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

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  • Friebel, Guido
  • Giannetti, Mariassunta

Abstract

In the nineties, average firm size decreased, organizations decentralized, and workers preferences shifted from large to small firms. Our model identifies the economic forces behind this trend. Small firms with little capital 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 inefficient organizational changes.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3610.

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Date of creation: Oct 2002
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Handle: RePEc:cpr:ceprdp:3610

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

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  1. Gromb, Denis & Scharfstein, David, 2002. "Entrepreneurship in Equilibrium," CEPR Discussion Papers 3652, C.E.P.R. Discussion Papers.
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  4. 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.
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Cited by:
  1. Oriana Bandiera & Luigi Guiso & Andrea Prat & Raffaella Sadun, 2010. "Matching Firms, Managers, and Incentives," Harvard Business School Working Papers 10-073, Harvard Business School, revised Aug 2011.
  2. Giannetti, Mariassunta, 2011. "Liquidity constraints and occupational choice," Finance Research Letters, Elsevier, vol. 8(1), pages 37-44, March.
  3. Hvide, Hans K. & Kristiansen, Eirik Gaard, 2012. "Management of Knowledge Workers," IZA Discussion Papers 6609, Institute for the Study of Labor (IZA).
  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, Économie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.

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