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Flexible Production and Entry: Institutional, Technological, and Organizational Determinants

Sharon Belenzon, Victor Manuel Bennett, Andrea Patacconi

NBER Working Paper No. 25659
Issued in March 2019
NBER Program(s):Labor Studies Program, Productivity, Innovation, and Entrepreneurship Program

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.

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Document Object Identifier (DOI): 10.3386/w25659

Published: Sharon Belenzon & Victor Manuel Bennett & Andrea Patacconi, 2019. "Flexible Production and Entry: Institutional, Technological, and Organizational Determinants," Strategy Science, vol 4(3), pages 193-216.

 
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