Why Do Large Firms Willingly Pay High Wages in Developing Countries?
AbstractUsing a simple game-theoretical model, this paper provides a new explanation for why large firms in developing economies may willingly pay higher wages than market wage rate. We show that large firms can strategically create entry barriers to the modern sector by setting high wage standards. They may do so to reduce competition or to distort the government's resource allocation. Focusing on the latter case, we also show that the size of the primitive sector will be larger than the efficient level, and public resource allocation will be biased in favor of incumbent large businesses despite the benevolent nature of the government. Using a survey of Chinese industrial firms, we find that industrial concentration is positively correlated with the size-wage effect, and such effect is stronger in less developed provinces. These findings are consistent with our theoretical prediction.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 53538.
Date of creation: Feb 2014
Date of revision:
size-wage effect; entry deterrence; government resource allocation;
Find related papers by JEL classification:
- J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
- J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
- J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-02-15 (All new papers)
- NEP-BEC-2014-02-15 (Business Economics)
- NEP-LAB-2014-02-15 (Labour Economics)
- NEP-LMA-2014-02-15 (Labor Markets - Supply, Demand, & Wages)
- NEP-SOG-2014-02-15 (Sociology of Economics)
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