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

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  • Mariassunta Giannetti

    (University of Toulouse (EHESS and IDEI) and CEPR)

  • Guido Friebel

    (Stockholm School of Economics CEPR and ECGI)

Abstract

During the nineties, talented workers began to spurn secure jobs in large organizations, which were formerly considered prestigious. They developed more positive attitudes towards jobs in small, innovative startups, although these involved less job security. We build a model that identifies some of the economic forces behind the shift in the supply for talent from large to small firms. Small firms with little capital at stake take excessive risk. They realize more of their workers' risky ideas, which allows to poach creative workers from better capitalized firms. We show that small firms' advantage in attracting creative workers emerges if ideas have ex ante positive net present value and increases if workers can smooth consumption through financial markets. As small firms take excessive risk, average enterprise profitability in the affected sectors decreases, while bankruptcy increases. Moreover, large firms react through inefficient organizational changes. We also provide some empirical evidence consistent with the implications of our theory.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 263.

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Date of creation: 2007
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Handle: RePEc:red:sed007:263

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  1. Guiso, Luigi & Paiella, Monica, 2001. "Risk Aversion, Wealth and Background Risk," CEPR Discussion Papers 2728, C.E.P.R. Discussion Papers.
  2. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1994. "Income Risk, Borrowing Constraints and Portfolio Choice," CEPR Discussion Papers 888, C.E.P.R. Discussion Papers.
  3. Claudio Michelacci & Javier Suarez, 2004. "Business Creation and the Stock Market," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 459-481.
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