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The Brother in Law Effect

  • David K Levine
  • Federico Weinschelbaum
  • Felipe Zurita

When a firm is forced to pay abnormally high wages, hiring transfers rents. This effectively endows the employer with the ability to grant favors, and he may wish to do so even at some cost to efficient production. We refer to this as the "brother-in-law effect". This article analyzes its consequences. When the brother-in-law effect is due to unionization, decisions regarding both the number and type of workers employed could be inefficient; overemployment could obtain even relative to the workforce that would be employed without unionization. We also identify cases in which nepotism improves efficiency. Copyright (2010) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 784828000000000587.

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Date of creation: 23 Oct 2006
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Handle: RePEc:cla:levarc:784828000000000587
Contact details of provider: Web page: http://www.dklevine.com/

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  1. Alberto E. Chong & Florencio López-de-Silanes, 2004. "Privatization in Mexico," IDB Publications (Working Papers) 6682, Inter-American Development Bank.
  2. James Andreoni & John Miller, 2002. "Giving According to GARP: An Experimental Test of the Consistency of Preferences for Altruism," Econometrica, Econometric Society, vol. 70(2), pages 737-753, March.
  3. Sebastian Galiani & Paul Gertler & Ernesto Schargrodsky, 2002. "The Benefits and Costs of Privatization in Argentina: A Microeconomics Analysis," Working Papers 53, Universidad de San Andres, Departamento de Economia, revised Sep 2002.
  4. José E. Galdón-Sánchez & James A. Schmitz Jr., 2002. "Competitive Pressure and Labor Productivity: World Iron-Ore Markets in the 1980's," American Economic Review, American Economic Association, vol. 92(4), pages 1222-1235, September.
  5. Federico Sturzenegger & Ernesto Schargrodsky & Sebastian Galiani & Paul Gertler, 2003. "The Costs and Benefits of Privatization in Argentina: A Microeconomic Analysis," Research Department Publications 3148, Inter-American Development Bank, Research Department.
  6. Canice Prendergast & Robert H. Topel, 1993. "Favoritism in Organizations," NBER Working Papers 4427, National Bureau of Economic Research, Inc.
  7. Alberto Chong & Florencio López-de-Silanes, 2005. "Privatization in Latin America : Myths and Reality," World Bank Publications, The World Bank, number 7461, December.
  8. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
  9. Goldberg, Matthew S, 1982. "Discrimination, Nepotism, and Long-Run Wage Differentials," The Quarterly Journal of Economics, MIT Press, vol. 97(2), pages 307-19, May.
  10. Shleifer, Andrei & Vishny, Robert W, 1994. "Politicians and Firms," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 995-1025, November.
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