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Profit Sharing, Credit Market Imperfections and Equilibrium Unemployment

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  • Koskela, Erkki

    ()
    (University of Helsinki)

  • Stenbacka, Rune

    ()
    (Swedish School of Economics)

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    Abstract

    We investigate the interaction between labour and credit market imperfections for equilibrium unemployment in the presence of profit sharing. In a partial equilibrium with exogenous outside options increased bargaining power of banks has adverse employment effects. In a general equilibrium with endogenous outside options this relationship is frequently reversed; reduced credit market imperfections increase equilibrium unemployment if the labour market imperfections – measured by the bargaining power of trade unions - are sufficiently strong and benefit-replacement ratio high enough. Finally, we show that higher bankruptcy risks increase equilibrium unemployment under similar conditions.

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    Bibliographic Info

    Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1020.

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    Length: 36 pages
    Date of creation: Feb 2004
    Date of revision:
    Publication status: published in: Scandinavian Journal of Economics, 2004, 106 (4), 677-701
    Handle: RePEc:iza:izadps:dp1020

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    Related research

    Keywords: equilibrium unemployment; compensation systems; wage and loan bargaining; outside options;

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    References

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    1. Holmlund, Bertil, 1990. "Profit Sharing, Wage Bargaining, and Unemployment," Economic Inquiry, Western Economic Association International, vol. 28(2), pages 257-68, April.
    2. Simon P. Anderson & Michael Devereux, 1989. "Profit-Sharing and Optimal Labour Contracts," Canadian Journal of Economics, Canadian Economics Association, vol. 22(2), pages 425-33, May.
    3. Bester, H., 1994. "A bargaining model of financial intermediation," Discussion Paper 1994-15, Tilburg University, Center for Economic Research.
    4. Martin J. Conyon & Richard B. Freeman, 2001. "Shared Modes of Compensation and Firm Performance: UK Evidence," NBER Working Papers 8448, National Bureau of Economic Research, Inc.
    5. Nickell, Stephen & Layard, Richard, 1999. "Labor market institutions and economic performance," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 46, pages 3029-3084 Elsevier.
    6. Jerger, Jurgen & Michaelis, Jochen, 1999. " Profit Sharing, Capital Formation and the NAIRU," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(2), pages 257-75, June.
    7. Steven A. Sharpe, 1989. "Asymmetric information, bank lending, and implicit contracts: a stylized model of customer relationships," Finance and Economics Discussion Series 70, Board of Governors of the Federal Reserve System (U.S.).
    8. Sharpe, Steven A, 1994. "Financial Market Imperfections, Firm Leverage, and the Cyclicality of Employment," American Economic Review, American Economic Association, vol. 84(4), pages 1060-74, September.
    9. Wasmer, Etienne & Weil, Philippe, 2002. "The Macroeconomics of Labour and Credit Market Imperfections," CEPR Discussion Papers 3334, C.E.P.R. Discussion Papers.
    10. Funke, Michael & Maurer, Wolf & Strulik, Holger, 1999. " Capital Structure and Labour Demand: Investigations Using German Micro Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(2), pages 199-215, May.
    11. Dalmazzo, Alberto, 1996. " Debt and Wage Negotiations: A Bankruptcy-Based Approach," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(3), pages 351-64.
    12. Daron Acemoglu, 2000. "Credit Market Imperfections and Persistent Unemployment," NBER Working Papers 7938, National Bureau of Economic Research, Inc.
    13. Koskela, Erkki & Stenbacka, Rune, 2000. "Agency Cost of Debt and Lending Market Competition: A Re-Examination," Research Discussion Papers 12/2000, Bank of Finland.
    14. Nickell, S. & Nicolitsas, D., 1995. "How Does Financial Pressure Affect Firms," Economics Series Working Papers 99170, University of Oxford, Department of Economics.
    15. Erkki Koskela & Rune Stenbacka, 2001. "Equilibrium Unemployment with Credit and Labour Market Imperfections," CESifo Working Paper Series 419, CESifo Group Munich.
    16. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780198284345, Octomber.
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    19. Olivier Blanchard & Francesco Giavazzi, 2003. "Macroeconomic Effects Of Regulation And Deregulation In Goods And Labor Markets," The Quarterly Journal of Economics, MIT Press, vol. 118(3), pages 879-907, August.
    20. Cahuc, P. & Dormont, B., 1992. "Profit-Sharing: Does It Increase Productivity and Employment? A Theoretical Model and Empirical Evidence of French Micro Data," Papiers d'Economie Mathématique et Applications 92.45, Université Panthéon-Sorbonne (Paris 1).
    21. Bronars, Stephen G & Deere, Donald R, 1991. "The Threat of Unionization, the Use of Debt, and the Preservation of Shareholder Wealth," The Quarterly Journal of Economics, MIT Press, vol. 106(1), pages 231-54, February.
    22. Oliver Hart, 2000. "Different Approaches to Bankruptcy," Harvard Institute of Economic Research Working Papers 1903, Harvard - Institute of Economic Research.
    23. Alexander, Carol & W Ledermann, 1994. "Are Nash bargaining wage agreements unique: an investigation into bargaining sets for firm-union negotiations," Discussion Papers in Economics 12/94, Department of Economics, University of Sussex.
    24. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
    25. Koskela , Erkki & Stenbacka, Rune, 2001. "Equilibrium unemployment with credit and labour market imperfections," Research Discussion Papers 5/2001, Bank of Finland.
    26. Layard, R. & Nickell, S., 1988. "Is Unemployment Lower If Unions Bargain Over Employment?," Papers 308, London School of Economics - Centre for Labour Economics.
    27. Dasgupta, Sudipto & Sengupta, Kunal, 1993. "Sunk Investment, Bargaining and Choice of Capital Structure," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(1), pages 203-20, February.
    28. Ricardo J. Caballero & Mohamad L. Hammour, 1998. "Improper Churn: Social Costs and Macroeconomic Consequences," NBER Working Papers 6717, National Bureau of Economic Research, Inc.
    29. Koskela, Erkki & Stenbacka, Rune, 2000. "Is there a tradeoff between bank competition and financial fragility?," Journal of Banking & Finance, Elsevier, vol. 24(12), pages 1853-1873, December.
    30. Perotti, E.C. & Spier, K.E., 1991. "Capital Structure As A Bargaining Tool: The Role Of Leverage In Contract Renegociation," Harvard Institute of Economic Research Working Papers 1548, Harvard - Institute of Economic Research.
    31. repec:fth:bfdipa:5/2001 is not listed on IDEAS
    32. repec:fth:bfdipa:12/2000 is not listed on IDEAS
    33. Zsolt Becsi & Victor Li & Ping Wang, 2000. "Financial matchmakers in credit markets with heterogeneous borrowers," Working Paper 2000-14, Federal Reserve Bank of Atlanta.
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    Cited by:
    1. Koskela, Erkki & Stenbacka, Rune, 2012. "The relationship between product market competition and unemployment with profit sharing," Labour Economics, Elsevier, vol. 19(3), pages 291-297.
    2. Ernst, Ekkehard & Semmler, Willi, 2010. "Global dynamics in a model with search and matching in labor and capital markets," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1651-1679, September.

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