RETAINED EARNINGS DYNAMIC, INTERNAL PROMOTIONS AND WALRASIAN EQUILIBRIUM

Pablo Beker

Working Papers. Serie AD from Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie)

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.

Keywords: Industry; Evolution; -; Market; Selection; Hypothesis; -; Production; under; Incomplete; Markets; -; Retained; Earnings; Dynamic; -; Self-Fulfilling; Expectations; -; Internal; Labor; Markets (search for similar items in EconPapers)
JEL-codes: D21 D52 D61 D84 D92 J41 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2004-03
New Economics Papers: this item is included in nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published by Ivie

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http://www.ivie.es/downloads/docs/wpasad/wpasad-2004-14.pdf Fisrt version / Primera version, 2004 (application/pdf)

Related works:
Journal Article: Retained earnings dynamic, internal promotions and Walrasian equilibrium (2008)
Working Paper: RETAINED EARNINGS DYNAMIC, INTERNAL PROMOTIONS AND WALRASIAN EQUILIBRIUM (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:ivi:wpasad:2004-14

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