Flexibility, Investment and Growth

This paper proposes a model of endogenous growth with diversifiable uncertainty, irreversible investment decisions and imperfect labour mobility. Obstacles to labour reallocation lower the operating profits earned by existing firms and increase the cost of creating new ones, thus reducing investment, growth and welfare in decentralized equilibrium. The model's macroeconomic framework is appropriate for a study of labour contracts, of capital- and labour-market imperfections, and of industrial policy.