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Employer moral hazard and wage rigidity. The case of worker owned and investor owned firms

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  • Albanese, Marina
  • Navarra, Cecilia
  • Tortia, Ermanno C.

Abstract

This paper studies wage and employment rigidity in a labor relationship in different organizational contexts. In investor owned firms, if the contract allows for flexible wages, the employer may have an incentive to opportunistically claim low demand and cut wages. Anticipating the employer's opportunism, workers may demand a fixed-wage contract, which may lead to inefficient layoffs in the presence of negative demand shocks. In contrast, in cooperatives, where the employer does respond to workers, the risk of employer's opportunism diminishes and results in an equilibrium characterized by more flexible wages and fewer layoffs. By developing these arguments we challenge the traditional explanation of workers’ preference for fixed wages based on risk aversion. To support our claim, we develop a principal agent model in which there is incomplete information on both sides of the employment relation. We model both the case of investor-owned firms and worker cooperatives.

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  • Albanese, Marina & Navarra, Cecilia & Tortia, Ermanno C., 2015. "Employer moral hazard and wage rigidity. The case of worker owned and investor owned firms," International Review of Law and Economics, Elsevier, vol. 43(C), pages 227-237.
    • Handle: RePEc:eee:irlaec:v:43:y:2015:i:c:p:227-237
    DOI: 10.1016/j.irle.2014.08.006
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    Cited by:

    1. Donald A R George & Eddi Fontanari & Ermanno Celeste Tortia, 2019. "Finance, property rights and productivity in Italian cooperatives," Edinburgh School of Economics Discussion Paper Series 293, Edinburgh School of Economics, University of Edinburgh.
    2. Tortia, Ermanno C., 2021. "Employment protection regimes and dismissal of members in worker cooperatives," MPRA Paper 109214, University Library of Munich, Germany.
    3. Ermanno Tortia & Martha Knox Haly & Anthony Jensen, 2014. "Workers' propensity to cooperate with colleagues and the general population: a comparison based on a field experiment," Econometica Working Papers wp52, Econometica.
    4. Luigi BONATTI & Lorenza A. LORENZETTI, 2018. "Why Wages Tend To Be Lower In Worker‐Owned Firms Than In Investor‐Owned Firms," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 89(4), pages 563-580, December.
    5. Luigi Bonatti & Lorenza A. Lorenzetti, 2017. "The quality of employment in the early labour market experience of young Europeans," DEM Working Papers 2017/08, Department of Economics and Management.
    6. Marina Albanese & Cecilia Navarra & Ermanno Tortia, 2017. "Equilibrium unemployment as a worker insurance device: Worker insurance and wage setting in worker owned enterprises," DEM Working Papers 2017/09, Department of Economics and Management.
    7. Tortia, Ermanno & Knox Haly, Martha & Jensen, Anthony, 2013. "From the Neoliberal to the Participatory Firm," AICCON Working Papers 130-2013, Associazione Italiana per la Cultura della Cooperazione e del Non Profit.
    8. Dirk Nicolas Wagner, 2019. "The Opportunistic Principal," Kyklos, Wiley Blackwell, vol. 72(4), pages 637-657, November.
    9. Marina Albanese & Cecilia Navarra & Ermanno Tortia, 2019. "Equilibrium unemployment as a worker insurance device: wage setting in worker owned enterprises," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 36(3), pages 653-671, October.
    10. Tortia, Ermanno Celeste, 2019. "Employment protection regimes in worker co-operatives: dismissal of worker members and distributive fairness," MPRA Paper 94536, University Library of Munich, Germany.
    11. Silvia Sacchetti & Marco Faillo, 2017. "The notion of social responsibility across different types of nonprofit and for profit organizations," Econometica Working Papers wp61, Econometica.
    12. Marina Albanese, 2020. "Social and Relational Variables in Worker Cooperatives: Implications for the Objective Function," Journal of Entrepreneurial and Organizational Diversity, European Research Institute on Cooperative and Social Enterprises, vol. 9(1), pages 26-44.
    13. Donald M. Houessou & Ben G. J. S. Sonneveld & Augustin K. N. Aoudji & Frejus S. Thoto & Smith A. R. Dossou & Denyse J. R. M. Snelder & Anselme A. Adegbidi & Tjard De Cock Buning, 2019. "How to Transition from Cooperations to Cooperatives: A Case Study of the Factors Impacting the Organization of Urban Gardeners in Benin," Sustainability, MDPI, vol. 11(17), pages 1-25, August.
    14. Carlo Borzaga & Chiara Carini & Ermanno Celeste Tortia, 2022. "Co‐operative enterprise anti‐cyclicality and the economic crisis: A comparative analysis of employment dynamics in Italy," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 93(3), pages 551-577, September.

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    More about this item

    Keywords

    Employment contract; Risk aversion; Moral hazard; Asymmetric information; Hidden action; Income insurance; Employment insurance; Worker cooperatives;
    All these keywords.

    JEL classification:

    • J54 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Producer Cooperatives; Labor Managed Firms
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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