Working papers

  • Title
  • Author(s)

Departments: Finance, GREGHEC (CNRS)

We explore how financial distress and choices are affected by noncognitive abilities. Our measures stem from research in psychology and economics. In a representative panel of households, we find that people in the bottom decile of noncognitive abilities are five times more likely to experience financial distress compared to those in the top decile. Relatedly, individuals with lower noncognitive abilities make financial choices that increase their likelihood of distress: They are less likely to plan for retirement and save, and more likely to buy impulsively and to have unsecured debt. Causality is shown using childhood trauma as an instrument.

Keywords: Noncognitive abilities, financial distress, financial choices, saving, unsecured debt, behavioral finance, psychology and economics

Departments: Strategy & Business Policy, GREGHEC (CNRS)

Non-governmental organizations (NGOs) often work with firms to facilitate the economic inclusion of the firms’ suppliers through practice improvements. Using a formal model, we examine how such NGO interventions can alleviate market failures and increase supplier economic inclusion. We account for the specific goals of the NGO and the need to induce collaboration between firms and their suppliers. We analyze the NGO’s intervention level and show how it depends on the NGO’s capabilities and the relative bargaining power among firms and suppliers. Our formal model offers testable hypotheses about NGO and firm behavior. In particular, it suggests that powerful firms are expected to match with more efficient NGOs due to sample selection and matching incentives.

Keywords: NGO; Non-Governmental Organizations; Nonprofit; Firm-NGO Collaboration; Value Creation

Departments: Economics & Decision Sciences, GREGHEC (CNRS)

Why do some people become entrepreneurs when it is not optimal? We explore this question by disentangling two mechanisms that may have been confounded: overconfidence and attitude toward uncertainty. We further distinguish between two types of uncertainty: risk and ambiguity. In a laboratory experiment, we shock individuals’ level of confidence in their skills to causally identify the effect of overconfidence on entry into competitive markets. Moreover, we highlight the critical role of attitude toward ambiguity on entry: independent of their level of confidence, individuals exhibit ambiguity-seeking behavior when the result of the competition depends on their skills, which in turn leads to a higher level of entry. This preference for ambiguity can explain results that have previously been attributed to overconfidence.

Keywords: Ambiguity, Overconfidence, Market Entry, Experiment, Entrepreneurship

Departments: Information Systems and Operations Management, GREGHEC (CNRS)

Energy efficiency projects are often executed by specialized entities, namely energy service companies (ESCOs). A typical ESCO's core business is conducted using performance-based contracts, whereby payment terms depend on the energy savings achieved. Despite their success in public, commercial, and industrial sectors, ESCOs in the residential sector are involved in fewer projects and face several challenges. First, an energy efficiency project often leads to changed consumption behavior; hence it is more difficult to evaluate the energy savings that are due to the project itself. The second challenge is that residential clients are more risk averse and, thus, less willing to contract for projects whose outcomes are uncertain. Third, a lack of monitoring protocols leads to ESCO's moral hazard problems. This paper studies ESCO contract design issues, focusing primarily on the residential market for energy efficiency. As opposed to other sectors, coordinating contracts do not exist. We show, however, that simple piecewise linear contracts work reasonably well. To improve their profitability, ESCOs can reduce uncertainty about the technology employed and/or develop ways of verifying post-project energy efficiency. Since policy makers are understandably keen to promote energy efficiency, we show also how regulations and monetary incentives can reduce inefficiencies in ESCOs' relationships and thereby maximize environmental benefits

Keywords: Sustainable Energy, Energy Efficiency, Performance-Based Contracts, Double Moral Hazard

  • SPE-2017-1188
  • Gross, Net, and New Job Creation by Entrepreneurs
  • T. ASTEBRO, Joacim TAG

Departments: Economics & Decision Sciences, GREGHEC (CNRS)

Using a dataset with over 24 million observations and more than 230,000 entries into entrepreneurship we analyze the gross (including the founders), net (excluding the founders), and new (jobs to the former unemployed or those outside the labor force) job creation by entrepreneurs two and six years after start-up. We show that the average entrepreneur does not create any jobs for any other than him/her-self, and that the average entrepreneur typically arrives from having another job so that even for him/her-self there is no new job created but simply a reshuffling of jobs from older to new firms. We further show that incorporation status is by far the most important correlate of job creation. High-ability individuals are more likely to form incorporated ventures and individuals with low ability are more likely to start sole proprietorships.

Keywords: Entrepreneurship, incorporation, job creation, occupational choice, self-employment, stars and misfits

Departments: Tax & Law, GREGHEC (CNRS)

The 2015 reform of the EU’s court system will go down in history as the most radical transformation of the EU judicial architecture since the establishment of the General Court in 1989. It doubles the number of General Court judges but also dissolves the Civil Service Tribunal. This article offers a critical assessment of these two major, structural changes, addressing both the process by which they were adopted and their overall merits. After providing a detailed examination of the reform’s tortuous legislative history and highlighting its unique underlying procedural feature – with the Court itself initiating the process – this article identifies and systematizes its major shortcomings. It criticizes the underlying diagnosis and the cure administered. It concludes by presenting this reform process as a missed opportunity to address, in a more holistic manner, the pressing non-docket related challenges facing the EU judicial system, in particular, to reform a governance structure which is no longer fit for purpose considering the massive transformation of the EU judicial branch since 1951

Keywords: Judicial Governance, Openness, Transparency, Legitimacy, Accountability, European Union, Good Governance

Departments: Economics & Decision Sciences, GREGHEC (CNRS)

Nudge is a concept of policy intervention that originates in Thaler and Sunstein's (2008) popular eponymous book. Following their own hints, we distinguish three properties of nudge interventions: they redirect individual choices by only slightly altering choice conditions (here nudge 1), they use rationality failures instrumentally (here nudge 2), and they alleviate the unfavourable effects of these failures (here nudge 3). We explore each property in semantic detail and show that no entailment relation holds between them. This calls into question the theoretical unity of nudge, as intended by Thaler and Sunstein and most followers. We eventually recommend pursuing each property separately, both in policy research and at the foundational level. We particularly emphasize the need of reconsidering the respective roles of decision theory and behavioural economics to delineate nudge 2 correctly. The paper differs from most of the literature in focusing on the definitional rather than the normative problems of nudge.

Keywords: nudge, liberal paternalism, policy analysis, behavioural economics, decision theory, rationality, decision biases, Thaler and Sunstein, Kahneman and Tversky

Departments: Finance, GREGHEC (CNRS)

We develop a model in which collateral serves to protect creditors from the claims of competing creditors. We find that borrowers rely most on collateral when cash flow pledgeability is high, because this is when it is easy to take on new debt, diluting existing creditors. Creditors thus require collateral for protection against being diluted. This causes a collateral rat race that results in all borrowing being collateralized. But collateralized borrowing has a cost: it encumbers assets, constraining future borrowing and investment, i.e. there is a collateral overhang. Our results suggest that the absolute priority rule, by which secured creditors are senior to unsecured creditors, may have an adverse effect — it may trigger the collateral rat race.

  • FIN-2017-1184
  • Drugs, Showrooms and Financial Products: Competition and Regulation When Sellers Provide Expert Advice

Departments: Finance, GREGHEC (CNRS)

Departments: Finance, GREGHEC (CNRS)

This paper explores the impact of regulations imposed by the Chinese government on the development of the Chinese IPO market between 2000 and 2011. Some of these regulations have affected the population of Chinese firms that went public domestically, some firms being excluding from the domestic IPO markets, others being induced to list abroad. We also provide evidence that, because of limits on prices and proceeds, the Chinese IPO market does not attract companies that need cash the most. Some IPO firms that raise large amounts of cash decide to pay large dividends shortly after going public, which investors interpret as evidence that their growth options were overestimated at the time of their IPO.

Keywords: Regulation, Emerging markets, Initial Public Offerings