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Asset Specificity, Human Capital Acquisition, and Labor Market Competition

Listed author(s):
  • MORITA, Hodaka
  • TANG, Cheng-Tao
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    Firms let their employees operate assets to produce goods and services. Firm-specificity of asset and human capital, key concepts of transaction cost economics and labor economics respectively, play important roles in determining firms' productivity and welfare consequences of their competition. How are the degrees of firm-specificity of asset and human capital determined? We address this question through exploring a new model that captures interconnections among asset specificity, human capital acquisition, managerial capability, and labor mobility. We consider a two-period model with two firms, where period 1 is the skill-acquisition period and period 2 is the output period. In the beginning of period 1, each firm chooses a level of its asset specificity and employs a certain number of workers from the labor market. The level of asset specificity is interpreted as the extent to which the firm tailors its asset to the unique features of the firm's business strategies and products. A firm's second-period productivity is determined by its managerial capability, the extent to which its asset is tailored, and its workers' familiarity with its asset specificity. Managerial capability here means the capability of a firm's top management to develop an effective strategy and create a unique competitive position. We find that, as the importance of managerial capability increases, the labor mobility increases, and both the level of asset specificity and firm size decrease. When a firm chooses the specificity of its asset and the number of workers it employs in period 1, it estimates how many workers it will retain and how many workers it will hire from its rival in period 2. A higher importance of managerial capability increases the difference of period 2 productivity between a high-capability and a low-capability firm. Then, as the importance of managerial capability increases, each firm anticipates higher labor mobility, because a larger number of workers will move from a low-capability to a high-capability firm. Anticipation of higher labor mobility, in turn, reduces each firm's incentives to hire more workers and increase the level of asset specificity in period 1. We discuss implications of our model in the contexts of cross-industry and cross-country comparisons. In a newly emerging industry or in a business undergoing revolutionary technological changes, a business's success critically depends on the quality of its strategic decision making because these industries face a high level of uncertainty. Whereas in industries facing lower levels of uncertainty, strategic decision making is less important. These arguments suggest that the importance of managerial capability is higher in the former types of industries, and the importance tends to be lower in the latter types of industries. Our model then predicts that labor mobility is higher, specificity of asset and human capital is lower, and average firm size is smaller in industries of the former type and vice-versa in industries of the latter type. Also, as the economy makes a transition from industrial capitalism to post-industrial capitalism, modern economies are becoming increasingly knowledge intensive which renders the disadvantage to the firms that heavily rely on physical assets. Our model yields new implications regarding the consequences of the transition.

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    File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/28294/1/070_hiasDP-E-42.pdf
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    Paper provided by Hitotsubashi Institute for Advanced Study, Hitotsubashi University in its series Discussion paper series with number HIAS-E-42.

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    Length: 32 p.
    Date of creation: Jan 2017
    Handle: RePEc:hit:hiasdp:hias-e-42
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    1. Chong-En Bai & Yijiang Wang, 2003. "Uncertainty in Labor Productivity and Specific Human Capital Investment," Journal of Labor Economics, University of Chicago Press, vol. 21(3), pages 651-676, July.
    2. Emin Dinlersoz & Glenn MacDonald, 2009. "The Industry Life-Cycle of the Size Distribution of Firms," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(4), pages 648-667, October.
    3. Wallace, T D & Ihnen, L A, 1975. "Full-Time Schooling in Life-Cycle Models of Human Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 83(1), pages 137-155, February.
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    5. Hideo Owan, 2004. "Promotion, Turnover, Earnings, and Firm-Sponsored Training," Journal of Labor Economics, University of Chicago Press, vol. 22(4), pages 955-978, October.
    6. Jed DeVaro & Hodaka Morita, 2013. "Internal Promotion and External Recruitment: A Theoretical and Empirical Analysis," Journal of Labor Economics, University of Chicago Press, vol. 31(2), pages 227-269.
    7. Yoram Ben-Porath, 1967. "The Production of Human Capital and the Life Cycle of Earnings," Journal of Political Economy, University of Chicago Press, vol. 75, pages 352-352.
    8. Kambayashi, Ryo & Kato, Takao, 2011. "Long-term Employment and Job Security over the Last Twenty-Five Years: A Comparative Study of Japan and the U.S," IZA Discussion Papers 6183, Institute for the Study of Labor (IZA).
    9. Gibbons, Robert, 2005. "Four forma(lizable) theories of the firm?," Journal of Economic Behavior & Organization, Elsevier, vol. 58(2), pages 200-245, October.
    10. Hashimoto, Masanori, 1981. "Firm-Specific Human Capital as a Shared Investment," American Economic Review, American Economic Association, vol. 71(3), pages 475-482, June.
    11. Tsutomu Shibata, 2006. "Japan, Moving Toward a More Advanced Knowledge Economy : Volume 1. Assessment and Lessons," World Bank Publications, The World Bank, number 7081, August.
    12. Katsuhito Iwai, 2002. "The Nature of the Business Corporation: Its Legal Structure and Economic Functions," The Japanese Economic Review, Japanese Economic Association, vol. 53(3), pages 243-273.
    13. Michael D. Whinston, 2003. "On the Transaction Cost Determinants of Vertical Integration," Journal of Law, Economics and Organization, Oxford University Press, vol. 19(1), pages 1-23, April.
    14. Jan Zábojník & Dan Bernhardt, 2001. "Corporate Tournaments, Human Capital Acquisition, and the Firm Size—Wage Relation," Review of Economic Studies, Oxford University Press, vol. 68(3), pages 693-716.
    15. Masten, Scott E, 1984. "The Organization of Production: Evidence from the Aerospace Industry," Journal of Law and Economics, University of Chicago Press, vol. 27(2), pages 403-417, October.
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