 11-14
Full Paper

Abstract:
This article proposes a novel approach to portfolio revision. The current literature on portfolio optimization uses a somewhat naive approach, where portfolio weights are always completely revised after a predefined fixed period. However, one shortcoming of this procedure is that it ignores parameter uncertainty in the estimated portfolio weights, as well as the biasedness of the in-sample portfolio mean and variance as estimates of the expected portfolio return and out-of-sample variance. To rectify this problem, we propose a Jackknife procedure to determine the optimal revision intensity, i.e., the percent of wealth that should be shifted to the new, in-sample optimal portfolio. We find that our approach leads to highly stable portfolio allocations over time, and can significantly reduce the turnover of several well established portfolio strategies. Moreover, the observed turnover reductions lead to statistically and economically significant performance gains in the presence of transaction costs.

Keywords: Portfolio optimization, Portfolio revision, Jackknife, Transaction costs.

JEL Classification: G11

On the Relationship among Partisan Effects, Electoral Probability, and Economic Uncertainty
Roland Füss and Jana Lenz
11-13
Full Paper

Abstract:
The literature on government partisanship suggests that financial risk should increase (decrease) as the probability of a Democrat (Republican) winning the upcoming election increases. At the same time, economic voting theories highlight that financial market risk, which mirrors economic uncertainty, should affect voter intentions, and thus parties' electoral prospects. To address this inherent endogeneity problem, we use the list of Barack Obama's campaign events as an instrumental variable for the electoral probabilities of Democrats during the 2008 presidential election. We find that corrected two-stage least squares estimates are considerably higher than estimates that do not account for this reverse causality. A 1-percentage point increase in the winning probability of the Democratic candidate can raise daily systematic risk on the U.S. stock market by 0.096 percentage points. In contrast, an unadjusted OLS estimation results in a 0.061-percentage point increase on average. In monetary terms, the difference approximates an average market value of about $4 billion. Thus, such a significant reversal effect, in which economic uncertainty reduces the probability that the Democratic candidate will win an upcoming election, emphasizes the underestimation of partisan effects, i.e., the pricing of party policies, policy differentials, and redistribution costs.

Keywords: Partisan effects; U.S. presidential election; prediction markets; systematic risk; conditional and implied volatility; instrumental variable estimation.

JEL Classification: G38, O16, P16 

Price Discovery and Information Transmission among Asset Markets: A High-Frequency Perspective
Roland Füss, Ferdinand Mager and Lu Zhao
No. 11-12
Full Paper

Abstract
This paper examines the intraday price discovery processes of the German stock, bond,and U.S. dollar/euro FX markets based on high-frequency sampling intervals. We analyze how quickly asset prices incorporate new information and react to macroeconomic news from the U.S. and Germany. We also study the interactions among the three asset markets conditional on the release of macroeconomic news. Our estimates show that the response patterns tend to be gradual, lasting from one to eight minutes. New information affects the FX market first, and then transmits to the bond market, which moves before the stock market. Moreover, we find that the size and direction of news effects and transmission channels differ significantly between “normal” and “crisis” times.

Keywords: Bund futures, DAX futures, USD/EUR exchange rate, macroeconomic announcements, price discovery process, information transmission process, high-frequency data.

 JEL-Classification: G01, G12, G14, G15

Spurious Dynamic Conditional Correlation
Roland Füss and Thorsten Glück
No. 11-11
Full Paper

Abstract
Multivariate GARCH and exponential smoothing models have been widely adopted by scholars to measure time-varying correlation structures. Even though these dynamic models are scientifically demanding, their value added remains unclear, because the conditional correlations they generate tend to exhibit highly unstable and erratic behavior. This paper provides a measure for the autocovariance structure of conditional correlations, defined as a function consisting of model-specific parameters and unconditional correlation. Because we find spurious conditional correlations, we construct confidence intervals based on the unconditional variance to assess fundamental changes in the conditional correlation process.

Keywords: Constant conditional correlation, dynamic conditional correlation, multivariate GARCH models, exponential smoother, moving average filter, spurious correlation.

JEL Classification: C52, C53

Configurations and Performance: The Role of Complementarities in the Design of Law Firms
Edgar Ennen, Ansgar Richter and Klaus Uhlenbruck
No. 11-09
Full Paper

Abstract
Despite the theoretical appeal of configurational approaches, little empirical research to date has found a clear relationship between configuration membership and firm performance. In this paper, we argue that complementarities among strategic and structural characteristics establish configurations and account for performance differences between firms. We analyze a panel data set of US law firms from the period of 1992-1999, using a fuzzy clustering approach to measure the firms' affiliation to theoretically derived configurations. The results show that the degree to which firms conform to these complementarity-driven configurations has a significant positive effect on their performance.

Keywords: Configuration, complementarity, performance, professional service firms.

Scattered Trust - Did the 2007-08 financial crisis change risk perceptions?
Roland Füss, Thomas Gehrig and Philipp B. Rindler
No. 11-06
Full Paper

Abstract
The paper investigates whether the financial crisis did affect risk perceptions, and, hence, change structural parameters. By decomposing credit spreads of US corporate bonds into the contributions by credit, equity, and liquidity risk factors as well as structural change, the relative contribution of the change in risk perceptions can be measured. We show that this increase is mostly due to aversion to default risk for high-yield bonds. For low-yield bonds, the increase is mostly due to liquidity related factors. By means of counterfactual analysis we find that the financial crisis shifted the distribution of bond spreads almost uniformly. This evidence is consistent with changing risk perceptions as predicted by theories of ambiguity aversion or social learning in the case of rare events.

JEL Classification: C21, G12

Keywords: Credit spreads, structural models, quantile regression, counterfactual analysis, ambiguity aversion. 

Should We Have or Should We Have Not, and Who Should Have Paid?
Benjamin Bental and Dominique Demougin
No. 11-05
Full paper

Abstract
We analyze an overlapping generations model which explicitly includes a secondary asset market. The economy is affected by a onetime shock which causes some of these assets to become toxic. As a response the government may intervene by buying these assets at market value and removing them from trade. When the shock is not anticipated we find that government intervention cannot improve upon the laissez-faire equilibrium. However, when agents anticipate that a crisis may occur, removing the toxic assets dominates laissez-faire, particularly when the toxic asset holders are financing the intervention scheme. Finally, we show that curbing incentives which drive investors to find high yield opportunities decreases the severity of a crisis once it occurs, but also output.

JEL Classification: E44, E61

Keywords: Crisis, Toxic Assets, Intervention

Individual vs. Relative Performance Pay with Envious Workers and Non-verifiable Performance
Jenny Kragl
No. 11-04
Full Paper

Abstract
In a moral-hazard environment, I compare the profitabilities of a rank-order tournament and independent bonus contracts when a firm employs two envious workers whose individual performances are not verifiable. Whereas the bonus scheme must then be self-enforcing, the tournament ist contractible. Yet the former incentive regime outperforms the latter as long as credibility problems are not too servere. This is due the fact that the tournament requires unequal pay across peers with certainty, thereby imposing large inequity premium costs on the firm. For a simple example, I show that the more envious the agents are, the larger is the range of interest rates for which the bonus scheme dominates the tournament.

JEL Classification: M52, M54, D63, D82

Keywords: Principal-agent, relational contract, inequity aversion, envy, bons, tournament, prize.

Merchant Fee Determination in Unitary Networks with Price Competition among Merchants
Markus Langlet and Jens Uhlenbrock
No. 11-03
Full Paper

Abstract
This paper investigates the determination of the merchant usage fee of a monopolistic unitary payment card network based on characteristics of the downstream market. Merchants engage in Bertrand price competition that allows for an observation of heterogeneous products. We find that the payment card network extracts a part of the economic rent that merchants obtain. The higher this rent, the higher the corresponding merchant usage fee. The rent, and consequently the merchant usage fee, is increasing in the downstream market size but decreasing in the price elasticity of consumer demand, as well as in the substitutability of products, and, interestingly, in the fraction of consumers preferring card payments.

JEL Classification: D53, G21, L11, L13, L4, L5

Keywords: Two-sided markets, payment card networks, platform pricing, Bertrand competition, industrial organization.

Wage Floors and Optimal Job Design
Jenny Kragl and Anja Schöttner
No. 11-02
Full Paper

Abstract
We analyze the effects of lower bounds on wages, e.g., minimum wages or liability limits, on job design within firms. In our model, two tasks contribute to non-verifiable firm value and affect an imperfect performance measure. The tasks can be assigned to either one or two agents. In the absence of a wage floor, it is optimal to assign the tasks to different agents whenever the agents' reservation utility is not too large. Under such a job design, the principal can tailor incentives according to each task's marginal productivity. By contrast, with a relatively large wage floor, the principal gradually lowers effort incentives to avoid rent payments to the agents, even before the wage floor exceeds the agents' reservation utility. If the wage floor is sufficiently large, the principal hires only one agent even though this leads to a distortion of effort across tasks or the non-execution of one task altogether.

JEL Classification: M51, M52, M54, D82, D86

Keywords: Job design, Moral hazard, Multitasking, Wage floor, Minimum wage, Limited liability

Who will Survive? A Competing Risks Analysis of Interdependent Top Executive Turnover Events
Stefan Hilger, Ansgar Richter and Utz Schäffer
No. 11-01
Full Paper

Abstract
We apply survival analysis to model the tenure and mode of exit of top executives from German stock-market quoted companies between 1999 and 2008. Drawing on both principal-agent and tournament theory, we find evidence that top executives face a higher likelihood of dismissal when firm performance is poor. High firm performance, in contrast, is no predictor of voluntary departures or internal promotions. Moreover, we show that CEOs have a greater risk of dismissal than CFOs, whereas the latter are more likely to leave voluntarily or change internally. Finally, we detect several interdependency effects. While dismissals increase the risk of dismissal for other top executives, routine turnover events increase the likelihood of subsequent internal changes and voluntary departures, regardless of whether the CEO or the CFO leaves first. Our results contribute to managerial succession research by incorporating time as a variable of interest and by considering different types of exit.

Keywords: Top executive turnover, Survival analysis, Top management teams, Tournament theory, Corporate governance.

Who Invests in Home Equity to Exempt Wealth from Bankruptcy?
Stefano Corradin, Reint Gropp, Harry Huizinga and Luc Laeven
No. 10-15
Full Paper

Abstract
Homestead exemptions to personal bankruptcy allow households to retain their home equity up to a limit determined at the state level. Households that may experience bankruptcy thus have an incentive to bias their portfolios towards home equity. Using US household data from the Survey of Income and Program Participation for the period 1996-2006, we find that especially households with low net worth maintain a larger share of their wealth as home equity if a larger homestead exemption applies. This home equity bias is also more pronounced if the household head is in poor health, increasing the chance of bankruptcy on account of unpaid medical bills. The bias is further stronger for households with mortgage finance, shorter house tenures, and younger household heads, which taken together reflect households that face more financial uncertainty.

JEL Classification: G11, K35, R21

Keywords: Homestead Exemptions, Personal Bankruptcy, Portfolio Allocation, Home Ownership.

Does Supply Chain Integration Pay? Mediating Effects of External Integration and the Contribution of Internal Integration to Performance
Heiko Woehner, Inga-Lena Darkow and Gernot Kaiser
No. 10-14
Full Paper

Abstract
The economic crisis has demonstrated that highly integrated supply chains are as strong as their weakest link. Therefore, one of the key topics in supply chain research has recently been how companies integrate externally with customers, to adapt to changing demands, and with suppliers, to ensure efficient and highly responsive material supply (Chen et al. 2009; Rosenzweig et al. 2003; van der Vaart and van Donk, 2008). Research on supply chain integration has focused on customer and supplier integration as well as on internal, or intra‐organizational, integration which improves the interfaces among corporate functions. However, research on the contribution of supply chain integration to performance has shown inconsistent results. Few studies take interactions among the integration perspectives into account. Recently, Flynn et al. (2010) tried to find evidence for a moderating effect of internal integration. Since internal integration is a prerequisite for external integration (Morash and Clinton, 1998), we propose that the relationship between internal integration and performance is mediated by external integration. Specifically, we find evidence that internal integration has a significant effect on operational  performance, which is mediated by customer integration. Moreover, our research reveals that the interactions among internal, customer, and supplier integration go beyond the findings of Flynn et al. (2010), which projected that asymmetric, customer‐oriented integration patterns are more efficient than balanced integration patterns.

Keywords: Internal Integration, Customer Integration, Supplier Integration, Operational Performance, Company Performance, Mediation

Job Matching when Employment Contracts Suffer from Moral Hazard
Dominique Demougin and Carsten Helm
No. 10-13
September 2010
Full Paper

Abstract
We consider a job matching model where the relationships between firms and wealth-constrained workers suffer from moral hazard. Specifically, effort on the job is non-contractible so that parties that are matched negotiate a bonus contract. Higher unemployment benefits affect the workers' outside option. The latter is improved for low skilled workers. Hence they receive a larger share of the surplus, which strengthens their effort incentives and increases productivity. Effects are reversed for high skilled labor. Moreover, raising benefit payments affects the proportion of successful matches which induces some firms to exit the economy and causes unemployment to increase.

JEL Classification: J65, D82, J41, E24

Keywords: Job matching, incentive contracts, unemployment benefits, Nash bargaining, moral hazard.

Modeling Spillover Effects among Financial Institutions: A State-Dependent Sensitivity Value-at-Risk (SDSVaR) Approach
Zeno Adams, Roland Füss and Reint Gropp
No. 10-12
June 2010
Full Paper

Abstract
In this paper, we propose a state-dependent sensitivity VaR (SDSVaR) to quantify the size and duration of risk spillovers among financial institutions. We permit spillover effects to change depending on the state of financial markets. We show that while small during calm times, equivalent shocks lead to considerable spillover effects in volatile market periods. The results highlight that estimates on spillover magnitudes that do not condition on the state of financial markets may substantially over- or understate spillover effects among a set of financial institutions. Using a TSLS related approach to control for endogeneity in a simultaneous equation system, we show that investment banks and, especially, hedge funds play a major role in the transmission of shocks to the other financial institutions.

JEL Classification: G01, G10, G24

Keywords: Contagion, state-dependent sensitivity value-at-risk (SDSVaR), quantile regression, financial institutions, hedge funds.

The Impact of Macroeconomic Announcements on Implied Volatility
Roland Füss, Ferdinand Mager, Holger Wohlenberg and Lu Zhao
No. 10-11
May 2011
Full Paper

Abstract
While many studies analyze the impact of scheduled macroeconomic announcements on equity market volatility,  few focus on the impact on option implied volatilities. In this study, we examine the link between German and U.S. macroeconomic events and the implied volatility indices VDAX and VIX. We find that both indices fall on announcements days, with the strongest reactions occurring during the financial crisis from 2008 to 2009. Further, we identify a volatility spillover effect and significant covariance clustering between the VDAX and VIX.

JEL Classification: G10, G11, G14, G15

Keywords: Implied volatility, VIX and VDAX indices, bivariate VECH GARCH model, macroeconomic announcements.

The Impact of Public Guarantees on Bank Risk Taking: Evidence From a Natural Experiment
Reint Gropp, Christian Gründl und André Güttler
No. 10-10
March 2010
Full Paper

Abstract
In 2001, government guarantees for savings banks in Germany were removed following a law suit. We use this natural experiment to examine the effect of government guarantees on bank risk taking,using a large data set of matched bank/borrower information. The results suggest that banks whose government guarantee was removed reduced credit risk by cutting o the riskiest borrowers from credit. At the same time, the banks also increased interest rates on their remaining borrowers. The effects are economically large: the Z-Score of average borrowers increased by 7% and the average loan size declined by 13%. Remaining borrowers paid 57 basis points higher interest rates, despite their higher quality. Using a difference-in-differences approach we show that the effect is larger for banks that ex ante benefited more from the guarantee. We show that both the credit quality of new customers improved (screening) and that the loans of existing riskier borrowers were less likely to be renewed (monitoring), after the removal of public guarantees. Public guarantees seem to be associated with substantial moral hazard effects.

JEL Classification: G21, G28, G32

Key words: banking, public guarantees, credit risk, moral hazard

Secure Collaborative Supply Chain Planning and Inverse Optimization - The JELS Model
Richard Pibernik, Yingying Zhang, Florian Kerschbaum and Axel Schröpfer
No. 10-09
April 2010
Full Paper

Abstract
It is a well-acknowledged fact that collaboration between different members of a supply chain yields a significant potential to increase overall supply chain performance. Sharing private information has been identified as prerequisite for collaboration and, at the same time, as one of its major obstacles. One potential avenue for overcoming this obstacle is Secure Multi-Party Computation (SMC). SMC is a cryptographic technique that enables the computation of any (well-defined) mathematical function by a number of parties without any party having to disclose its input to another party. In this paper, we show how SMC can be successfully employed to enable joint decision making and benefit sharing in a simple supply chain setting. We develop secure protocols for implementing the well-known "Joint Economic Lot Size (JELS) Model" with benefit sharing in such a way that none of the parties involved has to disclose any private (cost and capacity) data. Thereupon, we show that although computation of the model's outputs can be performed securely, the approach still faces practical limitations. These limitations are caused by the potential of "inverse optimization", i.e., a party can infer another party's private data from the output of a collaborative planning scheme even if the computation is performed in a secure fashion. We provide a detailed analysis of "inverse optimization" potentials and introduce the notion of "stochastic security", a novel approach to assess the additional information a party may learn from joint computation and benefit sharing. Based on our definition of "stochastic security" we propose a stochastic benefit sharing rule, develop a secure protocol for this benefit sharing rule, and assess under which conditions stochastic benefit sharing can guarantee secure collaboration.

Keywords: Supply Chain Management, collaboration, secure multi-party computation, information sharing.

Determinants of the Demand for Healthy Food: Does Stress Suppress Health Orientation in On-the-go Consumption?
Tabea Huneke, Sabine Möller and Tobias Schäfers
No. 10-08
April 2010
Full Paper

Abstract
Changes in eating habits comprise two major trends: The increasing demand for healthy products, and a stressful pace of life that leads to a growing convenience orientation. We link these trends by investigating whether stress, operationalized as time pressure and irregular daily routines, suppresses health orientation in on-the-go consumption. Based on current lit-erature and qualitative research a structural model was developed and empirically tested. Our results surprisingly show that time pressure fosters health orientation regarding on-the-go consumption. Implications for industry and retailers are derived. The contribution of our re-search is to advance the understanding of consumer behaviour regarding on-the-go consumption.

Keywords: Convenience, health orientation, on-the-go consumption.

Alternative Objective Functions for Quasi-shrinkage Portfolio Optimization
Andre Güttler and Fabian Trübenbach
No. 10-07
February 2010
Full Paper

Abstract
In this paper we propose a quasi-shrinkage approach for minimum-variance portfolios which does not use a quadratic loss function to derive the optimal shrinkage intensity. We develop two alternative objective functions for linear shrinkage. The first targets the reduction of portfolio variance. The second incorporates returns of assets to improve portfolio performance with respect to mean and variance. We compare the out-of-sample performance of our proposed portfolios to nine benchmark strategies across seven data sets. Our strategies often have lower portfolio variance and higher Sharpe ratios than the benchmark strategies. In particular, we beat the naïve portfolio empirically on all seven and significantly on three data sets.

Keywords: Covariance estimation, Eigenvalues, parameter uncertainty, portfolio choice, shrinkage.

Are European Corporate Bond Markets Integrated?
A Macro-Finance Term Structure Model Approach
No. 10-04
Roland Füss, Dirk Schiereck and Arne Wilkes
January 2010
Full Paper

Abstract
This paper proposes a term structure model of risk-free yields and corporate credit spreads for the European bond market. In addition to latent factors, we include observable macro factors that are linked to inflation, real activity, and financial activity. Following the approach of Ang and Piazzesi (2003), we model the term structure simultaneously by using yield and macroeconomic data on the Euro zone for the January 2000-September 2008 period. Empirical evidence suggests that the European bond market is integrated to a significant degree. However, it has not yet reached the level of the U.S. bond market due to some residual segmentation and market frictions.

Keywords: Term structure model, credit spreads, macro factors, European bond market, financial integration.

JEL: E43, E44, F15, G12

What Drives CEOs to Take on More Risk? Some Evidence from the Laboratory of REITs
No. 10-03
Roland Füss, Nico Rottke and Joachim Zietz
January 13, 2010
Full Paper

Abstract
This paper studies the impact of CEO discretion within the incentive structure of U.S. REITs. In contrast to the existing governance literature we focus on a specific sector with a specific legal setting (e.g., restrictive payout ratios), and organizational structure (e.g., little threat of a hostile takeover) to avoid issues of heterogeneity across industries. Restricting the focus to REITs allows us to simulate CEO behavior over the life cycle of the company and to generate and test empirically some interesting hypotheses how different CEO characteristics may affect the company's growth, its debt growth, and its performance. Testing is done on a panel of 101 U.S. equity REITs over the time period from 2003 to 2007. The empirics explicitly accounts for threshold effects in most continuous variables. The key empirical result is that a company's debt growth, and hence its exposure to risk, is inversely related to CEO stock ownership, but positively to a combination of the CEO also serving as chairman of the  board of directors and large bonus payments.

Keywords: Corporate governance, corporate performance, firm value, leverage, managerial ownership, REITs.

JEL: D23, G32, G38

Bank Owners or Bank Managers: Who is keen on Risk? Evidence from the Financial Crisis
No. 10-02
Reint Gropp and Matthias Köhler
February 2010
Full Paper

Abstract
In this paper, we analyse whether bank owners or bank managers were the driving force behind the risks incurred in the wake of the financial crisis of 2007/2008. We show that owner controlled banks had higher profits in the years before the crisis, and incurred larger losses and were more likely to require government assistance during the crisis compared to manager-controlled banks. The results are robust to controlling for a wide variety of bank specific, country specific, regulatory and legal variables. Regulation does not seem to mitigate risk taking by bank owners. We find no evidence that profit smoothing drives our findings. The results suggest that privately optimal contracts aligning the incentives of management and shareholders may not be socially optimal in banks.

Keywords: Banks, risk taking, corporate governance, ownership structure, financial crisis

JEL-Classification: G21, G30, G34

Ownership Concentration Beyond Good and Evil: Is there an Effect on Corporate Performance?
No. 10-01
Christian Weiss and Stefan Hilger
January 2010
Full Paper

Abstract
In this paper we analyze the relationship between ownership concentration and firm performance, while accounting for the endogeneity of the ownership structure, a potential curvilinearity of the performance effect, differences in corporate governance systems, and alternative performance measures. Accordingly, our paper presents - to our knowledge - the most comprehensive study of the effects of ownership concentration on firm performance. Using a sample of 1,079 firms from 8 countries we find that ownership concentration has no effect on firm performance. The results support the findings by Demsetz & Villalonga (2001) and cast doubt on the results by Thomsen, Pedersen, & Kvist (2006). The latter argued that in countries with a German- or French-Civil-Law background corporate governance systems might push ownership concentration levels above and beyond the value-maximizing point. Our analyses, however, do not find a performance effect for any level of ownership concentration or legal origin.

Keywords: Ownership concentration, corporate performance, endogeneity, corporate governance.

JEL: G32, G34, L20

An Econometric Pricing Model for CAT Bonds and the Impact of the 2005 Hurricane Season
No. 09-20
Frieder Ahrens, Roland Füss and Sevtap Kestel
November 05, 2009
Full Paper

Abstract
This paper examines the impact of the hurricane season 2005, in particular hurricane Katrina, on the pricing of CAT bonds. In doing so, we examine whether highly rated CAT bonds compared to sub-investment bonds show a different relation between objective risk measures and the spread. The theoretical framework for this relationship is based on the Lance Financial (LFC) model introduced by Lane(2003). The empirical results of treed Bayesian estimation confirm that the severity component of the spread has an increased impact, indicating a shift in the perception of investors during the pricing process. While the impact of the conditional expected loss significantly increases, it contributes through its interaction with the attachment probability, however, not through the variance. Finally, we show that the influence of conditional expected loss is also increased by investment grade ratings, since investors who demand highly rated bonds may be more concerned about possible losses than junk bond investors.

Keywords: CAT bonds, catastrophe insurance, hurricane Katrina, treed Gaussian process model.

JEL: C1, C5, G1, G22

Dynamic Linkages between Hedge Funds and Traditional Financial Assets: Evidence from Emerging Markets
No. 09-19
Roland Füss and Dieter G. Kaiser
April 20, 2009
Full Paper

Abstract
This paper analyses the short- and long-term relationships between hedge funds and traditional financial assets using multivariate cointegration analysis in order to investigate if the fees charged by hedge funds are justified for the kind of exposure they provide to investors. We therefore create an emerging market composite hedge fund index as well as region specific indices based upon a unique and large sample of 404 emerging market hedge funds obtained from the merger of two different databases. As to whether diversification benefits arise from adding emerging markets hedge funds to an emerging markets bond/equity portfolio, our results show that the advantages are significantly less for Eastern Europe than for the other emerging market regions of Asia and Latin America during the period January 1998 through May 2006. In summary, we find evidence that emerging market hedge funds in general are redundant securities for long-term investment horizons.

Keywords: Emerging markets, Asia, Latin America, Eastern Europe, hedge funds, Johansen cointegration test, asset allocation, portfolio diversification.

JEL: C32, G11, G15

Multi-Party Payment Card Network Pricing - Determination of Merchant and Interchange Fees
No. 09-18
Markus Langlet
November 06, 2009
Full Paper

Abstract
In this study, a multi-party payment card network model is constructed to explore the determination of merchant and interchange fees, thereby extending Langlet's (2009) observation of unitary payment systems. The focus of this analysis was on the impact of consumer price elasticity, the relative frequency of card usage, and the competitive condition of merchants in the determination of network fee payments. To accomplish this, two member bank homogeneity scenarios are analyzed: financial institutions that issue and acquire cards in an equal manner and banks that exclusively serve as either issuers or acquirers. The model yielded two significant results. First, similar to the Langlet (2009) case of unitary payment networks, the consumer price elasticity, the relative frequency of card usage, and the competitive condition of merchants determinants were found to impact the prices of the multi-party payment system. Second, limiting the interchange fee is found to be efficient in regulating the inefficiently high merchant usage fees.

Keywords: Payment Cards, Merchant Discount, Payment Systems, Credit Card Associations, Two-Sided Markets, Platform Pricing, No Surcharge Rule, Network Effect.

JEL: L11, G21, D53

Disentangling the Short and Long-Run Effects of Occupied Stock in the Rental Adjustment Process
No. 09-17
Zeno Adams and Roland Füss
August 2009
Forthcoming in: Journal of Real Estate Finance and Economics
Full Paper

Abstract
Using panel data covering 30 urban areas for 17 years, this is the first comprehensive study which investigates the rental adjustment process in the German office market. The application of recently developed cointegration techniques for non-stationary panel data in conjunction with the corresponding error correction model (ECM) enables us to overcome the data limitations, particularly existent for the German real estate market. In this context recent literature has been treating the compound variable "occupied stock" as a supply variable. In this study we show that this variable deserves a more critical investigation and that the general view of a supply variable may be misleading. Hence, our primary motivation is to (i) demonstrate how "occupied stock" should be interpreted correctly and (ii) provide useful insights into the long-term relationships and short-run dynamics of real office prime rents. The empirical evidence suggests that a one percent rise in office employment increases real rents on average by 1.64% through higher demand for office space. On the other hand, a one percent increase in the supply of office space decreases real rents in the long run by 2.25%. The results from the error correction model show that deviations from the long-run equilibrium lead to an adjustment process which restores equilibrium within two to three years.

Keywords: Panel cointegration analysis, FMOLS regression, error correction model, urban rent models, German office market.

JEL-Classification: C22, C23, G12, L85, R0

A Regime Switching Approach to Modeling Rental Prices of UK Real Estate Sectors
No. 09-16
Roland Füss, Michael Stein and Joachim Zietz
July 2009, this version: July 2010
Full Paper

Abstract
This paper uses regime switching models of the threshold type to analyze the adjustment process of real estate rental prices in the UK over the period 1973 to 2008. The proposed non-linear models outperform their linear counterparts because they can account for different phases or regimes of the real estate cycle. The empirical evidence shows that models using lagged real rental growth as the transition variable seem to be adequate for explaining and forecasting the rental adjustment process. A transition into another state sets in for the industrial, office, and retail sectors at real rental growth rates above 2.2%, -6.98%, and 4.91% respectively.

Keywords: Regime switching; non-linear estimation; time-varying rental adjustment process; rental cycle; UK real estate market.

JEL-Classification: C22, G12, L85

Short and Long-Term Interactions between Venture Capital Returns and the Macroeconomy: Evidence for the United States
No. 09-15
June 2008, this version: September 2010
Roland Füss and Denis Schweizer
Full Paper

Abstract
Based on theoretical rationales of an equilibrium model, we use macroeconomic and financial variables as proxies to empirically model their influence on the performance of risk capital in the U.S. In contrast to previous studies, we do not analyze the effect of one specific variable separately but consider the influence of several factors simultaneously. Thereby, the use of a vector error correction model (VECM) allows us to study short- and long-term dynamics as well as to overcome the problem of endogeneity, i.e. to discover causal mechanism. The results show that venture capital investments are positively related to industrial production, the exit channel Nasdaq, and the long-term interest rate, but negatively related to the short-term interest rate. According to the short-term dynamics, VEC Granger causality confirms that industrial production and the exit channel influence venture capital performance, while in the latter, venture capital Granger causes Nasdaq performance. However, in comparison to Nasdaq stock prices, venture capital prices are less exogenous.

Keywords: Venture capital investment, macro economy, cointegration test, VECM, Granger causality, variance decomposition.

JEL-Classification: C32, F4, G24

Lead-lag Relationships and Rating Convergence Among Credit Rating Agencies
No. 09-14
Andre Güttler
October 2009
Full Paper

Abstract
Using a sample of issuers rated by Moody's and S&P, we find evidence that Moody's rating change intensities are higher given a rating change by S&P. This seems to be tentative evidence that S&P assigns ratings in a timelier manner than Moody's. Second, we find that the tendency towards rating convergence is stronger for Moody's than for S&P. Our findings are important given the concerns regarding the agencies' inherent incentives and their dominant market position.

Keywords: credit rating agencies, rating intensities, rating convergence, rating timeliness.

Competition, Risk-Shifting, and Public Bail-out Policies
No. 09-13
Review of Financial Studies (forthcoming)
Reint Gropp, Hendrik Hakens and Isabel Schnabel
June 17, 2009
Full paper

Abstract
This paper empirically investigates the effect of government bail-out policies on banks outside the safety net. We construct a measure of bail-out perceptions by using rating information. From there, we construct the market shares of insured competitor banks for any given bank, and analyze the impact of this variable on banks' risk-taking behavior, using a large sample of banks from OECD countries.
Our results suggest that government guarantees to some banks strongly increase the risk-taking of the competitor banks not protected by such guarantees. In contrast, there is no evidence that public guarantees increase the protected banks' risk-taking.
These results have important implications for the effects of the recent wave of bank bail-outs on banks' risk-taking behavior.

Keywords: Government bail-out, implicit and explicit government guarantees, banking competition, risk-taking.

JEL: G21, G28, L53.

Payment Card Pricing - The Relationship of Consumer Price Elasticity and Merchant Fees of Unitary Network
No. 09-11
Markus Langlet
December 2008
Full Paper

Abstract
Even though there has been an enormous growth of literature on two-sided markets over the last decade, there remains a significant need for a deeper understanding of the determination of (i) privately and of (ii) socially optimized payment card network pricing1. Thus in this paper I explore the behavior of payment card network players. I particularly aim at unveiling the determination of payment card network fees. I thereby find three determinants of the merchant discount: 1. consumer price elasticity, 2. the relative frequency of card payments, and 3. the competitive condition of merchants.

Keywords: Two-sided markets, credit card associations, platform pricing.

Methodological area: industrial organization

Group vs. Individual Performance Pay in Relational Employment Contracts when Workers Are Envious
No. 09-09
Jenny Kragl
March 20, 2009
Full Paper

Abstract
I compare group to individual performance pay when workers are envious and performance is non-verifiable. Avoiding payoff inequity, the group bonus contract is superior as long as the firm faces no credibility problem. The individual bonus contract may, however, become
superior albeit introducing the prospect of unequal pay. This is due to two reasons: The group bonus scheme is subject to a free-rider problem requiring a higher incentive pay and impeding credibility of the firm. Moreover, with individual bonuses the firm benefits from the incentive-
strengthening effect of envy, allowing for yet smaller incentive pay and further softening the credibility constraint.

Keywords: Principal-agent, relational contract, inequity aversion, bonus, team, envy.

JEL classification: D63, D82, M52, M54

No. 09-01
Dominique Demougin and Carsten Helm
February 23, 2009
Full Paper

Abstract
Several European countries have reformed their labor market institutions. Incentive effects of unemployment benefits have been an important aspect of these reforms. We analyze this issue in a principal-agent model, focusing on unemployment levels and labor productivity. In our model, a higher level of unemployment benefits improves the worker's position in wage bargaining, leading to stronger effort incentives and higher output. However, it also reduces incentives for labor market participation. Accordingly, there is a trade-off. We analyze how changes in the economic environment such as globalization and better educated workers affect this trade-off.

Keywords: Unemployment benefits, incentive contracts, Nash bargaining, moral hazard, globalization

JEL Classifications: J65, D82, J41, E24