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The Brother-In-Law Effect

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  • David K. Levine
  • Federico Weinschelbaum
  • Felipe Zurita

Abstract

When a firm is forced to pay abnormally high wages, hiring transfers rents. This effectively endows the employer with the ability to grant favors, and he may wish to do so even at some cost to efficient production. We refer to this as the "brother-in-law effect". This article analyzes its consequences. When the brother-in-law effect is due to unionization, decisions regarding both the number and type of workers employed could be inefficient; overemployment could obtain even relative to the workforce that would be employed without unionization. We also identify cases in which nepotism improves efficiency. Copyright (2010) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 51 (2010)
Issue (Month): 2 (05)
Pages: 497-507

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Handle: RePEc:ier:iecrev:v:51:y:2010:i:2:p:497-507

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References

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  1. Goldberg, Matthew S, 1982. "Discrimination, Nepotism, and Long-Run Wage Differentials," The Quarterly Journal of Economics, MIT Press, vol. 97(2), pages 307-19, May.
  2. Canice Prendergast & Robert H. Topel, 1993. "Favoritism in Organizations," NBER Working Papers 4427, National Bureau of Economic Research, Inc.
  3. Sebastian Galiani & Paul Gertler & Ernesto Schargrodsky, 2002. "The Benefits and Costs of Privatization in Argentina: A Microeconomics Analysis," Working Papers 53, Universidad de San Andres, Departamento de Economia, revised Sep 2002.
  4. Federico Sturzenegger & Ernesto Schargrodsky & Sebastian Galiani & Paul Gertler, 2003. "The Costs and Benefits of Privatization in Argentina: A Microeconomic Analysis," Research Department Publications 3148, Inter-American Development Bank, Research Department.
  5. Alberto Chong & Florencio Lopez-de-Silanes, 2004. "Privatización en México," Research Department Publications 4374, Inter-American Development Bank, Research Department.
  6. Shleifer, Andrei & Vishny, Robert W, 1994. "Politicians and Firms," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 995-1025, November.
  7. James Andreoni & John Miller, 2002. "Giving According to GARP: An Experimental Test of the Consistency of Preferences for Altruism," Econometrica, Econometric Society, vol. 70(2), pages 737-753, March.
  8. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
  9. Jose E. Galdon-Sanchez & James A. Schmitz, Jr., 2003. "Competitive pressure and labor productivity: world iron ore markets in the 1980s," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 9-23.
  10. Alberto Chong & Florencio López-de-Silanes, 2005. "Privatization in Latin America : Myths and Reality," World Bank Publications, The World Bank, number 7461, October.
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Cited by:
  1. Bramoullé, Y. & Goyal, S., 2009. "Favoritism," Cambridge Working Papers in Economics 0942, Faculty of Economics, University of Cambridge.
  2. Roberto Cortes Conde, 2008. "Spanish America Colonial Patterns: The Rio de La Plata," Working Papers 96, Universidad de San Andres, Departamento de Economia, revised Mar 2008.
  3. Zudenkova, Galina, 2011. "Cronyism in Business, Public Sector and Politics," MPRA Paper 30231, University Library of Munich, Germany.
  4. Natalia Montinari & Antonio Nicolo & Regine Oexl, 2012. "Mediocrity and induced reciprocity," Working Papers 2012-19, Faculty of Economics and Statistics, University of Innsbruck.

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