FLEXIBILITY, INVESTMENT, AND GROWTH

This paper proposes a model of growth with diversifiable microeconomic uncertainty and uses it to study the efficiency costs and distributional effects of obstacles to labor mobility. Labor mobility costs reduce private and social returns to irreversible investment decisions, decrease the speed of capital accumulation, and lower a representative agent's welfare. They can however shift income distribution towards 'workers', or individuals who own no accumulated factors of production and have no incentives to save any portion of their income flows in balanced-growth equilibrium. This may help explain why labor's political representatives often favor provisions which decrease socially desirable labor mobility.