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Retained Earnings Dynamic, Internal Promotions And Walrasian Equilibrium

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  • Pablo F. Beker

    () (Universidad de Alicante)

Abstract

In the early stages of the process of industry evolution, firms are financially constrained and pay different wages because workers have heterogeneous 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 a Walrasian equilibrium. To some extent, it is not technological efficiency but workers' self-fulfilling expectations about their prospects for advancement within the firm what explains which firms have lower unit costs, grow more and dominate the market.

Suggested Citation

  • Pablo F. Beker, 2004. "Retained Earnings Dynamic, Internal Promotions And Walrasian Equilibrium," Working Papers. Serie AD 2004-14, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  • Handle: RePEc:ivi:wpasad:2004-14
    as

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    File URL: http://www.ivie.es/downloads/docs/wpasad/wpasad-2004-14.pdf
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    References listed on IDEAS

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    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.
    2. Blume, Lawrence E. & Easley, David, 2002. "Optimality and Natural Selection in Markets," Journal of Economic Theory, Elsevier, vol. 107(1), pages 95-135, November.
    3. 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.
    4. Arthur, W Brian, 1989. "Competing Technologies, Increasing Returns, and Lock-In by Historical Events," Economic Journal, Royal Economic Society, vol. 99(394), pages 116-131, March.
    5. Armen A. Alchian, 1950. "Uncertainty, Evolution, and Economic Theory," Journal of Political Economy, University of Chicago Press, vol. 58, pages 211-211.
    6. Bernhardt, Dan & Scoones, David, 1993. "Promotion, Turnover, and Preemptive Wage Offers," American Economic Review, American Economic Association, vol. 83(4), pages 771-791, September.
    7. Sidney G. Winter, 1971. "Satisficing, Selection, and the Innovating Remnant," The Quarterly Journal of Economics, Oxford University Press, vol. 85(2), pages 237-261.
    8. 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.
    9. Rosen, Sherwin, 1985. "Implicit Contracts: A Survey," Journal of Economic Literature, American Economic Association, vol. 23(3), pages 1144-1175, September.
    10. 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.
    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.
    12. Beker, Pablo F., 2004. "Are inefficient entrepreneurs driven out of the market?," Journal of Economic Theory, Elsevier, vol. 114(2), pages 329-344, February.
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    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.

    More about this item

    Keywords

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

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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