Firm-Specificity of Asset, Managerial Capability, and Labor Market Competition

Abstract

We develop a model that captures the link between specificity of a firm’s asset and capability of the firm’s top management, two important sources of profitability. It contributes to strands of economics and management literature by proposing a logic through which firm-specificity and heterogeneity are determined endogenously through labor market competition. Higher importance of managerial capability raises labor mobility, which reduces firm-specificity of asset and human capital, and firm size, whereas higher importance of asset specificity yields opposite effects. We discuss how our model results can enrich a prediction of transaction cost economics on the relationship between uncertainty and governance structure. Also, we discuss implications of our model in the contexts of cross-stage comparisons within an industry’s life-cycle and cross-country differences.

Keywords: Asset Specificity, Managerial Capability, Firm Size, Labor Turnover

JEL Classification: J24, J30, L13