Incentives For Firms Research Articles

Enforcing export controls learning from and using the financial system

AbstractRussian imports of battlefield goods subject to export controls have surged since mid‐2022 and reached levels close to those prior to Russia's full‐scale invasion of Ukraine. Russia thus continues to be able to acquire foreign components critical for its military industry. These imports largely occur via mainland China, Hong Kong, Turkey and the United Arab Emirates, while other countries including Armenia, Georgia, Kazakhstan and the Kyrgyz Republic have also seen massive increases in tech imports that likely end up in Russia. The enforcement of export controls faces multifaceted challenges centred around complex supply chains, lack of transparency and opaque financial structures, issues familiar from anti‐money laundering (AML) and countering financing of terrorism (CFT) frameworks. We propose using a similar framework in export control enforcement: First, financial institutions need to play a role in monitoring trade in export‐controlled goods and blocking illicit transactions. Second, non‐financial companies could learn from banks' efforts in the AML/CFT sphere to implement proper due‐diligence procedures and to ensure export controls compliance. Public‐sector investigations and appropriate fines are critical to increase the incentives for firms to act. Technology sanctions will remain part of the economic statecraft toolbox. The Russia case will test their effectiveness and credibility.

A Study on Consumers’ Willingness to Purchase Autonomous Vehicles from a Multi-Party Interaction Perspective: A Tripartite Evolutionary Game Model Involving the Government, Automobile Manufacturers, and Consumers

With the rapid development of autonomous driving technology, the advent of the autonomous driving era has become inevitable. An in-depth study of consumers’ willingness to purchase autonomous vehicles is critical to accelerating the adoption and commercialization of autonomous vehicles. By constructing a tripartite evolutionary game model of governments, automobile manufacturers, and consumers, we analyze the stable choice of unilateral strategy and equilibrium strategy of autonomous vehicle purchase intention. The MATLAB2022b tool was used for data simulation analysis to verify the validity of the conclusion and the influence of related factors on the purchase intention toward autonomous vehicles. The results show the following: (1) The combination of government support, active R&D, and consumer purchasing is the evolutionary stability strategy (ESS) of the model. (2) With an increase in government support, the probability of automobile enterprises taking the initiative to participate in R&D also increases. However, the negative impact of risk can significantly reduce the incentive for firms to conduct R&D and reduce the effectiveness of government support. (3) Government subsidies to consumers and purchase incentives offered by automotive companies can significantly increase the likelihood that consumers will purchase an autonomous vehicle. Based on these findings, recommendations are made to strengthen government support, establish risk mitigation mechanisms, and strengthen market promotion efforts to promote the commercialization of autonomous vehicles. The study provides a new perspective for understanding multi-party interactions in the rollout of autonomous vehicles and provides valuable insights for policymakers and industry stakeholders.

The impact of economic policy uncertainty on corporate environmental information disclosure: the moderating role of media attention and financing constraints

Economic policy uncertainty (EPU) is a major source of risk that could affect corporate environmental behaviors. We investigated the impact of EPU on environmental information disclosure by using 15,308 firm-year observations from 2,316 Chinese manufacturing firms between 2010 and 2020. Our study shows that EPU can be an incentive for firms to disclose environmental information. This finding supports the voluntary disclosure theory that firms are prone to disclose more environmental efforts in times of high EPU. Furthermore, the results show that the positive relationship between EPU and corporate environmental information disclosure can be positively moderated by media attention and financing constraints. Firms in competitive industries and heavily polluting industries provided better environmental information disclosure when facing uncertainty. Our results provide implications that managers should emphasize the quality of disclosure and use environmental information disclosure as a key strategy to deal with EPU.

Digitalization and Automation and AI: A Theoretical Framework of rethinking the Pollution Haven Hypothesis

This theoretical paper investigates the impact of digitalization, automation, and artificial intelligence (AI) on environmental regulations, specifically through the lens of the Pollution Haven Hypothesis (PHH). It explores how these advancements influence pollution intensity and environmental compliance costs, challenging the traditional understanding of the PHH. Methodology. The study employs a Cobb-Douglas production function to model the relationship between technological innovations and environmental regulations. By integrating digitalization, automation, and AI into the model, the paper examines how these factors affect the economic incentives for firms to relocate to regions with lenient environmental standards. Findings. The analysis reveals that advancements in digitalization and automation reduce pollution intensity and lower the costs of complying with strict environmental standards. As a result, the economic incentive to relocate to pollution havens diminishes. In an open economy, the combination of stringent environmental policies and technological innovations leads to reduced pollution levels and a shift toward cleaner production processes. Practical Implication. The findings suggest that integrating technological innovations into environmental policy can make adherence to stricter regulations more economically viable, thereby weakening the appeal of pollution havens. This has significant implications for global sustainability efforts, as it highlights the potential for technology to support more effective and equitable environmental regulations. Originality. This study introduces a novel perspective by directly linking technological innovations to shifts in capital allocation and the efficacy of environmental policies. It offers a fresh understanding of the PHH in the context of modern advancements, providing new understanding into the relationship between innovation and environmental regulation.

The labor market effects of facilitating social security contributions under part-time employment contracts: Evidence from Colombia

We examine the impact of homogenizing the tax base between part-time and full-time labor contracts in a context with high informality. Using employer–employee matched administrative records and household survey data, we estimate the effects of a reform that eliminated a wedge in regulatory costs across different work schedules in Colombia, reducing the relative costs of formal part-time employment. We find that the reform increased the probability of entering the formal sector for previously informal part-time workers (the target population). Using pre-reform variation in firms’ demand for workers eligible for the policy, we find a 5.5 % increase in formal employment at firms more exposed to the policy. Mean wages at these firms rose by 0.88 % after the reform relative to those at firms that tend to hire fewer workers with no formal sector experience. Firms with more exposure to the reform also experienced higher churn, consistent with the policy creating incentives for firms to rotate across workers at a faster pace.

U.S. vertically integrated electric utility greenhouse gas emissions and carbon risk premiums around the Paris Accord

We study the pricing of greenhouse gas emissions of vertically integrated producers of electricity around the Paris Accord (PA). We study whether emissions are priced by financial markets, providing a market-based incentive for firms to reduce their carbon footprints and if the heightened attention on climate change post-Paris Accord (PA) impacts the size of the “carbon risk premium.” We focus on electricity generators, because they are responsible for the largest share of emissions and emissions reductions in the U.S. and are highly exposed to regulatory, physical, and stranded asset risks. We find the cost of carbon risk is reflected in the returns of vertically integrated electric utilities. The post-PA period provides the strongest evidence that carbon risk is priced. We find that equity markets provide incentives for power producers to reduce emissions, as reductions in emissions are associated with reductions in required returns on equity (increases in equity market values). The challenge for regulators is how to respond in rate cases. Lowering a utility's regulated return to reflect lower market estimates of the return on equity would dilute the market-based incentive for emissions reductions. Adding a longer-term return incentive for continued investment in emissions reductions would reinforce the market incentive.

Does Smaller Government Mean Less Corruption?

Government intervention, whether in the role of a regulator or a market participant, presents opportunities for corruption. A burdensome regulatory environment creates more opportunities and incentives for individuals and firms to circumvent these regulations by resorting to different forms of bribery. Glaeser and Saks find that benefits of circumventing the regulations increase as the size of the government increases. The studies collected in this special issue investigate the relationship between various forms of government interventions on corruption.

Shadow union in local labor markets and corporate financing policies

This paper identifies an externality of a firm’s unionization that affects the financing decisions of non-unionized firms within a local labor market. We find that non-unionized firms increase their leverage ratios and hold less cash reserves following a union victory at other firms. This “shadow union” effect manifests through the heightened threat of unionization following shadow union organizing. Specifically, the effect is more pronounced when the probability of unionization rises by a larger margin and non-union firms face higher union rents conditional on being unionized. The threat appears credible enough to shape corporate financing decisions: shadow unions raise employees’ wages and the likelihood of subsequent union victories in the local labor market. Additional results indicate that the shadow union effect is distinct from leverage-mimicking behavior. Overall, our findings suggest that shadow labor market institutions create a strategic incentive for non-unionized firms to adopt less conservative financial policies to combat the union threat.

R&D capitalization vs. R&D expensing: A theoretical model with policy implications

The aim of this study is to establish a theoretical model to investigate the incentives of firms for choosing R&D capitalization. We focus on a monopoly firm managed by a typically myopic manager. In a two-stage setting, the manager determines the level of R&D prior to its output decision. Our model indicates that capitalizing some R&D costs yields higher profitability than fully expensing such investments. Moreover, we show that a longer useful life of capitalized assets is favorable for both consumer surplus and social welfare; thus, policy-makers should encourage policies that support extended lifespans of these assets.

Technology Coopetition and Voluntary Disclosures of Innovation

ABSTRACT We examine firms’ voluntary disclosures of innovation under technology coopetition, focusing on technology standard setting organizations (SSOs). Technology coopetition is characterized by (1) cooperation to determine technology standards, which requires information sharing to reach consensus, and (2) competition for standard implementation to obtain standard-essential patents, which create incentives for firms to deviate from the expected level of information sharing. We document a decrease in 10-K narrative R&D disclosures, more generic 10-K narrative R&D disclosures, and a longer delay of patent disclosures via the USPTO after a firm joins an SSO. Among alternative explanations, our evidence is most supportive of the hypothesis that firms strategically withhold innovation information. JEL Classifications: L15; M41; O32.

Factor market distortion and corporate innovation: Theory and evidence from China

The paper models the effect of distortion in factor markets on corporate innovation in a developing country, where the factor markets are underdeveloped in contrast to product markets. The distortion between factor markets and product markets has deteriorated the capability of firms to obtain profits, thereby dampening the incentives of firms to invest in innovation. Using a detailed firm-level dataset with manufacturing corporate innovation activities from 2008 to 2014, we testify to the prediction from the theoretical models that distortion depresses corporate R&D investment as well as R&D per capita. We strengthen our results using an IV approach to address reverse causality. Overall, our results have shed light on an emerging literature on distortion and innovation.

Exploring the interplay between intellectual property models and sustainability transitions: A multi‐level analysis

AbstractResearch on international technology transfer and partnership agreements provides a comprehensive understanding of country‐level impacts of intellectual property (IP) rights on sustainability transitions. However, firm‐level studies on how firms use and share their IP to support sustainability practices remains limited. The paper disentangles the relationship between firm‐level IP models and sustainability practices drawing from a cross‐case analysis of 28 firms offering sustainable innovations across four sectors. Analysis of firms' year‐wise data collected from 854 documents (typically 1996–2021) and 58 in‐depth interviews exploring linkage between IP models and sustainability practices of firms engaged in sustainable innovation provide six key findings: (a) emphasis on safeguarding registered and unregistered IP assets among firms with sustainable innovations; (b) widespread adoption of selectively open inbound IP models coupled with diverse IP sharing mechanisms; (c) a preference for collaborative (joint) IP ownership among internally driven firms, contrasting with a tendency for exclusive in‐licensing among those reacting to external pressures; (d) a divergence in outbound IP models, with internally motivated firms favouring selectively open approaches and externally driven firms favouring closed IP models; (e) the adoption of fully open outbound IP models democratize sustainable innovation diffusion; and (f) leveraging broadly open outbound IP models alongside closed or selectively open models balances widespread use with access control and achieves significant social sustainability. A framework is hence developed to guide technology‐sharing policies and procedures. Therefore, the paper creates a platform for prescribing sustainable IP incentives for encouraging firms to share IP for wider diffusion of sustainable innovations.

Green innovation and competitiveness: empirical evidence from Ecuadorian manufacturing

ObjetivoO objetivo desta pesquisa é explorar a inovação verde e seu papel na promoção da competitividade nas empresas manufatureiras equatorianas, com foco nas PMEs, que representam mais de 90% das unidades produtivas e da renda nacional. O sector manufatureiro no Equador regista um crescimento variável desde o início da pandemia da COVID, atraindo mais atenção tanto de profissionais, reguladores como académicos, devido à sua pegada distinta nas pessoas, nos lucros e no planeta, particularmente no contexto das economias em desenvolvimento.Desenho/metodologia/abordagemUm modelo com dois construtos de segunda ordem é desenvolvido e testado em uma amostra de 325 gestores de empresas industriais no Equador, utilizando métodos quantitativos e transversais.ResultadosApós a obtenção de métricas ajustadas e validadas, é apresentado um modelo de equações estruturais, onde é confirmada a hipótese principal, apoiando o impacto positivo da inovação verde na competitividade.Implicações práticas e sociaisA nossa investigação fornece evidências sobre como as empresas industriais que favorecem iniciativas ecologicamente inovadoras no seu planeamento a longo prazo, podem aumentar e sustentar a competitividade. Os decisores políticos poderiam então oferecer incentivos às empresas para incorporar práticas sustentáveis, com potenciais efeitos em cascata ao longo da cadeia de abastecimento, agregando competitividade aos níveis industrial e nacional.Originalidade/valorO nosso estudo visa colmatar a lacuna de conhecimento existente sobre a interação entre inovação verde e competitividade, alegando que a primeira influencia significativamente a última, num contexto de mercado emergente, com ganhos incrementais para todas as partes interessadas, conforme postulado pela teoria dos stakeholders.

An evolutionary game-theoretic approach to analysis the green innovation chain dynamics under government policies

Continuous improvement of the green innovation chain is essential for promoting sustainable entrepreneurship and addressing environmental issues. In this paper, we developed a tripartite evolutionary game model involving tech firms, startups, and accelerators. Our goal is to examine the impact of both static and dynamic government interventions on the evolution of the green innovation chain. After determining the evolutionary stable strategies, we examine government interventions through a system dynamics simulation using three different scenarios: (1) Government support downstream of the innovation chain, (2) government support upstream of the innovation chain, and (3) government support throughout the chain. In the first scenario, it is observed that although it promotes green technology innovation (GTI), the necessary support for startups and accelerators to scale up green innovations is lacking. Consequently, the overall level of GTI is limited. Conversely, in the second scenario, there is a lack of incentives for tech firms to invest in GTI, resulting in a stagnation in the innovation chain. Nevertheless, with government support extended throughout the chain, a synergistic effect emerges between all players, leading to a higher level of collaboration and resulting in a more efficient and effective green innovation chain.

Reshoring, Automation, and Labor Markets Under Trade Uncertainty

We study the implications of trade uncertainty for reshoring, automation, and U.S. labor markets. Rising trade uncertainty creates incentive for firms to reduce exposures to foreign suppliers by moving production and distribution processes to domestic producers. However, we argue that reshoring does not necessarily bring jobs back to the home country or boost domestic wages, especially when firms have access to labor-substituting technologies such as automation. Automation improves labor productivity and facilitates reshoring, but it can also displace jobs. Furthermore, automation poses a threat that weakens the bargaining power of low-skilled workers in wage negotiations, depressing their wages and raising the skill premium and wage inequality. The model predictions are in line with industry-level empirical evidence.

Green technological licensing strategies with fixed-fee among rival firms under emissions trading scheme

This paper considers no-licensing, unilateral licensing, and cross-licensing strategies among rival firms with different green technologies under emissions trading scheme. We mainly focus on the impact of green technological licensing strategies on firms’ operational management from a business perspective by considering different carbon quota allocations. It is shown that the green technological licensing strategy is always a preferred strategy in globally optimal sense when the technological gap and emission improvement are lower than some thresholds; if firms’ bargaining powers are within a certain range, the green technological licensing strategies can realize a Pareto improvement; the equilibrium decisions have a certain degree of robustness under random perturbation. To improve the performance of green technological licensing models, we introduce revenue-sharing contracts into the green technological licensing negotiation processes and show that, if the better-off firms agree to transfer a certain portion of their revenues, revenue-sharing contracts can increase the total profits of firms and are profitable for all parties. From an economic and environmental perspective, green technological licensing strategies can promote sustainable social development, while revenue-sharing contracts can significantly increase the incentive for rival firms to license green technologies.

The value of backup supply for mitigating disruption risk with equity finance

Based on the policy incentives for equity financing and firms' awareness of managing supply disruption risk, this paper examines a two-tier supply chain. A large manufacturer can purchase products either from a capital-constrained unreliable supplier who has disruption risk or a reliable backup supplier with a higher cost. We investigate the value and interactive use of the backup supplier and equity financing on firms' performances. The results show both the backup supplier and equity financing alone can always benefit the manufacturer, but the unreliable supplier can become worse off. However, when the backup supplier and equity financing interact, their impact changes dramatically. Under equity financing, the backup supplier can make the unreliable supplier better, and the effect of the backup supplier on disruption risk management differs with different wholesale prices. Moreover, with a backup supplier, equity financing can benefit both the manufacturer and the unreliable supplier. Specifically, with the backup supplier, the unreliable supplier can lose all autonomy on whether or not to raise equity financing. Then, the manufacturer and unreliable supplier can achieve Pareto optimality due to ‘bidirectional free riding’. These insights provide strategic guidance for product ordering, enabling firms to manage disruption risk better and achieve high profitability.

Scientific research, technology, and economic growth in a cross section of countries

ABSTRACT This paper aims to investigate the role of scientific research in the development of technology advancement and subsequent economic growth. The publication data collected from Science and Nature consists of 31,615 lines in Excel. Scholars from 3,790 universities and research institutes in 118 countries have published in the two premier journals over the period 2012–2019. Using these publication data, we explore two transmission channels: first, research output can be used for the development of innovations and inventions; second, such a technological advancement promotes economic growth. Instrumental variable (IV) estimation suggests that scientific publications have a causal effect on the enhancement of advanced technologies; the technology enhancement, in turn, has a causal effect on economic growth. Empirical evidence in direct support of these two relationships provide major incentives for governments and business firms to invest more towards future research in the fields of science and technology.

Collusion risk in corporate networks

Collusion among economic operators increases prices, reduces product quality, and hinders innovation. Structural links can affect the incentive and ability of firms to behave competitively by facilitating collusion. We use a network-based approach to study the relationship between ownership links and bidding behavior in procurement markets. We build temporal multiplex networks based on firms’ ownership and co-bidding ties to find network measures that may signal collusion risk. We test four network measures, two at market-level (density and average harmonic closeness centrality) and two at firm-level (degree centrality and harmonic closeness centrality). Using data on public procurement contracts awarded in Sweden from 2010 to 2015, we found higher incidence of single bidding in markets that are more closely related through ownership links. Missing bidders are also more likely in these markets. Single bidding and missing bidders may indicate the presence of collusive arrangements such as of bid suppression or rotation. For the firm-level analyses, our results showed a positive relationship between winning probability and centrality in the ownership network. A similar result was obtained for cut-point position, indicating that firms that are more closely connected to other firms through ownership links have a more important position in the co-bidding network and are also more likely to win contracts.

Audit committee quality and cosmetic accounting: an examination in an emerging market

PurposeThe literature on the influence of audit committees (AC) and cosmetic accounting (CA) is scarce. AC plays a unique and vital role in boosting earnings reliability in countries with weaker application of accounting standards or weaker legal protection for investors. AC, therefore, are considered to be one of the essential tools available to directors in supervising management decisions regarding financial reporting. This paper aims to examine the influence of AC characteristics (ACC) on CA and how this relationship is moderated by the audit fee.Design/methodology/approachThis study used probit regression to analyze 1,218 firm-year observations of listed companies in Tehran Stock Exchange from 2014 to 2020.FindingsThe results show that AC financial accounting expertise, AC independence, female AC membership and AC tenure were negatively related to CA. The negative relationship is highly pronounced when a firm incurs higher audit fees, and audit fees moderate the relationship between ACC and CA. Results for the robustness checks show that only AC independence was significant, and the results of other characteristics were not significant.Research limitations/implicationsThis research was conducted in an Iranian setting where the formation of ACs is on the verge of regulation; therefore, the data used for the study only contains the seven-year period of ACs’ statutory activity. In addition, a lack of consensus on the precise measures of an AC’s effectiveness could be considered as a restrictive factor.Originality/valueThe findings provide an initial insight into the effect AC on CA and moderating effect of audit fee on the relationship between ACC and CA.