Firm Heterogeneity and Inequality: A Regional Perspective

Abstract

Income inequality has increasingly become more ubiquitous within rather than across countries. Yet much of the theorizing has been at macro levels and does not sufficiently account for the firms within regions, which are primary sources of income inequality. Moreover, much of the research that does implicate firms, assumes that firms impact inequality equivalently. It neither accounts for the heterogeneity of firms within regions nor the potential for differential impact from that heterogeneity. Our study challenges these assumptions through a theory that connects a firm’s life cycle and recruiting and compensation strategies to its impact on income inequality within and across regions. We incorporate a set of contingencies that also have the potential to alter the model’s predictions, which are based on external shocks and ownership of the firm. The paper concludes with a discussion of the implications of this model for theory, policy, and practice.