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Globalization and the Empowerment of Talent

Globalization and the Empowerment of Talent. Dalia Marin University of Munich and CEPR Thierry Verdier Paris School of Economics and CEPR Institute for Advanced Studies, Vienna June 2011. The New Features of Trade. Fact 1: Explosion of World Trade in Intermediate Goods

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Globalization and the Empowerment of Talent

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  1. Globalizationand the Empowerment of Talent Dalia MarinUniversity of Munich and CEPR Thierry VerdierParis School of Economics and CEPR Institute for Advanced Studies, ViennaJune 2011

  2. The New Features of Trade • Fact 1: Explosion of World Trade in Intermediate Goods • Fact 2: Explosion of Foreign Direct Investment since the early 1990s • Fact 3: Explosion of Executive Pay in the US and In Europe

  3. The Changing Nature of the Corporation • Break up of the conglomerate  focus on ''core competencies'' • Decentralization of decision making  workers empowerment  flatter firm hierarchies • The emergence of ''the talent firm''

  4. Questions What accounts for these changes in the world economy on the one hand and in the nature of the corporation on the other? Why has human capital become so important recently?

  5. Answer Requires a theory of international trade in which the firm organization is endogenous.

  6. International Trade Theory describes the market environment in which firms operate (Helpman and Krugman 1985), but the firm remains a black box The Theory of the Firm focus on the power struggle in a single firm (Aghion and Tirole 1997, Rajan and Zingales 2001), but neglects the market environment (competition in product and factor markets)

  7. Our Contribution We introduce the Aghion-Tirole (AT) theory of the firm into the Helpman-Krugman (HK) theory of international trade to examine the interaction between international trade and corporate organization. We explain how trade leads • to flatter corporate hierarchies • the “war for talent” • The rise of executive pay in rich countries

  8. The Rise of Human Capital traditional explanation • skill-biased technical change • import competition from low-wage countries novel explanation • “war for talent” • change in corporate organization (the emergence of the “talent firm”)

  9. Emerging Literature Endogenous Organizations in General Equilibrium Focus on the Boundaries of Firms Mc Laren 2001, Legros/Newman 2002, Grossman/Helpman 2004, Antras 2003, Antras/Helpman 2004, 2008. Focus on Internal Hierarchies Marin and Verdier 2002, 2004, 2008a, 2008b, 2011 Antras, Garicano, Rossi-Hansberg 2006, Grossman/Rossi- Hansberg 2007

  10. Our Previous Work • Marin and Verdier 2010, 2008 examine how international competition affects corporate organization in similar countries (North-North-Trade) • This paper examines how factor endownments affect corporate organization in dissimilar countries (North-South Trade) • Marin and Verdier (2008b) examines how corporate organization determines firm heterogeneity

  11. The Aghion-Tirole View of the Firm a firm with a simple hierarchy CEO (P) hires division manager (A) to implement a project; both look for projects for the firm There is a conflict of interest between P and A; Payoffs of P and A depend on who’s project is implemented

  12. Formal and Real Power P and A collect information about projects, uninformed party prefers to rubber-stamp the informed party’s suggestion rather than to do nothing → gives decision control to the informed party Two sources of power: ''formal'' power: it is allocated to you ''real'' power: you are better informed

  13. Three Firm Organizations • P-Organization: (integration) P has formal power in the firm P runs the firm with A’s cooperation • A-Organization: (outsourcing) P delegates formal power to A A runs the firm with P’s cooperation • O-Organization: single managed P-firm without internal hierarchy P runs the firm without A’s cooperation

  14. P-organization: P has formal power in the organization (integration) P’s and A’s expected payoffs E probability that P gets informed e probability that A gets informed αB P’s monetary benefit with A’s project βb A’s monetary benefit with P’s project wE2, ke costs of information collection q agent’s wage α, β congruence parameters between P and A with 0 ≤ α, β ≤ 1

  15. Trade-off between Control and Initiative FOC in efforts E and e P: A: P supervises more, A has more initiative, the larger B, the larger b the lower α, the lower E (the larger the conflict) , (the lower P’s interference) the lower e.

  16. A-organization P delegates formal power to A (outsourcing). Delegation increases A’s initiative, because P cannot overrule A’s decision → A has more incentives to become informed Delegation involves P’s loss of control (formal and real)

  17. Optimal Firm Organization What happens to incentives inside the firm when profits gradually increase? No trade-off between control and initiative at low and high profits level The optimal firm organization is

  18. The AT-Firm into HK-Trade Theory 2 countries: human capital rich North; labor rich South 2 factors of production: human capital H; unskilled labor L 2 sectors: Y-sector: homogenous goods, perfect competition X-sector: differentiated goods , monopolistic competition, n firms X-sector more skill intensive than Y-sector 3 organizations in X-sector: P-organization A-organization O-organization unskilled P hires skilled A to start a firm A-firms are more skill intensive than P-firms

  19. Product Markets Consumers preferences over the two goods X and Y Assumption P-firms have lower marginal cost than A-firms

  20. Factor Markets Factor demands depends on the organizational mix in the economy under P-organization under A-organization under O-organization

  21. Three Steps Step 1: Solve the Model for The Closed Economy Step 2: Factor Endowment →Firm’s Mode of Organization Step 3: International Trade →Corporate Organization

  22. How does the Country’s Factor Endowment affect the Choice of Firm Organization?

  23. Rybczynski Theorem of Firm Organization • For each L/H ](L/H)M, (L/H)O[ there exists a unique mixed equilibrium with A-organizations and O-organizations with the following properties • Factor prices are fixed and do not depend on factor endowments. • The fraction of firms choosing an A-organization is given by • For all L/H outside the interval ](L/H)M, (L/H)O[ a mixed organizational equilibrium does not exists. • For each L/H ](L/H)M, (L/H)O[, we have the Rybczynski Theorem of Firm Organization

  24. How does Trade affect the Choice of Firm Organization?

  25. Equilibrium Organization in a Closed Economy What happens to incentives inside the firm when countries become richer in L/H? • Firm organization matters for incentives inside the firm when countries are not too poor and not too rich in L/H. • No trade-off between control and initiative when countries are either poor or rich in L/H. • Countries’ Equilibrium Organization when poor in L/H → P-organization when intermediate in L/H → A-organization when rich in L/H → O-organization

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