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Positional Wages, Market Wages and Firm Size

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Author Info
Rene van den Brink () (Department of Economics, Free University Amsterdam)
Pieter H.M. Ruys () (Dept. of Econometrics & Operational Research, Tilburg University)

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Abstract

We model a firm in an institutional market setting, consisting of a production technology and its governance. The governance consists of a hierarchical firm structure, a cost efficiency parameter,and an internal pay system. The depth of the firm is determined by profit maximization under the participation restriction that lowest wages meet reservation wages. Reservation wages are endogenously determined in the institutional market economy. We give conditions guaranteeing a finite optimal firm size. Using CES-production technologies we illustrate how firm size depends on labor substitutability, and show that a linear technology yields the deepest structure and a complementary the flattest structure.

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Publisher Info
Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 05-020/1.

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Date of creation: 14 Feb 2005
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Handle: RePEc:dgr:uvatin:20050020

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Related research
Keywords: Optimal firm size; governance; hierarchy; internal organization structure; cooperative game; permission value; labor substitutability; general equilibrium;

Find related papers by JEL classification:
D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Maskin, Eric & Qian, Yingyi & Xu, Chenggang, 2000. "Incentives, Information, and Organizational Form," Review of Economic Studies, Blackwell Publishing, vol. 67(2), pages 359-78, April.
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  2. Rothschild, R., 2001. "On the use of a modified Shapley value to determine the optimal size of a cartel," Journal of Economic Behavior & Organization, Elsevier, vol. 45(1), pages 37-47, May. [Downloadable!] (restricted)
  3. Raghuram G. Rajan & Luigi Zingales, 1998. "Power In A Theory Of The Firm," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 387-432, May. [Downloadable!] (restricted)
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  4. Teece, David J., 1996. "Firm organization, industrial structure, and technological innovation," Journal of Economic Behavior & Organization, Elsevier, vol. 31(2), pages 193-224, November. [Downloadable!] (restricted)
  5. Raghuram G. Rajan & Luigi Zingales, 2001. "The Firm As A Dedicated Hierarchy: A Theory Of The Origins And Growth Of Firms," The Quarterly Journal of Economics, MIT Press, vol. 116(3), pages 805-851, August. [Downloadable!] (restricted)
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  6. Kessler, Anke S., 2000. "On Monitoring and Collusion in Hierarchies," Journal of Economic Theory, Elsevier, vol. 91(2), pages 280-291, April. [Downloadable!] (restricted)
  7. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-58, December. [Downloadable!] (restricted)
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  8. Ju, Y. & Borm, P.E.M. & Ruys, P.H.M., 2004. "The consensus value : a new solution concept for cooperative games," Discussion Paper 50, Tilburg University, Center for Economic Research. [Downloadable!]
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  9. Maskin, Eric & Tirole, Jean, 1999. "Unforeseen Contingencies and Incomplete Contracts," Review of Economic Studies, Blackwell Publishing, vol. 66(1), pages 83-114, January. [Downloadable!] (restricted)
  10. Maniquet, Francois, 2003. "A characterization of the Shapley value in queueing problems," Journal of Economic Theory, Elsevier, vol. 109(1), pages 90-103, March. [Downloadable!] (restricted)
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  11. Ruys, P.H.M. & Brink, R. van den & Semenov, R., 1999. "Values and governance systems," Discussion Paper 66, Tilburg University, Center for Economic Research. [Downloadable!]
  12. Luis Garicano, 2000. "Hierarchies and the Organization of Knowledge in Production," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 874-904, October. [Downloadable!] (restricted)
  13. Sherwin Rosen, 1982. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 311-323, Autumn. [Downloadable!] (restricted)
  14. Yellen, Janet L, 1984. "Efficiency Wage Models of Unemployment," American Economic Review, American Economic Association, vol. 74(2), pages 200-205, May. [Downloadable!] (restricted)
  15. Alan Beggs, 2000. "Queues and Hierarchies," Economics Series Working Papers 034, University of Oxford, Department of Economics.
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  16. Pekec, Aleksandar & Roberts, Fred S., 2001. "The role assignment model nearly fits most social networks," Mathematical Social Sciences, Elsevier, vol. 41(3), pages 275-293, May. [Downloadable!] (restricted)
  17. Michael Keren & David Levhari, 1983. "The Internal Organization of the Firm and the Shape of Average Costs," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 474-486, Autumn. [Downloadable!] (restricted)
  18. Prescott, Edward Simpson & Townsend, Robert M., 2002. "Collective Organizations versus Relative Performance Contracts: Inequality, Risk Sharing, and Moral Hazard," Journal of Economic Theory, Elsevier, vol. 103(2), pages 282-310, April. [Downloadable!] (restricted)
  19. Qian, Yingyi, 1994. "Incentives and Loss of Control in an Optimal Hierarchy," Review of Economic Studies, Blackwell Publishing, vol. 61(3), pages 527-44, July. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ruys, P.H.M., 2005. "The governance of services," Discussion Paper 24, Tilburg University, Tilburg Law and Economic Center. [Downloadable!]
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