Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Investment fund wikipedia , lookup
Private equity secondary market wikipedia , lookup
Beta (finance) wikipedia , lookup
Business valuation wikipedia , lookup
Investment management wikipedia , lookup
Greeks (finance) wikipedia , lookup
Mark-to-market accounting wikipedia , lookup
International asset recovery wikipedia , lookup
Modern portfolio theory wikipedia , lookup
Financial economics wikipedia , lookup
Are Workers' Enterprises entry policies conventional? Gianpaolo Rossini University of Bologna Michele Moretto University of Padova ASSETAnnual Conference, Padova 1-3 November 2007 Rossini - Unibo - ASSET 2007 1 Introduction LMFs exist in most countries and industries (Craig and Pencavel, 1992, 1995; Moretto and Rossini, 2003). LM banks in developed and emerging countries contribute to equity and financial stability (Hesse and Cihàk, 2007): market share of some 10%. LMF close to (US Census) Nonemployer (Moretto and Rossini, 2007 - SEJ) and Partnership, popular among infant firms in high tech sectors Rossini - Unibo - ASSET 2007 2 LMF vis à vis conventional profit maximizing firm (PMF) in perfect competition: short run (SR) differences, long run (LR) coincidence. SR: supply reacts negatively to price; odd labour demand. Higher fixed costs -> larger membership. These reactions: based on the assumption that, in the SR, LMF can change membership size set at the foundation. Rossini - Unibo - ASSET 2007 3 New theory of Workers' Enterprises (WE) (Sertel, 1987; 1991; 1993; Fehr and Sertel, 1993). WEs similar to LMFs, but for membership: A) size chosen at entry, not varied in SR. B) competitive market for memberships -> number of members can change in SR. In WE "perversities" of the LMF shy away. Rossini - Unibo - ASSET 2007 4 LR: LMFs, WEs and PMF are indistinguishable. LR comparison between PMF and WE confined to static framework -> entry not modeled. Rossini - Unibo - ASSET 2007 5 AIM OF THE PAPER Model entry with uncertainty and irreversibility and test LR convergence of WE and PMF. Provide an interpretation of persistence of WEs (Hesse and Cihàk, 2007) despite ongoing mantra of their imminent demise. Rossini - Unibo - ASSET 2007 6 AN OPTION - LIKE SCENARIO In an option-like scenario, firms observe market demand and choose size and price, that triggers entry regardless of market structure (Leahy, 1993, Grenadier 2002). Rossini - Unibo - ASSET 2007 7 With certainty in a dynamic setting trigger prices of WEs and PMFs are equal (Moretto and Rossini, 2005) with labour fixed after entry. Labour (firm) specific -> firms reluctant to vary it. Rigidity makes PMF close to WE. Rossini - Unibo - ASSET 2007 8 The textbook case WE sets membership maximizing surplus per worker [value added (y(p;L)) minus market wage (w)]: y(p;L) – w = [(p Q(L) - I)/L] - w (1) SR FOC: p Q′(LWESR) = y (p;LWESR) (2) if y(p;L) – w > 0 labour of WE is smaller than PMF. Rossini - Unibo - ASSET 2007 9 Long Run features New firms enter at the Marshallian point: pWE = AC(LMES) ≡ (w LMES + I) / [Q(LMES)], (3) with AC(LMES) = LR average total cost at the MES. PMF and WE behave the same way, i.e. LWELR = LPMFLR. No rents. Rossini - Unibo - ASSET 2007 10 WE's entry under uncertainty Assumptions entry sunk cost 2. Entry can be delayed 3. Market price driven by trendless stochastic differential equation: dpt = σ pt dBt with σ>0 and p₀=p, (4) 5. The project funded by WE members 6. L fixed after entry 1. Rossini - Unibo - ASSET 2007 11 If p is high enough, WE enters. First, for any L, the individual option to enter is computed. Then, candidate members of WE choose L maximizing their (option) value at entry and the investment timing (T): fWE(p;L) = max E₀[(y(pT;L) - w) e-ρT|p₀=p] (5) Each employee invests at T when pt reaches an upper value pWE. Rossini - Unibo - ASSET 2007 12 The WE invests when the price exceeds the break-even threshold: pWE = [β/(β-1)]AC(L) (6) the (deterministic) Marshall trigger AC(L) multiplied by β/(β-1)>1, due to irreversible entry. Rossini - Unibo - ASSET 2007 13 Long Run equilibria LR: option value to wait is zero (i.e. fwE = 0). However, by the infinite elasticity of demand, the optimal entry trigger (6) is not altered (Leahy, 1993, Dixit and Pindyck, 1994, Grenadier, 2002). Rossini - Unibo - ASSET 2007 14 Proposition a) LR competition makes WE larger than in the SR, i.e.: LWESR < LMES < LWELR b) trigger prices react distinctively in LR and SR, i.e.: ((∂pWESR)/(∂L))>0 ((∂pWELR)/(∂L))<0. Rossini - Unibo - ASSET 2007 15 SUM UP The myopic WE enters with a size lower than LMES The farsighted (rationality: anticipating effects of LR entry) WE adopts a size > LMES. WE SR and LR triggers react in opposite ways to dimension. Rossini - Unibo - ASSET 2007 16 With free entry firms exercise their option sooner since the potential entry of rivals reduces the value of waiting. In LR the WE chooses size equating the value marginal product to w as PMF. Rossini - Unibo - ASSET 2007 17 A LR coincidence between WE and PMF emerges. The coincident entry of WE and PMF facing after entry labour rigidities explains persistence of WE in industries where human capital specificities make labour flexibility costly. Rossini - Unibo - ASSET 2007 18