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By Brendan O'Flaherty

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Firms aren’t the correct institutional setting because they bind their workers too closely to their tasks. For people to start doing new and innovative things, they have to stop doing the things they were doing before. The people who were counting on them to do the old things will be disappointed if they stop. Firms are set up to avoid this kind of disappointment. They establish rules and incentives so that people can count on other people to continue what they’re doing. If a firm is operating in the countryside, where search costs are high, the costs of someone leaving to do something new are high— finding a new accountant in Montana when your old accountant has left to join Maidenform is not easy—and so firms make it difficult for people to leave (or to do new things within the firm).

References 33 Glaeser, Edward. 1998. ” Journal of Economic Perspectives 12(2):139– 160. Glaeser, Edward, and D. Mare. 1994. “Cities and Skills,” Hoover Institution Working Paper E94-11. Glaeser, Edward, et al. 1992. “Growth in Cities,” Journal of Political Economy 100:1126–1152. Glied, Sherry. 1997. Chronic Condition: Why Health Reform Fails. Cambridge, MA: Harvard University Press. , and William C. Strange. 1991. ” Journal of Urban Economics 29(1):96–112. ———. 2001. ” Journal of Urban Economics 51:25–45.

For AnnaLee Saxenian (1994), this was the major difference between Silicon Valley and the less dynamic computer industry along Route 128 in Massachusetts. She quotes a Silicon Valley entrepreneur who sounds a lot like Jane Jacobs (p. 116): “It would be very difficult for me to do what I’m doing here with DEC on the East Coast . . Back East, I would have to rely on DEC’s internal suppliers and functional groups for everything . . The same job of bringing a new workstation to market takes two times as long in the East Coast and many more people than it does here.

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