Working Paper: CEPR ID: DP1162
Authors: David B. Audretsch; George van Leeuwen; Bert J. Menkveld; Roy Thurik
Abstract: The purpose of this paper is to shed some light on why so many smaller-scale firms which have traditionally been classified as sub-optimal scale firms can exist. We suggest that by pursuing a strategy of compensating factor differentials, that is by remunerating and deploying factors of production differently to their larger counterparts, small enterprises are able to compensate for size-inherent cost disadvantages. Based on a sample of over 7000 Dutch manufacturing firms, we find considerable evidence that such a strategy of compensating factor differentials is pursued within a European context. When viewed through a static lens, the existence of such a strategy, while making small and sub-optimal scale enterprises viable, suggests that they impose a net welfare loss on the economy. When viewed through a dynamic lens, however, the findings of a positive relationship between firm age and employee compensation as well as firm age and firm productivity suggest that there may be at least a tendency for the inefficient firm of today to become the efficient firm of tomorrow.
Keywords: firm size; wages; productivity
JEL Codes: L0; O3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| smaller firms (L25) | compensating factor differentials (J31) |
| compensating factor differentials (J31) | firm viability (G32) |
| firm age (L10) | employee compensation (M52) |
| firm age (L10) | productivity (O49) |
| compensation gap narrowing (J31) | smaller firms increasing size (L25) |