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Fighting for Talent: Risk-shifting, Corporate Volatility, and Organizational Change

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  • Guido Friebel
  • Mariassunta Giannetti

Abstract

In the nineties, average firm size decreased, organisations decentralized, and workers preferences shifted from large to small firms. Our model identifies the economic forces behind this trend. Small firms with little capital at risk are subject to risk-shifting. They realize more of their workers‘ risky ideas, helping small firms to poach creative workers from better capitalized firms. This advantage increases if a) workers receive easier credit access, and b) technological progress raises the payoff from new ideas, provided that it remains very difficult to distinguish good ideas from bad ideas. As small firms take excessive risk, average enterprise profitability decreases, while bankruptcy increases. Moreover, large firms react through ineffecient organizational changes.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 793.

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Date of creation: 2002
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Handle: RePEc:ces:ceswps:_793

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Keywords: financial development; spin-offs; sorting; organizations; markets;

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References

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  1. Thomas Hellmann, 2007. "When Do Employees Become Entrepreneurs?," Management Science, INFORMS, vol. 53(6), pages 919-933, June.
  2. Raghuram G. Rajan & Luigi Zingales, 1998. "The Governance of the New Enterprise," CRSP working papers 487, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  3. Luigi Zingales, 2000. "In Search of New Foundations," CRSP working papers 515, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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  6. Richard E. Caves, 1998. "Industrial Organization and New Findings on the Turnover and Mobility of Firms," Journal of Economic Literature, American Economic Association, vol. 36(4), pages 1947-1982, December.
  7. Denis Gromb & David Scharfstein, 2002. "Entrepreneurship in Equilibrium," NBER Working Papers 9001, National Bureau of Economic Research, Inc.
  8. Pryor, Frederic L., 2001. "Will most of us be working for giant enterprises by 2028?," Journal of Economic Behavior & Organization, Elsevier, vol. 44(4), pages 363-382, April.
  9. Lazear, Edward P, 1986. "Salaries and Piece Rates," The Journal of Business, University of Chicago Press, vol. 59(3), pages 405-31, July.
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Cited by:
  1. Hvide, Hans K. & Kristiansen, Eirik Gaard, 2012. "Management of Knowledge Workers," IZA Discussion Papers 6609, Institute for the Study of Labor (IZA).
  2. Nathalie Lazaric & Alain Raybaut, 2014. "Do incentive systems spur work motivations of inventors in high-tech firms," Post-Print halshs-00930186, HAL.
  3. Oriana Bandiera & Luigi Guiso & Andrea Prat & Raffaella Sadun, 2012. "Matching Firms, Managers, and Incentives," CEP Discussion Papers dp1144, Centre for Economic Performance, LSE.
  4. Nathalie Lazaric & Alain Raybaut, 2013. "Do Incentive Systems Spur Work Motivation of Inventors in High Tech Firms ? A Group-Based Perspective," GREDEG Working Papers 2013-40, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
  5. Giannetti, Mariassunta, 2011. "Liquidity constraints and occupational choice," Finance Research Letters, Elsevier, vol. 8(1), pages 37-44, March.

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