Firm Dynamics and Labor Market Consequences

Abstract

This article explores a new model of firm dynamics that incorporates workers, their accumulation of specific human capital, and their mobility. A firm's production efficiency is determined by the levels of its managerial capability and its workers' firm-specific human capital in the model. Elaborating on the connection between firm dynamics and specific human capital, I show that the importance of managerial capability systematically influences firm dynamics and employment practices. The model offers a new perspective on the public policy implications of apparently anticompetitive entry restrictions. By incorporating a government that can enforce entry regulations in the model, I demonstrate that entry restrictions can improve welfare by mitigating the underinvestment problem in specific human capital. The Author 2010. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.