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Sorting, Selection, and Industry Shakeouts

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  • Peter Thompson

    ()

  • Mihaela Pintea

    ()

Abstract

A number of plausible theories offer explanations for the propensity of many young industries to undergo a shakeout phase, during which the number of firms declines sharply in the face of continued rising output. However, none of the theories considers the role of labor market sorting. This paper presents a model in which individual abilities are complements in production, but frictions permit only gradual sorting among firms. The quality distribution of firms becomes wider over time, inducing exit of firms that have ended up with predominantly low-quality workers. The model does not ensure that a shakeout takes place, but when it does it will be characterized by rising output alongside a declining price, an increasing average wage, and a widening of the distributions across firms of employment, output, productivity and average wages.

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Bibliographic Info

Article provided by Springer in its journal Review of Industrial Organization.

Volume (Year): 33 (2008)
Issue (Month): 1 (August)
Pages: 23-40

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Handle: RePEc:kap:revind:v:33:y:2008:i:1:p:23-40

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Web page: http://www.springerlink.com/link.asp?id=100336

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Keywords: Industry evolution; shakeouts; skill complementarity; L1; J62;

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Cited by:
  1. Jiri Podpiera & Marie Rakova, 2008. "The Price Effects of an Emerging Retail Market," Working Papers 2008/6, Czech National Bank, Research Department.
  2. Bester, Helmut & Milliou, Chrysovalantou & Petrakis, Emmanuel, 2012. "Wage bargaining, productivity growth and long-run industry structure," Labour Economics, Elsevier, vol. 19(6), pages 923-930.

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