Media Briefings

Fighting For Talent: How Competition Between Small And Large Firms Leads To Excessive Risk-Taking And Economic Volatility

  • Published Date: October 2009

The reckless policies of big banks may have been affected by competition with smaller and
riskier organisations in the financial industries, such as hedge funds, poaching talented
individuals from their larger competitors. That is one of the conclusions of research by
Guido Friebel and Mariassunta Giannetti, which examines possible sources of ‘boom
and bust’ in the labour market for highly skilled people.
Writing in the October 2009 issue of the Economic Journal, they argue that when consumer
credit is easily available, people will be more willing to risk taking a job with a small firm,
especially people who are highly skilled and employed in innovative industries. That may
well have net benefits for innovation, but it can also encourage all firms to take too many
risks, which can ultimately lead to disaster.
The researchers note the widely observed fact that the fortunes of small organisations are
positively related to the business cycles while large firms seem to lose their edge during
booms. This has its flipside during recessions: at the beginning of the crisis in the
early 2000s, the media were just as full of stories about big is beautiful again as in the
current crisis.
Friebel and Giannetti offer a novel explanation for the relative fortunes of small and large
firms over the business cycle and empirical evidence in its support. They argue that easy
access to finance during expansions affects corporations not only through financial
markets, but also through the labour market, possibly in a perverse way.
The theory provides a new rationale for why easier access to consumer credit may increase
the volatility of the economy. During booms, individuals have easy access to consumer
credit. Friebel and Giannetti argue that when their borrowing constraints relax, employees
change their attitude towards jobs and wage security in large firms.
Rather, they seek riskier jobs in small firms that allow them to realise their own ideas. As
the upside of ideas is particularly important for talented workers, large firms lose their most
creative workers and may become less profitable than small firms.
A high propensity to realise risky ideas has good sides. Think of biotech or electric cars. It
has been Tesla, not the global automobile companies, which has come up with the first
highway-adapted electric cars.
But the theory also highlights the dark sides: the high propensity of start-ups to fund new
ideas may create excessive volatility and affect average firm profits negatively. Having little
at stake, small firms may recklessly fund new ideas and steal the most creative workers
from large firms.
Although their conservatism may be optimal, large firms may adopt policies to commit
themselves to fund more ideas by creating spin-offs and increasing leverage to attract
creative workers. Indeed, large firms – such as Nokia, Philips and many others – started
their own incubators and venture funds to provide opportunities for their employees to go
with their ideas.
In the competition for talent, the reckless risk-taking of small firms may thus infect large
firms. Not surprisingly, these innovative practices are short-lived. When crisis comes,
incubators are dismantled and large firms adopt more conservative behaviour again.
But some large firms may turn out to have taken as much risk as small firms and may fail.
According to this interpretation, large banks’ reckless policies may have been affected by
competition with smaller and riskier organisations in the financial industries, such as hedge
funds, poaching talents from their larger competitors.
The researchers find empirical evidence that is consistent with their theory. A relaxation in
the borrowing constraint is shown to increase the probability that an individual chooses a
job in a small firm, especially if the individual is highly skilled, is employed in innovative
industries and has low initial wealth.
Notes for editors: ‘Fighting for Talent: Risk-taking, Corporate Volatility, and Organisational
Change’ by Guido Friebel and Mariassunta Giannetti is published in the October 2009 issue
of the Economic Journal.
Guido Friebel is at the University of Frankfurt. Mariassunta Giannetti is at the Stockholm
School of Economics.
For further information: contact Mariassunta Giannetti via email:; or Romesh Vaitilingam on 07768-661095 (email: