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Retained Earnings Dynamic, Internal Promotions and Walrasian Equilibrium

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  • Beker, Pablo F

    (Department of Economics, University of Warwick)

Abstract

In the early stages of the process of industry evolution, firms are financially constrained and might pay different wages to workers according to their expectations about the prospects for advancement offered by each firm’s job ladder. This paper argues that, nevertheless, if the output market is competitive, the positive predictions of the perfectly competitive model are still a good description of the long run outcome. If firms maximize the discounted sum of constrained profits, financing expenditure out of retained earnings, profits are driven down to zero as the perfectly competitive model predicts. Ex ante identical firms may follow different growth paths in which workers work for a lower entry-wage in firms expected to grow more. In the steady state, however, workers performing the same job, in ex-ante identical firms, receive the same wage. I explain when the long run outcome is efficient, when it is not, and why firms that produce inefficiently might drive the efficient ones out of the market even when the steady state has the positive properties of aWalrasian equilibrium. To some extent, it is not technological efficiency but workers’ self-fulfilling expectations about their prospects for advancement within the firm that explains which firms have lower unit costs, grow more, and dominate the market.

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Bibliographic Info

Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 813.

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Length: 41 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:wrk:warwec:813

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Keywords: Industry Evolution ; Market Selection Hypothesis ; Production under Incomplete Markets ; Retained Earnings Dynamic ; Self-Fulfilling Expectations ; Internal Labor Markets;

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  1. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  2. Beker, Pablo F, 2007. "Retained Earnings Dynamic, Internal Promotions and Walrasian Equilibrium," The Warwick Economics Research Paper Series (TWERPS) 813, University of Warwick, Department of Economics.
  3. Bernhardt, Dan & Scoones, David, 1993. "Promotion, Turnover, and Preemptive Wage Offers," American Economic Review, American Economic Association, vol. 83(4), pages 771-91, September.
  4. Lawrence E. Blume & David Easley, 1997. "Optimality and Natural Selection in Markets," GE, Growth, Math methods 9712003, EconWPA, revised 09 Jul 1998.
  5. Beker, Pablo F., 2004. "Are inefficient entrepreneurs driven out of the market?," Journal of Economic Theory, Elsevier, vol. 114(2), pages 329-344, February.
  6. Armen A. Alchian, 1950. "Uncertainty, Evolution, and Economic Theory," Journal of Political Economy, University of Chicago Press, vol. 58, pages 211.
  7. Sherwin Rosen, 1985. "Implicit Contracts: A Survey," NBER Working Papers 1635, National Bureau of Economic Research, Inc.
  8. Malcomson, James M, 1984. "Work Incentives, Hierarchy, and Internal Labor Markets," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 486-507, June.
  9. Sidney G. Winter, 1964. "Economic "Natural Selection" and the Theory of the Firm," LEM Chapters Series, in: Yale Economic Essays, pages 225-272 Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  10. Winter, Sidney G, 1971. "Satisficing, Selection, and the Innovating Remnant," The Quarterly Journal of Economics, MIT Press, vol. 85(2), pages 237-61, May.
  11. Feldman, Mark & Gilles, Christian, 1985. "An expository note on individual risk without aggregate uncertainty," Journal of Economic Theory, Elsevier, vol. 35(1), pages 26-32, February.
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Cited by:
  1. Beker, Pablo F., 2008. "Retained earnings dynamic, internal promotions and Walrasian equilibrium," Journal of Economic Theory, Elsevier, vol. 139(1), pages 114-156, March.

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