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Learning Within or Outside Firms? Labor Market Frictions and Entrepreneurship

mimeo
Andrea Canidio, Patrick Legros
working paper

When labor mobility is imperfect, employers (firms) will invest in the discovery of their employees’ talent at different tasks; in this case, agents become entrepreneurs only if they have a valuable business idea or cannot find employment. If instead employees can easily move to other firms, employers have little incentive to invest in talent discovery. In this case, an additional motive for entrepreneurship emerges: learning one’s comparative advantage over tasks. We develop such a model and show a causal relationship between the degree of labor-market frictions and the level of entrepreneurial activity; the value of entrepreneurial failures; the payoff of entrepreneurs relative to workers; the wage of former entrepreneurs relative to former workers; the degree of firms’ short-termism; the rate of within-firm talent discovery. The theoretical correlations between these variables are consistent with the evidence available for the US and continental Europe.

This is an extended revision of  “The value of entrepreneurial failures: Task Allocation and Career Concerns”, CEPR DP 11295, 2016 by the same authors.

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How university admissions can help integrate secondary schools

Web Article
Fernanda Estevan, Thomas Gall, Patrick Legros, Andrew Newman
Vox column 23 May 2017

In recent years, several US states have introduced college admission policies that reward local rather than global relative performance by guaranteeing admission to students graduating in the top N-percent of their high school. This column examines how these policies affected socioeconomic and ethnic segregation at both the university and high school levels in the state of Texas. While the policies did not replicate the level of diversity in universities seen under earlier affirmative action policies, they did lead to a reduction in the overall level of ethnic segregation in high schools.

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College Admission and High School Integration

Working Paper
Thomas Gall, Patrick Legros, Andrew Newman
CEPR DP11910

We investigate whether a policy that bases college admission on relative performance at high school could modify in the aggregate the degree of segregation in schools, by inducing some students to relocate to schools that offer weaker competition. In a theoretical model, such high school arbitrage will occur in equilibrium and typically result in desegregating high schools, if schools are segregated with regards to socio-economic characteristics that are correlated with academic performance and race. This is supported by empirical evidence on the effects of the Texas Top Ten Percent Law, indicating that a policy designed to support diversity at the college level in fact achieved high school desegregation, uninten- tionally generating incentives for some students to choose schools strate- gically.

College Diversity and Investment Incentives

Working Paper
Thomas Gall, Patrick Legros, Andrew Newman
this version supersedes CEPR DP 10337, January 2015

We study diversity policies such as affirmative action in college admission in the presence of local peer effects. If students are constrained in making side payments within peer groups, the free market allocation displays excessive segregation relative to the first-best, generating excessively disparate pre-college investments. Effective diversity policy must overcome market forces within as well as across college boundaries. Policies that engender diversity affect pre-college investment incentives. When based on achievement, policies can increase aggregate investment and income, reduce inequality, and increase aggregate welfare relative to the market outcome. They may also be more effective than student cross-subsidization by colleges.

 

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Rock and Roll Bands: (In)Complete Contracts and Creativity

Conference ProceedingsPeer Reviewed Article
Cédrice Ceulemans, Victor Ginsburgh, Patrick Legros
American Economic Review (Proceedings), Volume 101, Issue 3, 2011, 217-221

Members of a rock and roll band are endowed with different amounts of creativity. They come together (match), compose songs, and share credit and royalties for their compositions. The presence of more creative members increases the probability that the band will succeed, but those more creative members may also claim a larger share of the pie. In our theoretical model, the nature of matching (postive or negative assortative) as well as the covariation between the probability of having a hit and the allocation (dispersion) of credit among individual members are a function of the completeness of contracting. When members adopt a “gentleman’s agreement” to share credit equally, the covariation between the probability of a hit and the dispersion of credit is negative–the consequence of positive assortative matching in creativity. The data show that the relation between dispersion and success is significantly negative. In other words, rock bands tend to enter into incomplete contracts.

 

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Co-Ranking Mates: Assortative Matching in Marriage Markets

Peer Reviewed Article
Patrick Legros, Andrew Newman
Economics Letters, Volume 106, 2010, 177-179

We show that co-ranking is the necessary and sufficient condition for assortative matching with strictly nontransferable utility. This condition is equivalent to the GID condition in Legros and Newman (2007) and is a weakening of existing conditions for equilibrium uniqueness.

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Beauty is a Beast, Frog is a Prince -- Assortative Matching with Nontransferabilities

Peer Reviewed Article
Patrick Legros, Andrew Newman
Econometrica, Volume 75, Issue 4, 1073-1102

We present sufficient conditions for monotone matching in environments where utility is not fully transferable between partners these conditions involve not only complementarity in types of the total payoff to a match as in the transferable utility case but also monotonicity in type of the degree of transferability between partners we apply our conditions to study some models of risk sharing and incentive problems deriving new results for predicted matching patterns in those contexts.

 

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The Timing of Education

Conference ProceedingsPeer Reviewed Article
Thomas Gall, Patrick Legros, Andrew Newman
Journal of the European Economic Association (Proceedings), Volume 4, Issue 2-3, May 2006, 427-432

We study an assignment with investment model to higlight a tradeoff between investment in human capital before (ex-ante system) and after (ex-post system) matching on the labor market. The ex-post system is better at coordinating investment within firms while the ex-ante system is better at reducing mismatches. We further show that the ability to transfer surplus within firms affects mismatches and the relative performance of the two systems. At high degrees of transferability they are equivalent but when transferability is very low the ex-post system outperforms the ex-ante system while with moderate transferability the reverse is true.

 

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Monotone Matching in Perfect and Imperfect Worlds

Peer Reviewed Article
Patrick Legros, Andrew Newman
The Review of Economic Studies, Colume 69, Issue , 925-942

We study frictionless matching in large economies with and without market imperfections, providing sufficient conditions for monotone matching that are weaker than those previously known. Necessary conditions, which depend on a key analytical object we call the surplus function, are also offered. Changes in the surplus yield valuable information about the comparative statics of matching patterns across environments. We apply our framework to some examples adapted from the literature, accounting for and extending several comparative-static and welfare results. We also explore the dependence of the matching pattern on the type distribution.

 

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Segregation, Efficiency and Equity

Book Chapter
Patrick Legros, Andrew Newman
in

We compare the welfare and equity properties of two compensation rules for university professors; a laissez-faire policy where universities are free to discriminate between professors of different quality and an equity based compensation where wages must be equalised inside a university. In terms of matching inside universities, the laissez-faire equilibrium involves heterogeneity of types while the other policy leads to segregation. Laissez-faire is always more efficient in terms of surplus and total output. More surprisingly the ex-pst distribution of wages can be more unequal under the “equity based” compensation than under laissez-faire. This illustrates some possibly unintended consequences of well meaning policy makers’ and university administrators’ attempts to maintain equity.

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