Articles & Summaries in Economics, Political Science, Psychology, & More

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iii) The third possible direction is to introduce degrees of learning or differing degrees of employee ability. Here, one might think of a standard signaling story in which ex ante only the employee’s ability is known with some precision. Hence, the learning will be a function of ability and will not be known to the employer (he would only be able to estimate it based on the signal). In that case, high enough variance in the signals may also drive back the results to resemble those of Franco and Mitchell. Here, yet again, there may be a need for CNCs to move closer to the unachievable, otherwise first-best contract.

Instances of Production Knowledge Information Symmetry

The hypothesis proposed by Franco and Mitchell implies that if information asymmetry (regarding the knowledge that an employee has of the production technology developed by the firm) were reduced in an industry, that industry should show less agglomeration. This result is based on the crucial assumption made by the authors that the employer does not know whether his employee has learned the technology developed at the firm. Thus, if the assumption of asymmetry is relaxed and CNCs are not allowed, the optimal contract becomes. If the combined employer’s and employee’s profits given by the employee having learned and left the firm is less than the employer’s profit given by the employee having learned and stayed with the firm , and if the employer’s profit given by the employee having learned and staying with the firm is greater than the profits given by the opposite case , the employer has the incentive to offer an incentive for the employee not to leave. As long as holds, the employer will be able to offer compensation that eliminates the employee’s incentive to leave the firm. Thus, greater symmetry should reduce the number of spinouts, and hence, reduce industry agglomeration.

However, observation of agglomeration effects in industries with arguably greater symmetry than the Silicon Valley industry does not always imply this. The shoe manufacturing industry is one that does not require highly skilled labor. One can deduce that workers higher in the management hierarchy or with better training can easily learn any innovation within the firm, and the employer will have knowledge of this. Thus, the greater symmetry of information in the shoe industry should result in less agglomeration, and one that is diminishing over time. However, Olav Sorenson and Pino G. Audia show in their paper entitled “The Social Structure of Entrepreneurial Activity: Geographic Concentration of Footwear Production in the United States” that the agglomeration in the shoe manufacturing industry is significant and persistent through time.

A similar case is that of the watch manufacturing industry. Historically, the best watches have been those made by hand. This process involved highly trained laborers who were involved in most of the manufacturing process. Again, it is reasonable to conclude that an experienced watchmaker in a firm will learn any innovations, and the employer will know it. In this case greater symmetry should result in less agglomeration; however, in Europe, for example, the watch making industry has historically been concentrated in Switzerland.

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