This paper presents a model of industry dynamics in which worker abilities are complements in production, but frictions permit only gradual sorting among firms. As an industry matures, segregation by skill becomes more marked, the wage distribution widens, and so does the distribution of firm size. Eventually, firms that have ended up with predominantly low-quality workers will exit. The model generates shakeouts with characteristics similar to empirical observation only for intermediate values of entry costs.
Review of Industrial Organization – Springer Journals
Published: Aug 29, 2008
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