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Title: Sub-Optimal Scale Firms and Compensating Factor Differentials in Dutch Manufacturing

Author(s): David B Audretsch, A R Roy Thurik and Geroge Van Leeuwen

Publication Date: April 1995

Keyword(s): Firm Size, Productivity and Wages

Programme Area(s): Industrial Organization

Abstract: The purpose of this paper is to shed some light on why so many smaller-scale firms which have traditionally been classified as sub-optimal scale firms can exist. We suggest that by pursuing a strategy of compensating factor differentials, that is by remunerating and deploying factors of production differently to their larger counterparts, small enterprises are able to compensate for size-inherent cost disadvantages. Based on a sample of over 7000 Dutch manufacturing firms, we find considerable evidence that such a strategy of compensating factor differentials is pursued within a European context. When viewed through a static lens, the existence of such a strategy, while making small and sub-optimal scale enterprises viable, suggests that they impose a net welfare loss on the economy. When viewed through a dynamic lens, however, the findings of a positive relationship between firm age and employee compensation as well as firm age and firm productivity suggest that there may be at least a tendency for the inefficient firm of today to become the efficient firm of tomorrow.

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Bibliographic Reference

Audretsch, D, Thurik, A and Van Leeuwen, G. 1995. 'Sub-Optimal Scale Firms and Compensating Factor Differentials in Dutch Manufacturing'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1162