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Retained earnings dynamic, internal promotions and Walrasian equilibrium

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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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Official URL: http://dx.doi.org/10.1016/j.jet.2007.06.008

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

Dates:

Date	Event
March 2008	Published

Volume:

Vol.139

Number:

No.1

Number of Pages:

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/

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