Heterogeneous Firms, Skill-Biased Management, and Trade
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Within an economy, decentralization of firms would impact on the pattern of labor demand through generating higher-paying jobs for managers, who are delegated for supervision of production workers. This paper presents a tractable general-equilibrium model, which examines the economic impact of management practices on aggregate economy. While decentralization is costly, it does not benefit firms equally. Higher entrepreneurial-skill firms are benefited more than lower entrepreneurial-skill firms because higher-skill entrepreneur draws higher synergy from delegated managers. Thus, firms self-select for decentralization only if the benefit outweighs the cost; centralized firms and decentralized firms coexist. Decentralization dramatizes the firm size distribution. Higher entrepreneurial-skill firms are more efficiently decentralized, more productive, and produce larger outputs. Those firms contribute to increase aggregate income by creating higher-paying jobs but wage inequality deepens. Trade openness widens differences of firm sizes and generates inter-country income distributions when business environment (of average labor skill and status of social trust) differs between two countries. In short, trade gain is larger for a country, where average labor skill is higher, because decentralization is skill-biased. This paper can contribute to the literature of firm heterogeneity, managements, and trade.
Abstract
Within an economy, decentralization of firms would impact on the pattern of labor demand through generating higher-paying jobs for managers, who are delegated for supervision of production workers. This paper presents a tractable general-equilibrium model, which examines the economic impact of management practices on aggregate economy. While decentralization is costly, it does not benefit firms equally. Higher entrepreneurial-skill firms are benefited more than lower entrepreneurial-skill firms because higher-skill entrepreneur draws higher synergy from delegated managers. Thus, firms self-select for decentralization only if the benefit outweighs the cost; centralized firms and decentralized firms coexist. Decentralization dramatizes the firm size distribution. Higher entrepreneurial-skill firms are more efficiently decentralized, more productive, and produce larger outputs. Those firms contribute to increase aggregate income by creating higher-paying jobs but wage inequality deepens. Trade openness widens differences of firm sizes and generates inter-country income distributions when business environment (of average labor skill and status of social trust) differs between two countries. In short, trade gain is larger for a country, where average labor skill is higher, because decentralization is skill-biased. This paper can contribute to the literature of firm heterogeneity, managements, and trade.
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