Beker, Pablo. (2008) Retained earnings dynamic, internal promotions and Walrasian equilibrium. Journal of Economic Theory, Vol.139 (No.1). pp. 114-156. ISSN 0022-0531

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Abstract

In the early stages of the process of industry evolution, firms are financially constrained and might pay different wages to workers according to their expectations about the prospects for advancement offered by each firm's job ladder. This paper argues that, nevertheless, if the output market is competitive, the positive predictions of the perfectly competitive model are still a good description of the long run outcome. If firms maximize the discounted sum of its assets, financing expenditure out of retained earnings, profits are driven down to zero as the perfectly competitive model predicts. Ex ante identical firms may follow different growth paths in which workers work for a lower entry-wage in firms expected to grow more. In the steady state, however, workers performing the same job, in ex ante identical firms, receive the same wage. I explain when the long run outcome is efficient, when it is not, and why firms that produce inefficiently might drive the efficient ones out of the market even when the steady state has many of the positive properties of a Walrasian equilibrium. To some extent, it is not technological efficiency but workers' self-fulfilling expectations about their prospects for advancement within the firm that explains which firms have lower unit costs, grow more, and dominate the market. (C) 2007 Elsevier Inc. All rights reserved.

Item Type:	Journal Article
Subjects:	H Social Sciences > HC Economic History and Conditions
Divisions:	Faculty of Social Sciences > Economics
Journal or Publication Title:	Journal of Economic Theory
Publisher:	Academic Press
ISSN:	0022-0531
Official Date:	March 2008
Volume:	Vol.139
Number:	No.1
Number of Pages:	43
Page Range:	pp. 114-156
Identification Number:	10.1016/j.jet.2007.06.008
Status:	Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Restricted or Subscription Access
Version or Related Resource:	Earlier version available: Beker, P.F. (2007). Retained earnings dynamic, internal promotions and Walrasian equilibrium. [Valencia]: Instituto Valenciano de Investigaciones Económicas. IVIE working papers, 2004-14. http://wrap.warwick.ac.uk/148/
Related URLs:	Other Repository
URI:	http://wrap.warwick.ac.uk/id/eprint/30416

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