How Do Trading Firms Upgrade Skills and Technology: A Theoretical Model

Abstract

This paper studies the mechanisms of skill upgrading in trading firms by developing a theoretical model that relates the individual’s incentives for acquiring higher skills to the profit-maximizing behaviour of trading firms. The model shows that only the high ability individuals have incentives for acquiring higher skills, as long as they are compensated with higher wages after entering employment. Furthermore, high-productive firms have incentives for investing in higher technology, to employ high-skilled labour, and to engage in international trade. The decisions for technology dress-up and skill upgrading coincide with firm’s decisions to start importing and exporting as the latter requires higher technology and high-skilled labour. Contributions of the paper are twofold: gaining new insights by combining fragments of models on individual’s and firm’s behaviours, and broadening the content of the Melitz (2003) model by introducing importers and controlling for skilled and unskilled labour.

Keywords

• skill upgrading
• technology upgrading
• trading firms