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A Theory of the Firm with Non-Binding Employment Contracts

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  • Asher Wolinsky

Abstract

The purpose of this paper is ti develop the theory of the firm to get better understanding of situations in which individual employees enjoy some bargaining power in their relations with the firm, and in which the terms of employment are determined and adjusted through individual contracting and recontracting with the firm. The main elements of the situations studied here are that the employees are not organized, that the employment contracts are nonbinding or at least not for very long, and that the firm has opportunities to replace employees. The paper develops analyzes a dynamic model in which the processes of contarcting and re-contracting between the firm and its employees are intertwined with the dynamic evolution of the firm's workforce. The analysis of the model is somewhat complicated because the employmest level is a non-degenerate state variable that evolves over time and is affected by past decisions. The main analytical results characterize certain important equilibria: the profit maximizing, profit minimizing and stationary equilibria. The unique stationary equilibrium is markedly inefficient: it exhibits inefficient over-employment and the steady state wages coincide with the workers' reservation wage. It confirms earlier results derived by Stole and Zwiebel (1996a,b) in the contextof a static model and shows that they are very robust even when the firm has nearly frictionless hiring opportunities. In contrast, the profit maximizing equilibrium captures a very different pattern. The outcome is nearly efficient and the wage exhibits a mark-up over the reservation wage. The path of the wages exhibits an interesting behavior--it declines sharply when it reaches its steady state level

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Bibliographic Info

Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 68 (2000)
Issue (Month): 4 (July)
Pages: 875-910

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Handle: RePEc:ecm:emetrp:v:68:y:2000:i:4:p:875-910

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  1. Horn, Henrik & Wolinsky, Asher, 1988. "Worker Substitutability and Patterns of Unionisation," Economic Journal, Royal Economic Society, vol. 98(391), pages 484-97, June.
  2. Stole, Lars A & Zwiebel, Jeffrey, 1996. "Intra-firm Bargaining under Non-binding Contracts," Review of Economic Studies, Wiley Blackwell, vol. 63(3), pages 375-410, July.
  3. Matthew O. Jackson & Asher Wolinsky, 1995. "A Strategic Model of Social and Economic Networks," Discussion Papers 1098R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Stole, Lars A & Zwiebel, Jeffrey, 1996. "Organizational Design and Technology Choice under Intrafirm Bargaining," American Economic Review, American Economic Association, vol. 86(1), pages 195-222, March.
  5. Henrick Horn & Asher Wolinsky, 1988. "Bilateral Monopolies and Incentives for Merger," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 408-419, Autumn.
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Cited by:
  1. Baccara, Mariagiovanna & Razin, Ronny, 2004. "Curb Your Innovation: Corporate Conservatism in the Presence of Imperfect Intellectual Property Rights," CEPR Discussion Papers 4466, C.E.P.R. Discussion Papers.
  2. Pierre Cahuc & Fabien Postel-Vinay & Jean-Marc Robin, 2006. "Wage Bargaining with On-the-Job Search: Theory and Evidence," Econometrica, Econometric Society, vol. 74(2), pages 323-364, 03.
  3. Monique Ebell & Christian Haefke, 2002. "Product market deregulation and labor market outcomes," Economics Working Papers 726, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2003.
  4. Gabriel Felbermayr & Julien Prat, 2011. "Product Market Regulation, Firm Selection, And Unemployment," Journal of the European Economic Association, European Economic Association, vol. 9(2), pages 278-317, 04.
  5. Marc-Andreas Muendler & Sascha O. Becker, 2010. "Margins of Multinational Labor Substitution," American Economic Review, American Economic Association, vol. 100(5), pages 1999-2030, December.
  6. Marini, Marco A., 2005. "The value of a new idea: knowledge transmission, workers' mobility and market structure," MPRA Paper 1687, University Library of Munich, Germany, revised Jan 2006.
  7. Björnerstedt, Jonas & Westermark, Andreas, 2006. "Bargaining and Strategic Discrimination," Working Paper Series 2006:6, Uppsala University, Department of Economics.
  8. Catherine de Fontenay & Joshua Gans, 2004. "Sequential Bilateral Bargaining and the Shapley value," Econometric Society 2004 Australasian Meetings 84, Econometric Society.
  9. Catherine C. de Fontenay & Joshua S. Gans, 2003. "Organizational Design and Technology Choice under Intrafirm Bargaining: Comment," American Economic Review, American Economic Association, vol. 93(1), pages 448-455, March.
  10. Mumcu, Ayşe, 1999. "Firm-Specific Skills, Wage Bargaining, and Efficiency," MPRA Paper 1913, University Library of Munich, Germany.

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