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Wage Concessions and Debt Forgiveness as Strategic Responses to Financial Distress

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  • David Margolis

    (Crest)

  • Pascale Viala

    (Crest)

Abstract

We propose a model of strategic interactions betweeen a firm, its workers and its creditors in a dynamic, uncertain environment. We show that the firm can play if one stakeholder against another increases the likehood and magnitude of concessions being made, either on a bilateral or trilateral basis. Debt is shown to undermine the firm's ability to commit to an increasing wage-seniority profile, which brings about the classic Williamson (1985) holdup phenomenon when workers invest in firm-specific human capital.
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  • David Margolis & Pascale Viala, 1998. "Wage Concessions and Debt Forgiveness as Strategic Responses to Financial Distress," Working Papers 98-04, Center for Research in Economics and Statistics.
    • Handle: RePEc:crs:wpaper:98-04
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