Matthias Fischbach Kirill Lindt Globalization and the Empowerment
Matthias Fischbach & Kirill Lindt Globalization and the Empowerment of Talent Dalia Marin, LMU Munich Thierry Verdier, DELTA Paris October 2003
Introduction § Globalization changes firms‘ organizational structure § Observable “Empowerment of Talent“ § Paper offers explanation for this development based on changes in firm organization § Combination of Aghion & Tirole (1997) firm model with Helpman & Krugman (1985) model of trade § Findings: • Trade integration leads to “war for talent“ which induces firms to empower human capital • Shift to skill intensive firms increases demand for skilled labor beyond the usual effect due to a change in output mix Matthias Fischbach & Kirill Lindt 3/5/2021 #2
Introduction § Retrospective on Marin & Verdier (2002): • Introduce AT firm into Dixit-Stiglitz model • Show that identical countries can have different corporate cultures depending on the organization choice of other firms • Find that trade leads to organizational convergence, organizational equilibrium undetermined § NEW in this paper: different countries regarding factor endowments § Ability to predict organizational equilibrium in integrated world economy Matthias Fischbach & Kirill Lindt 3/5/2021 #3
Overview 1. Introduce 2 -sector general equilibrium model for closed economy where firms endogenously choose their form or organization - AT- model of the firm - Product- and Factor Markets - Equilibrium in a Closed Economy 2. Examine impact of varying factor endowments on organizational equilibrium 3. Show that trade may lead to emergence of the “Talent Firm“ and to convergence of corporate cultures Matthias Fischbach & Kirill Lindt 3/5/2021 #4
1. Model with Endog. Firm Organization The Setup § Two goods X, Y § Two production factors L, H § Consumer preferences: § Y is a homogeneous good produced under perfect competition and CRS production function: c. Y(w, q) § X is a bundle of n differentiated goods produced under monopolistic competition Matthias Fischbach & Kirill Lindt 3/5/2021 #5
1. Model with Endog. Firm Organization AT-Model of the firm § X-Sector is formed by n firms consisting of a principal P and an agent A § m available projects / ways to run the firm § Best project for P: payoff B (with marginal costs c. B) § Best project for A: payoff b (with marginal costs cb) § cb = φc. B with φ>1 § P‘s (A‘s) payoff for A‘s (P‘s) best project: αB (βb) Matthias Fischbach & Kirill Lindt 3/5/2021 #6
1. Model with Endog. Firm Organization § Information collection to learn payoffs of projects § Costs for P: g. P(E) = w. E² § Costs for A: g. A(e) = ke with e ϵ [0, ē] and k<b § P is risk neutral, A is infinitely risk averse A gets a fixed wage q equal to his opportunity costs § 3 types of organization: • P-organization = P has formal power • A-organization = A has formal power • O-organization = P has formal power, no coop. with agent Matthias Fischbach & Kirill Lindt 3/5/2021 #7
1. Model with Endog. Firm Organization P-organization § P‘s expected payoff: u. P = EB + (1 -E)eαB - w. E² § A‘s expected payoff: u. A = EβB + (1 -E)eb – ke § Maximize w. r. t. E/e § Principal: B(1 -eα) = 2 w. E § Agent: e = ē if k b(1 -E) = 0 if k > b(1 -E) Matthias Fischbach & Kirill Lindt 3/5/2021 #8
1. Model with Endog. Firm Organization A-organization § P‘s expected payoff: u. P = eαB + (1 -e)EB - w. E² § A‘s expected payoff: u. A = eb + (1 -e)Eβb – ke § Maximize w. r. t. E/e § Principal: B(1 -e) = 2 w. E § Agent: e = ē if k b(1 -βE) = 0 if k > b(1 -βE) Matthias Fischbach & Kirill Lindt 3/5/2021 #9
1. Model with Endog. Firm Organization O-organization § P‘s expected payoff: u. P = EB - w. E² § A‘s expected payoff: u. A = Eβb - ke § Maximize w. r. t. E/e § Principal: B = 2 w. E § Agent: e = 0 Matthias Fischbach & Kirill Lindt 3/5/2021 # 10
1. Model with Endog. Firm Organization The Choice of Firm Organization B/w 0 P-org. A-org. < Matthias Fischbach & Kirill Lindt O-org. < 3/5/2021 # 11
1. Model with Endog. Firm Organization Now Upcoming. . . Product- and Factor Markets & Closed Economy Equilibrium by Matthias Fischbach & Kirill Lindt 3/5/2021 # 12
1. Model with Endog. Firm Organization Product Markets - Demand • Demand for good Y: • Demand for good X: • For convenience, simplify this function with a constant A: Matthias Fischbach & Kirill Lindt 3/5/2021 # 13
1. Model with Endog. Firm Organization Product Markets – Prices and Profits Price in sector Y = marginal cost (perfect competition): Price in sector X with a markup (monopolistic competition): Ø By using demand from previous slide, this results in firm‘s profits: Matthias Fischbach & Kirill Lindt 3/5/2021 # 14
1. Model with Endog. Firm Organization Endogenizing the principals profits: § Since best project for P offers payoff B, we set this equal to firm‘s profit and insert the cost term for P: § Since P‘s payoff for A‘s best project is αB, we just set for α: with φ = cb/c. B Ø Production costs go up, when agent has control in the firm, measured by φ Matthias Fischbach & Kirill Lindt 3/5/2021 # 15
1. Model with Endog. Firm Organization Free Entry Condition Ø expected current profits of firm = fixed startup costs (q for hiring Agent A) § Case of P-organization (P‘s expected payoff rearranged and substituted for Nash equilibrium values – for P-Orga: ): § Case of A-organization § Case of O-Organization Matthias Fischbach & Kirill Lindt Note: q/w is also called the wage gap between skilled and unskilled labor 3/5/2021 # 16
1. Model with Endog. Firm Organization Factor Markets Only shown for P-organization case in detail in the following. § Labor demand from Y-Sector is given by unit input requirements times the produced amount of goods Y § Unit input requirements follow from shepard’s lemma: § Labor share costs for unskilled and skilled (human capital) labor, respectively, are then denoted by: Matthias Fischbach & Kirill Lindt 3/5/2021 # 17
1. Model with Endog. Firm Organization Factor Markets (ctd. ) § Labor demand from X-Sector can be derived on the basis of the firm’s output equation, which depends on the different costs: § Analyzing the different cases of real power in the firm and adding demand from the Y-Sector, we can find aggregate labor demand for unskilled labor: § Substituting with xb, x. B and φ from product markets gives: § The corresponding aggregate demand for skilled capital is simply: Matthias Fischbach & Kirill Lindt 3/5/2021 # 18
1. Model with Endog. Firm Organization Factor Markets (ctd. ) § Both aggregate demands can be further specified by substituting Y. From product market equilibrium we get: § Then, we substitute Nash equilibrium values ( ) Ø This finally leads to the following aggregate demands in the PCase: with Matthias Fischbach & Kirill Lindt for other organizations this derivation works similarly 3/5/2021 # 19
1. Model with Endog. Firm Organization Summing up: Equilibrium in the Closed Economy Basically from the two factor market clearing conditions and the free entry condition, we get for the P-Case: which we simplify to the function that is upward sloping under some assumptions explained in detail in the paper. Matthias Fischbach & Kirill Lindt 3/5/2021 # 20
1. Model with Endog. Firm Organization Equilibrium in the Closed Economy (ctd. ) for comparison the equilibrium is characterized by § in the A-Case: § in the O-Case: Matthias Fischbach & Kirill Lindt 3/5/2021 # 21
1. Model with Endog. Firm Organization Now Upcoming. . . Analysis of the Equilibrium & Rybczinsky Theorem of Firm Org. by Kirill Matthias Fischbach & Kirill Lindt 3/5/2021 # 22
2. Analyzing the Org. Equilibrium Factor endowments and Org. Equilibrium All equilibrium patterns Θi(B/w), i ϵ {P, A, O} are upward sloping in L/H • A rise in L/H leads to excess supply of unskilled labor • B/w has to inrease to restore factor market equilibrium • A rise in B/w increases unskilled labor demand over 2 channels: • B/w leads to expansion of production, which is biased towards the unskilled-labor intensive Y-sector (Rybczynski effect!) • B/w increases monitoring incentives for P, monitoring E is also unskilled-labor intensive • L/H B/w Θi(B/w) Matthias Fischbach & Kirill Lindt 3/5/2021 # 23
2. Analyzing the Org. Equilibrium § ΘA(B/w) lies above the ΘP(B/w) – scedule • A-firms are more skill-intensive than P-firms, because P monitors less and output is lower • Thus for a given increase in L/H, real profits have to rise more to ensure factor market clearing § ΘA(B/w) and ΘO(B/w) cannot be ranked unambiguously • O-curve lies below A-curve for low levels of L/H: low B/w implies low EO*, creating less profitable production opportunities. O-firms are less unskilled labor intensive than A-firms • O-curve lies above A-curve for high levels of L/H: profit opportunities are large which leads to higher EO* and higher output in O-firms, making them more unskilled labor intensive Matthias Fischbach & Kirill Lindt 3/5/2021 # 24
2. Analyzing the Org. Equilibrium Matthias Fischbach & Kirill Lindt 3/5/2021 # 25
2. Analyzing the Org. Equilibrium § Left-hand side: free entry / “war for talent“ curves relate fixed startup costs q/w to real profits B/w § Order of u. P, u. A, u. O equivalent to Θi(B/w) – curves due to similar labor-intensity related argument § Free entry curves q/w are increasing in B/w • B/w more firms want to enter the market • Market entry requires hiring a skilled agent • Human capital constraint binding no further market entry • Firms compete for scarce talent increasing wage gap q/w Matthias Fischbach & Kirill Lindt 3/5/2021 # 26
2. Analyzing the Org. Equilibrium Pattern of Organizational Equilibria (L/H)A (L/H)P (L/H)M (L/H)O L/H 0 P-org. (L/H)A = ΘA( (L/H)P = ΘP( (L/H)A = ΘA( (L/H)A = ΘO( P-org. or A-org. and O-org. ) ) Matthias Fischbach & Kirill Lindt 3/5/2021 # 27
2. Analyzing the Org. Equilibrium Rybczynski Theorem of Firm Organization § For each (L/H) ϵ ](L/H)M, (L/H)P[ there exist a unique mixed organizational equilibrium of A- and O-firms § Factor prices are fixed and do not depend on endowments § The fraction of firms choosing an A-org is given by with § For each (L/H) ϵ ](L/H)M, (L/H)P[ we have Matthias Fischbach & Kirill Lindt 3/5/2021 # 28
2. Analyzing the Org. Equilibrium Now Upcoming. . . The Impact of Trade by Matthias Fischbach & Kirill Lindt 3/5/2021 # 29
3. The Impact of Trade § no transportation cost § equilibirium with factor price equalization North: § human capital rich § low L/H § P-organization in autarky South: § labor rich § high L/H § O-organization in autarky Matthias Fischbach & Kirill Lindt 3/5/2021 # 30
3. The Impact of Trade Matthias Fischbach & Kirill Lindt 3/5/2021 # 31
3. The Impact of Trade Convergence in Corporate Culture and Trade Patterns Matthias Fischbach & Kirill Lindt 3/5/2021 # 32
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