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Financial Markets and Wages

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  • Claudio Michelacci
  • Vincenzo Quadrini

Abstract

We study the optimal long-term contract offered to workers when firms are financially constrained in their investment plans. To alleviate the tightness of the financial constraints, firms promise an increasing wage profile to workers, that is, they pay lower wages today in exchange of higher future wages. Because firms with tighter financial constraints are also smaller, the wages paid in small firms are lower than the in large firms, and therefore, the model generates a positive relation between the size of the firm and the average wages paid to workers (wage-firm size relation). The model also captures other empirical regularities such as the lower wages paid by fast growing firms and firms in financial distress.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 116.

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Date of creation: 2004
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Handle: RePEc:red:sed004:116

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Keywords: Investment financing; long-term contracts; dynamics of wages;

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References

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Citations

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Cited by:
  1. Udo Brixy & Susanne Kohaut & Claus Schnabel, 2007. "Do Newly Founded Firms Pay Lower Wages? First Evidence from Germany," Small Business Economics, Springer, vol. 29(1), pages 161-171, June.
  2. Jonathan Thomas & Tim Worrall, 2007. "Limited Commitment Models of the Labour Market," CESifo Working Paper Series 2109, CESifo Group Munich.
  3. Matthias Kredler, 2010. "Experience vs. Obsolescence: A Vintage-Human-Capital Model," 2010 Meeting Papers 369, Society for Economic Dynamics.
  4. Vincenzo Quadrini, 2004. "EconomicDynamics Interviews Vincenzo Quadrini on Firm Dynamics," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 5(2), April.
  5. Eisfeldt, Andrea L. & Rampini, Adriano A., 2007. "New or used? Investment with credit constraints," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2656-2681, November.
  6. Johannes Gernandt & Friedhelm Pfeiffer, 2006. "Einstiegslöhne bei unvollkommenen Arbeitsmärkten," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 7(2), pages 147-172, 05.
  7. Claudio Michelacci & Vincenzo Quadrini, 2005. "Borrowing from Employees: Wage Dynamics with Financial Constraints," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 360-369, 04/05.

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