Working Paper: NBER ID: w25659
Authors: Sharon Belenzon; Victor Manuel Bennett; Andrea Patacconi
Abstract: Academics, the media, and policymakers have all raised concerns about the implications of human workers being replaced by machines or software. Few have discussed the implications of the reverse: firms’ ability to replace capital with workers. We show that this flexibility can help new firms overcome uncertainty and increase entrepreneurial entry. We develop a simple real options model where permissive labor regulations allow firms to take advantage of capital-labor substitutability by replacing ‘rigid’ capital with ‘flexible’ labor. The model highlights institutional, technological, and organizational preconditions to using this flexibility. Using a large and comprehensive dataset on entry by standalone firms and group affiliates, we provide evidence in support of the model.
Keywords: flexible production; entrepreneurial entry; labor market flexibility; capital-labor substitutability
JEL Codes: K22; L22; L23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| flexibility to substitute labor for capital (D24) | higher entry rates into uncertain markets (G19) |
| flexibility of labor regulations (J89) | flexibility to substitute labor for capital (D24) |
| flexibility of labor regulations (J89) | higher entry rates into uncertain markets (G19) |
| standalone firms (L29) | more likely to adopt labor-intensive production strategies in uncertain environments (L23) |
| internal market flexibility (P23) | mitigates rigidities for multiunit organizations (L22) |
| labor rigidity and factor substitutability (J29) | less affected entry rate of group affiliates (L26) |
| firm age and uncertainty resolution (G33) | substitute labor for capital (J24) |
| firm age (L10) | transition from labor-intensive to capital-intensive production strategies (L23) |