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Positional Wages, Market Wages and Firm Size

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  • Rene van den Brink

    ()
    (Department of Economics, Free University Amsterdam)

  • Pieter H.M. Ruys

    ()
    (Dept. of Econometrics & Operational Research, Tilburg University)

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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Bibliographic 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;

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References

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  1. Eric Maskin & Yingyi Qian & Chenggang Xu, 1999. "Incentives, Information, and Organizational Form," Working Papers 99009, Stanford University, Department of Economics.
  2. Yuan Ju & Peter Borm & Pieter Ruys, 2007. "The consensus value: a new solution concept for cooperative games," Social Choice and Welfare, Springer, vol. 28(4), pages 685-703, June.
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  13. Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers 495, Massachusetts Institute of Technology (MIT), Department of Economics.
  14. Kessler, Anke S., 2000. "On Monitoring and Collusion in Hierarchies," Journal of Economic Theory, Elsevier, vol. 91(2), pages 280-291, April.
  15. 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.
  16. 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.
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Citations

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Cited by:
  1. Ruys, P.H.M., 2005. "The Governance of Services," Discussion Paper 2005-024, Tilburg University, Tilburg Law and Economic Center.

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