JOURNAL OF Economic Dynamics & Control Learning by observation within the firm

This paper explores the implications of learning by observation on the production and wage decisions of a firm. Firms are viewed as collective arrangements that enable workers to share information. This information takes the form of productivity-enhancing innova-tions and is the product of research by workers. Some workers may choose to free ride on the research of others; and the firm, by its choice of wage profiles, can affect the amount of research done. The production function of a firm is then derived from the technology of learning, as constrained by the incentives of workers. The qualitative properties of the production function ~ most importantly, the nature of returns to scale and the incentives to limit firm size ~ are shown to depend on the behaviour and objectives of the firm