Why Do Large Firms Willingly Pay High Wages in Developing Countries?

Hongbin Cai (), Miaojun Wang and Se Yan

MPRA Paper from University Library of Munich, Germany

Abstract: Using a simple game-theoretical model, this paper provides a new explanation for why large firms in developing economies may willingly pay higher wages than market wage rate. We show that large firms can strategically create entry barriers to the modern sector by setting high wage standards. They may do so to reduce competition or to distort the government's resource allocation. Focusing on the latter case, we also show that the size of the primitive sector will be larger than the efficient level, and public resource allocation will be biased in favor of incumbent large businesses despite the benevolent nature of the government. Using a survey of Chinese industrial firms, we find that industrial concentration is positively correlated with the size-wage effect, and such effect is stronger in less developed provinces. These findings are consistent with our theoretical prediction.

Keywords: size-wage effect; entry deterrence; government resource allocation (search for similar items in EconPapers)
JEL-codes: J21 J31 J42 L11 (search for similar items in EconPapers)
Date: 2014-02
New Economics Papers: this item is included in nep-bec, nep-cwa, nep-lab, nep-lma and nep-sog
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:53538

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