The Third Pillar: How Markets and the State Leave the Community Behind

by Raghuram G. Rajan

The firm value maximising management would train, because it would see the higher wages going to long-term employees not as a cost, but merely a transfer from one set of firm investors (shareholders) to another (long-term employees). It would see the positive increase in revenue net of training costs as the total benefit to the firm. The shift to firm value maximisation is not just good for society (in that a value-enhancing investment takes place, regardless of how the fruits are shared), it is good for employees (since their wages go up), and it is even good for shareholders. This may seem strange since shareholders suffer a direct loss in profits from training the employees. This is where the words ‘specific investment’ and ‘long-term’ come in. If employees are expected to make substantial specific investments in the hotel’s culture over time, they know they are tied to it because they would be reluctant to leave the hotel’s employment and lose the additional wages that come from their specialisation. Conversely, hotel management

Theory of firm value maximisation