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The World Bank Economic Review Advance Access published online on October 5, 2005
The World Bank Economic Review, doi:10.1093/wber/lhi012
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© The Author 2005. Published by Oxford University Press on behalf of the International Bank for Reconstruction and Development/THE WORLD BANK. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org.

Article

Attaching Workers through In-Kind Payments: Theory and Evidence from Russia

Guido Friebel 1* and Sergei Guriev 2*

1 School for Advanced Studies in the Social Sciences (EHESS) and fellow at the Institute of Industrial Economics (IDEI) of Universite des Sciences Sociales de Toulouse
2 Human Capital Foundation associate professor of Corporate Finance, New Economic School, Moscow

* To whom correspondence should be addressed.
Guido Friebel, E-mail: friebel{at}cict.fr
Sergei Guriev, E-mail: sguriev{at}nes.ru


  Abstract

External shocks may cause a decline in the productivity of fixed capital in certain regions of an economy. Exogenous obstacles to migration make it hard for workers in those regions to reallocate to more prosperous regions. In addition, firms may devise "attachment" strategies to keep workers from moving out of a local labor market. When workers are compensated in kind, they find it difficult to raise the cash needed for migration. This endogenous obstacle to migration has not yet been considered in the literature. The article shows that the feasibility of attachment depends on the inherited structure of local labor markets: attachment can exist in equilibrium only if the labor market is sufficiently concentrated. Attachment is beneficial for both employers and employees but hurts the unemployed and the self-employed. An analysis of matched household-firm data from the Russian Federation corroborates the theory.


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