Working Paper: CEPR ID: DP2707
Authors: Helmut Bester; Emmanuel Petrakis
Abstract: This Paper studies the inter-temporal problem of a monopolistic firm that engages in productivity-enhancing innovations to reduce its labour costs. If the level of wages is sufficiently low, the firm's rate of productivity growth approaches the rate of wage growth and eventually the firm reaches a steady state where its unit labour cost remains constant over time. Otherwise, it will gradually reduce its innovation effort over time and ultimately terminate production. Productivity-dependent wage differentials do not affect productivity growth in the steady state; they increase, however, the firm's long-run equilibrium cost level.
Keywords: Dynamic Programming; Innovation; Labour Productivity; Monopoly; Wage Differentials; Wages
JEL Codes: D24; D42; D92; J30; J51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower initial labor cost (J39) | higher productivity growth (O49) |
| wage growth (J31) | higher productivity growth (O49) |
| productivity-dependent wage differentials (J31) | no effect on productivity growth in steady state (O49) |
| rent sharing (D33) | no inhibition of innovation rates in the long run (O39) |
| wage growth (J31) | long-run productivity growth (O49) |