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Asset Pricing in a Production Economy with Chew-Dekel Preferences

  • Claudio Campanale
  • Rui Castro
  • Gian Luca Clementi

Corporate organization varies within a country and across countries with country size. The paper starts by establishing some facts about corporate organization based on unique data of 660 Austrian and German corporations. The larger country (Germany) has larger firms with flatter and more decentralized corporate hierarchies compared to the smaller country (Austria). Firms in the larger country change their organization less fast than firms in the smaller country. Over time firms have been introducing less hierarchical organizations by delegating power to lower levels of the corporation. We develop a theory, which explains these facts and which links these features to the trade environment that countries and firms face. We introduce firms with internal hierarchies in a Krugman(1980) cum Melitz and Ottaviano (2007) model of trade. We show that international trade and the toughness of competition in international markets induce a power struggle in firms, which eventually leads to decentralized corporate hierarchies. We offer empirical evidence, which is consistent with the models predictions.

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File URL: http://pages.stern.nyu.edu/%7Egclement/Papers/Asset.pdf
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Paper provided by New York University, Leonard N. Stern School of Business, Department of Economics in its series Working Papers with number 07-13.

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Date of creation: 2007
Date of revision:
Handle: RePEc:ste:nystbu:07-13
Contact details of provider: Postal: New York University, Leonard N. Stern School of Business, Department of Economics, 44 West 4th Street, New York, NY 10012-1126
Phone: (212) 998-0860
Fax: (212) 995-4218
Web page: http://w4.stern.nyu.edu/economics/

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  1. Marin, Dalia & Verdier, Thierry, 2003. "Globalization and the Empowerment of Talent," Discussion Papers in Economics 268, University of Munich, Department of Economics.
  2. Marin, Dalia & Verdier, Thierry, 2006. "Power Inside the Firm and the Market: A General Equilibrium Approach," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 109, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  3. Ottaviano, Gianmarco & Melitz, Marc, 2008. "Market Size, Trade, and Productivity," Scholarly Articles 3229096, Harvard University Department of Economics.
  4. Nick Bloom & John Van Reenen, 2006. "Measuring and Explaining Management Practices Across Firms and Countries," NBER Working Papers 12216, National Bureau of Economic Research, Inc.
  5. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November.
  6. Elhanan Helpman, 2006. "Trade, FDI, and the Organization of Firms," Harvard Institute of Economic Research Working Papers 2118, Harvard - Institute of Economic Research.
  7. Raghuram Rajan & Henry Servaes & Luigi Zingales, . "The Cost of Diversity: The Diversification Discount and Inefficient Investment," CRSP working papers 463, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  8. Marin, Dalia, 2006. "A New International Division of Labour in Europe: Outsourcing and Offshoring to Eastern Europe," CEPR Discussion Papers 5447, C.E.P.R. Discussion Papers.
  9. Philippe Aghion & Jean Tirole, 1994. "Normal and Real Authority in Organizations," Working papers 94-13, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Barbara Spencer, 2005. "International outsourcing and incomplete contracts," Canadian Journal of Economics, Canadian Economics Association, vol. 38(4), pages 1107-1135, November.
  11. Marin, Dalia & Verdier, Thierry, 2007. "Competing in Organizations: Firm Heterogeneity and International Trade," Discussion Papers in Economics 1933, University of Munich, Department of Economics.
  12. Marin, Dalia & Verdier, Thierry, 2003. "Globalization and the new enterprise," Munich Reprints in Economics 19256, University of Munich, Department of Economics.
  13. Raghuram Rajan & Julie Wulf, 2003. "The Flattening Firm: Evidence from Panel Data on the Changing Nature of Corporate Hierarchies," NBER Working Papers 9633, National Bureau of Economic Research, Inc.
  14. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  15. Bengt Holmstrom & Steven N. Kaplan, 2001. "Corporate Governance and Merger Activity in the United States: Making Sense of the 1980s and 1990s," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 121-144, Spring.
  16. Patrick Bolton & David S. Scharfstein, 1998. "Corporate Finance, the Theory of the Firm, and Organizations," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 95-114, Fall.
  17. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
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