The Role of Expectation in Job Search and Firm Size Effect on Wages

One of the most puzzling facts in economics is the firm size-wage effect. After controlling for the observable characteristics of workers (age, gender, education, residence etc.), firms (industry, occupation, work conditions etc.) and negotiation effect (unionization), one still finds that the sheer size of a firm increases the wage, contrary to the one-good one-price doctrine. We provide a simple dynamic game model of wage determination to give a new rationale to the firm size-wage effect. We think that the wages are not market clearing prices but strategies by firms. Firms choose wages to control workers' search behavior. The essential feature of the model is that a large firm's history of wages is observable to all the current and future workers, while a small firm is not visible and only its current offer is observable. Therefore a small firm is expected to be a myopic low-wage payer, and its workers search and quit often. A large firm can prevent search if it maintained a high wage throughout the past, thus making workers expect high future wages. In this way, the firm size determines the worker expectations of its future wages, which changes the quit rate and equilibrium wages. To give additional support to our theoretical result, we test a new aspect of firm size-wage effect. Since the effect on wage levels are extensively studied, we derive two main hypotheses on wage gains after job changes. (H1) The proportion of firms that are larger than the previous employer increases the wage gain. (H2) The size of the previous employer decreases the wage gain. The firm size distribution effect (H1) is a new test. We obtain supports for both. Thus we conclude that the wages are strategies and affected by how workers utilize the firm size information in changing jobs. (297 words.)

Chinese managers used to state control have a hard time acting as capitalists

Decision-makers act on their experience, write Henrich R. Greve and Cyndi Man Zhan

How Chinese firms reacted when told to change their share ownership structures

The slowest to comply had few public shares and had ties to the state through their board members, write Henrich R. Greve and Cyndi Man Zhan

Back to basics : behavioral theory and internationalization

International business (IB) scholars’ over-reliance on a select few theories leaves our understanding of firm internationalization incomplete. The behavioral theory of the firm (BTF) can offer new insights and can be used to model a broad range of firm actions. We focus on the three basic BTF components: problemistic search, learning by doing, and vicarious learning. These components help us understand why firm behaviors are more dynamic and heterogeneous than other theories allow. BTF, with its emphasis on how firms assess performance according to aspiration levels, selectively learn and update routines, and selectively incorporate the learning of others, is better suited to examine the diversity and change increasingly observed in internationalization decisions. We explain why scholars should move beyond “dynamizing” static theories and show BTF’s applicability to behaviors involving change such as multi-mode market entries and market re-entries. BTF also helps examine the decision to internationalize in the first place, nascent firm internationalization, location choices, international market adaptation, and headquarter–subsidiary relationships. We encourage IB scholars to use theories that can handle the complexity increasingly associated with modern firm growth, and propose BTF as a promising starting point