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An evolutionary model of firms' institutional behavior focusing on labor decisions

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  • Sandra Tavares Silva

    ()
    (CEMPRE, Faculdade de Economia do Porto, Universidade do Porto)

  • Aurora A.C. Teixeira

    ()
    (CEMPRE, Faculdade de Economia do Porto, Universidade do Porto)

Abstract

The understanding of the economy's aggregate growth patterns is a fundamental objective of economic growth theorizing. However, the micro constructions are strongly linked to economic growth and so cannot be neglected in such process. This paper is concerned with this problem, proposing a formal mechanism to establish the bridge between macro regularities and micro evolutionary behavior. Within a micro to macro or bottom-up perspective, the adopted approach is focused in the influence of firms’ ‘institutional settings’ on economic growth and in the industry dynamics that lies behind more aggregate behaviors. The analysis associates such settings to firms’ labor choices in terms of hiring/firing policies and to their screening capabilities. Building a computer simulation model which deals with the nature and evolution of the knowledge that guides firms’ efforts to improve their institutional settings, we were able to draw some important implications. The results show that firm’s ability to change its ‘institutional setting’ is crucial for its survival. In a model without a learning mechanism the results show significant turbulence in terms of exit and entry of firms and no significant connection with the firm’s ‘institutional set’. In the LearnModel, the outcome is much more stable, with initial firms surviving for long period of time. Results also suggest that the presence of a learning mechanism is particularly striking in what concerns firms’ behavior and industry’s dynamics. The survival probability depends on firms’ hiring efficiency and on their ability to react to environmental changes. Since firms’ hiring efficiency and their learning rates depend on their accumulated non-routine workers, the results seem to imply some ‘lock-in’ paths. Firms with initial low values of relative non-routine workers have lower chances of survival. However, firms with initial high values of relative non-routine workers will survive if and only if they rapidly improve their hiring efficiency.

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Bibliographic Info

Paper provided by Universidade do Porto, Faculdade de Economia do Porto in its series FEP Working Papers with number 227.

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Length: 41 pages
Date of creation: Aug 2006
Date of revision:
Handle: RePEc:por:fepwps:227

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Related research

Keywords: evolutionary; industrial dynamics; learning; labor decisions;

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References

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  1. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  2. Aghion, Philippe & Tirole, Jean, 1994. "Formal and Real Authority in Organizations," IDEI Working Papers 37, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. Durlauf, Steven N. & Fafchamps, Marcel, 2005. "Social Capital," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 26, pages 1639-1699 Elsevier.
  4. Denis Gromb, 2007. "Cultural Inertia and Uniformity in Organizations," Journal of Law, Economics and Organization, Oxford University Press, vol. 23(3), pages 743-771, October.
  5. Mata, Jose, 1993. "Entry and type of entrant : Evidence from Portugal," International Journal of Industrial Organization, Elsevier, vol. 11(1), pages 101-122, March.
  6. Sandra Tavares Silva & Aurora Amelia Castro Teixeira & Mário Rui Silva, 2004. "Economics of the Firm and Economic Growth. An hybrid theoretical framework of analysis," FEP Working Papers 158, Universidade do Porto, Faculdade de Economia do Porto.
  7. Marco Valente, 1998. "Laboratory for Simulation Development," DRUID Working Papers 98-5, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
  8. Richard R. Nelson, 1995. "Recent Evolutionary Theorizing about Economic Change," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 48-90, March.
  9. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
  10. Tesfatsion, Leigh S., 2001. "Structure, Behavior, and Market Power in an Evolutionary Labor Market with Adaptive Search," Staff General Research Papers 1914, Iowa State University, Department of Economics.
  11. Kurt Dopfer & John Foster & Jason Potts, 2004. "Micro-meso-macro," Journal of Evolutionary Economics, Springer, vol. 14(3), pages 263-279, 07.
  12. Klepper, Steven, 1996. "Entry, Exit, Growth, and Innovation over the Product Life Cycle," American Economic Review, American Economic Association, vol. 86(3), pages 562-83, June.
  13. Gabriele R. & Fagiolo G. & Dosi G., 2004. "Towards an Evolutionary Interpretation of Aggregate Labor Market Regularities," Computing in Economics and Finance 2004 84, Society for Computational Economics.
  14. Rutherford,Malcolm, 1994. "Institutions in Economics," Cambridge Books, Cambridge University Press, number 9780521451895, October.
  15. Mata, Jose & Portugal, Pedro, 1994. "Life Duration of New Firms," Journal of Industrial Economics, Wiley Blackwell, vol. 42(3), pages 227-45, September.
  16. David Martimort & Thierry Verdier, 2003. "From Inside The Firm to the Growth Process," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 621-629, 04/05.
  17. Richard R. Nelson & Sidney G. Winter, 2002. "Evolutionary Theorizing in Economics," Journal of Economic Perspectives, American Economic Association, vol. 16(2), pages 23-46, Spring.
  18. Esben Sloth Andersen & Anne K. Jensen & Lars Madsen & Martin Jørgensen, 1996. "The Nelson and Winter Models RevisitedPrototypes for Computer-Based Reconstruction of Schumpeterian Competition," DRUID Working Papers 96-5, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
  19. Geroski, P. A., 1995. "What do we know about entry?," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 421-440, December.
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