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Sorting, Selection, and Industry Shakeouts

  • Peter Thompson

    ()

    (Department of Economics, Florida International University)

  • Mihaela Pintea

    ()

    (Department of Economics, Florida International University)

A number of plausible theories offer explanations for the propensity of many young industries to undergo a shakeout phase, during which the number of firms declines sharply in the face of continued rising output. However, none of the theories considers the role of labor market sorting. This paper presents a model in which individual abilities are complements in production, but frictions permit only gradual sorting among firms. The quality distribution of firms becomes wider over time, inducing exit of firms that have ended up with predominantly low-quality workers. The model does not ensure that a shakeout takes place, but when it does it will be characterized by rising output alongside a declining price, an increasing average wage, and a widening of the distributions across firms of employment, output, productivity and average wages.

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File URL: http://casgroup.fiu.edu/pages/docs/2243/1275228452_07-02.pdf
File Function: First version, 2007
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Paper provided by Florida International University, Department of Economics in its series Working Papers with number 0702.

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Length: 27 pages
Date of creation: Mar 2007
Date of revision:
Handle: RePEc:fiu:wpaper:0702
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