Corporate governance, firm dynamics, and wage inequality

Abstract

This paper investigates the distributive and welfare effects of corporate governance with firm competition. In the short run, where the number of manufacturing firms is given, a better corporate governance can raise both of the skilled and unskilled wage rates, but the skilled-unskilled wage gap will be widened in the economy. Nonetheless, in the long run, a better corporate governance causes manufacturing firms to exit, which in turn reallocates some capital to the agricultural sector. This benefits unskilled workers and raises their wages, while reducing the skilled wage rate via the firm-exit effect. The exit of manufacturing firms mitigates the issue of excessive entry of firms, which can improve social efficiency in the long run. As a result, the optimal level of corporate governance is higher in the long run.