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Retained earnings dynamic, internal promotions and Walrasian equilibrium

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Beker, Pablo (2004) Retained earnings dynamic, internal promotions and Walrasian equilibrium. Discussion Paper. [Valencia]: Instituto Valenciano de Investigaciones Económicas. Working paper (Ivie), Vol.14 .

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Abstract

In the early stages of the process of industry evolution, firms are financially constrained and might pay different wages if workers have heterogeneous 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 constrained profits, 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 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 what explains which firms have lower unit costs, grow more, and dominate the market.

Item Type:

Working or Discussion Paper (Discussion Paper)

Subjects:

H Social Sciences > HF Commerce
H Social Sciences > HB Economic Theory

Divisions:

Faculty of Social Sciences > Economics

Library of Congress Subject Headings (LCSH):

Business enterprises, Labor supply

Series Name:

Working paper (Ivie)

Journal or Publication Title:

Journal of Economic Theory

Publisher:

Instituto Valenciano de Investigaciones Económicas

Place of Publication:

[Valencia]

ISSN:

0022-0531

Official Date:

March 2004

Dates:

Date	Event
March 2004	Published

Volume:

Vol.14

Number of Pages:

Page Range:

pp. 114-156

Institution:

University of Warwick

Status:

Not Peer Reviewed

Access rights to Published version:

Open Access (Creative Commons)

Description:

Working paper.

Funder:

Spain. Ministerio de Ciencia y Tecnología (MCT), Instituto Valenciano de Investigaciones Económicas (IVIE)

Grant number:

BEC2001-0980 (MCT)

Version or Related Resource:

Later realised as: Beker, P.F. (2007). Retained earnings dynamic, internal promotions and Walrasian equilibrium. Journal of Economic Theory, 39(1), pp.114-156. http://wrap.warwick.ac.uk/30416/

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