Working Paper: CEPR ID: DP2975
Authors: Pierre-Philippe Combes; Gilles Duranton
Abstract: When firms cluster in the same local labour market, they face a trade-off between the benefits of labour pooling (i.e., access to workers whose knowledge helps reduce costs) and the costs of labour poaching (i.e., loss of some key workers to competition and the indirect effect of a higher wage bill to retain the others). We explore this trade-off in a duopoly game. Depending on market size and on the degree of horizontal differentiation between products, we characterize the strategic choices of firms regarding locations, wages, poaching and prices. Our results show that co-location, although it is always efficient, is not in general the equilibrium outcome.
Keywords: agglomeration; firm clustering; labour poaching; labour pooling
JEL Codes: J60; L13; R32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Labor Market Pooling (J68) | Efficiency of Firms (D21) |
| Labor Poaching (J79) | Overall Wage Bills (J31) |
| Co-location (Y80) | Increased Labor Poaching (J79) |
| Increased Labor Poaching (J79) | Reduction in Competitive Advantage (L15) |
| Market Competition Increases (L13) | Incentive to Raise Wages Increases (J38) |
| Incentive to Raise Wages Increases (J38) | Mitigation of Labor Pooling Benefits (J68) |
| Perfect Competition (D41) | Firms Likely to Separate (L22) |
| Higher Wages (J31) | Decreased Poaching (Q57) |