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

  • Guido Friebel
  • Mariassunta Giannetti

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

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 793.

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Date of creation: 2002
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Handle: RePEc:ces:ceswps:_793
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  1. Raghuram G. Rajan & Luigi Zingales, 1998. "The Governance of the New Enterprise," CRSP working papers 487, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  2. Thomas Hellmann, 2007. "When Do Employees Become Entrepreneurs?," Management Science, INFORMS, vol. 53(6), pages 919-933, June.
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  7. 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.
  8. Laux, Christian, 2001. "Project-Specific External Financing and Headquarters Monitoring Incentives," Journal of Law, Economics and Organization, Oxford University Press, vol. 17(2), pages 397-412, October.
  9. Lazear, Edward P, 1986. "Salaries and Piece Rates," The Journal of Business, University of Chicago Press, vol. 59(3), pages 405-31, July.
  10. Sah, Raaj Kumar & Stiglitz, Joseph E, 1988. "Committees, Hierarchies and Polyarchies," Economic Journal, Royal Economic Society, vol. 98(391), pages 451-70, June.
  11. Pryor, Frederic L., 2001. "Will most of us be working for giant enterprises by 2028?," Journal of Economic Behavior & Organization, Elsevier, vol. 44(4), pages 363-382, April.
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