Leverage, Bank Employee Compensation and Institutions

This paper investigates the empirical relationship between financial structure and employee compensation in the banking industry. Using an international panel of banks, we show that well-capitalized banks pay higher wages to their employees. Our results are robust to changes in measurement, model specification and estimation methods. In order to account for the positive association between bank capital and employee compensation, we illustrate a stylized 3-period model and show that well-capitalized banks have incentives to pay higher wages to induce monitoring. Such monitoring rents of employees at capitalized banks are expected to be higher in societies with weak institutions. Further empirical analysis shows that the weaker is institutional quality of a country the stronger is the positive relationship between bank capital and wages - supporting our theoretical conjectures. High compensations in the financial industry received increasing criticism over the course of years following the great recession, whereas capitalization of banks has been encouraged. Our paper is the first to highlight that there is an empirically visible trade-off between the two and that institutions strongly interact with this relationship

Preference Heterogeneity and Optimal Monetary Policy

We study optimal policy design in a monetary model with heterogeneous preferences. In the model markets are incomplete and households are heterogeneous with respect to their current consumption preferences and discount factors. The government controls the supply of money (liquid) and nominal bonds (illiquid) based on which households make optimal portfolio choices. We uncover that the two types of preference heterogeneity have distinctimplications for the optimal policy mix of the government. While the heterogeneity in current consumption preferences pushes the economy towards a zero-lower-bound (ZLB) associated with nominal interest rates, the heterogeneity in discount factors moves the economy away from the ZLB. We characterize the optimal policy design and quantify the welfare losses associated a binding ZLB - and thus potential welfare benefits from allowing negative interest rates on government bonds

Firms and Unions

Is firm growth always positively linked to higher wages? How does technological progress affect the relationship between firms and labor unions? This paper offers the first analysis to explain this interplay, reproducing the empirical patterns observed in the data. We introduce a general equilibrium model showing how firm growth, driven by general-purpose technologies, initially raises both firm size and wages. Beyond a firm-size threshold, firms transition to labor-substituting technologies, like automation, due to their ease of scalability, which, contrary to the predictions of neoclassical growth models, results in stagnating wages despite further firm growth. The progression to automation is delayed in industries with entry barriers. The increased ease of substituting labor diminishes the union-extractable rents, reducing the benefits of unionization. By incorporating automation's impact, we revise the view of unions as rent-seeking entities, offering a novel perspective on how automation reshapes union rents and labor dynamic

Curating Local Knowledge:Experimental Evidence from Small Retailers in Indonesia (Revision of DP 2019-015)

Business practices and performance vary widely across businesses within the same sector. A key outstanding question is why protable practices do not readily diffuse. We conduct a field experiment among urban retailers in Indonesia to study whether alleviating informational and behavioral frictions can facilitate such discussion in a cost-effective manner. Through quantitative and qualitative fieldwork, we curate a handbook that associates locally relevant practices with performance, and provides idiosyncratic implementation guidance informed by exemplary local retailers. We complement this handbook with two light-touch interventions to facilitate behavior change. A subset of retailers is invited to a documentary movie screening featuring the paths to success of exemplary peers. Another subset is offered two 30 minute personal visits by a local facilitator. A third group is offered both. Eighteen months later, we find significant impacts on practice adoption when the handbook is coupled with the two behavioral nudges, and up to a 35% increase in profits and 16.7% increase in sales. These findings suggest both informational and behavioral constraints are at play. The types of practices adopted map the performance improvements to efficiency gains rather than other channels. A simple cost-benefit analysis shows such locally relevant knowledge can be codified and scaled successfully at relatively low cost

Flexible Labor Contracts, Firm-specific Pay, and Wages

In this paper, we use comprehensive employer-employee data for the Netherlands to investigate the labor income effects of flexible labor contracts in two different settings: wage determination as in the AKM model, and an analysis of earnings losses after job displacement. In both settings, we find that flexible contracts lead to lower wages, but that workers with flexible contracts primarily earn less because they work at or join lower paying firms. This implies that the negative effects of flexible contracts on wage income are overstated, if firm-specific pay differentials are not taken into account

Local Best Practices for Business Growth

Can best practices of successful business peers influence the efficiency and growth of small-scale enterprises? Does it matter how this information is disseminated? This paper conducts a field experiment among urban retail shop owners in Indonesia to address these research questions. Through extensive baseline quantitative and qualitative assessments, we develop a handbook of local best practices that associates specific business practices with performance and provides detailed implementation guidance informed by exemplary local shop owners. The handbook is distributed to a randomly selected sample of shop owners and is complemented with three experiential learning modules: one group is invited to watch a documentary video on experiences of highly successful peers, another is offered light in-shop assistance on the implementation of the handbook, and a third group is offered both. Eighteen months after the intervention, we find no effect of offering the handbook alone, but significant impact on practice adoption when the handbook is coupled with experiential learning. On business performance we find sizable and significant improvements as well, up to a 35% increase in profits and 16.7% in revenues. The types of practices adopted map these performance improvements to efficiency gains rather than other channels. The analysis suggests these interventions are simple, scalable, and highly cost-effective

E-Payment Technology and Business Finance:A Randomized Controlled Trial with Mobile Money (revision of CentER DP 2019-032)

We conducted a randomized controlled trial with small and medium-sized enterprises in Kenya to estimate the causal impact of an e-payment technology on business finance. Using an encouragement design, we exogenously increased e-payment usage among a random subset of firms by relaxing adoption transaction costs and information barriers. Sixteen months after the intervention, we find that the e-payment technology increased access to mobile loans (in number of loans, as well as in the amount borrowed) by at least 50% (0.17 sd), likely due to the reduction of information asymmetries brought by an increase in digital transactions. We find no effect of the e-payment technology on sales and profits, but we do find a reduction of sales volatility and precautionary investment, especially for smaller firms. This suggests that mobile loans help smaller firms cope with short-term negative shocks. We provide a stylized model of business finance that rationalizes these findings