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Search, Concave Production, and Optimal Firm Size

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  • Smith, Eric

Abstract

This paper presents a simple search and bargaining economy in which firms use concave production. Because a firm and worker negotiate over the worker's marginal productivity, the firm's wage is a function of its labour force. Reacting to this wage function, firms choose an excessively large and inefficient number of workers. They overemploy, but because too few firms exist in equilibrium, aggregate employment and vacancies are suboptimal. Imposing a fixed exogenous wage, for example by legislating a minimum wage or through union contracting, reduces this inefficiency.

Suggested Citation

  • Smith, Eric, 1994. "Search, Concave Production, and Optimal Firm Size," CEPR Discussion Papers 882, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:882
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    References listed on IDEAS

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    1. David Card, 1992. "Using Regional Variation in Wages to Measure the Effects of the Federal Minimum Wage," ILR Review, Cornell University, ILR School, vol. 46(1), pages 22-37, October.
    2. Ronald G. Ehrenberg, 1992. "New Minimum Wage Research: Symposium Introduction," ILR Review, Cornell University, ILR School, vol. 46(1), pages 3-5, October.
    3. Berman, Eli, 1997. "Help Wanted, Job Needed: Estimates of a Matching Function from Employment Service Data," Journal of Labor Economics, University of Chicago Press, vol. 15(1), pages 251-292, January.
    4. Martin Chalkley, 1991. "Monopsony Wage Determination and Multiple Unemployment Equilibria in a Non-Linear Search Model," Review of Economic Studies, Oxford University Press, vol. 58(1), pages 181-193.
    5. Coles, Melvyn G & Smith, Eric, 1996. "Cross-Section Estimation of the Matching Function: Evidence from England and Wales," Economica, London School of Economics and Political Science, vol. 63(252), pages 589-597, November.
    6. repec:fth:prinin:300 is not listed on IDEAS
    7. Mellow, Wesley, 1982. "Employer Size and Wages," The Review of Economics and Statistics, MIT Press, vol. 64(3), pages 495-501, August.
    8. Oliver Jean Blanchard & Peter Diamond, 1989. "The Beveridge Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 1-76.
    9. Lucas, Robert Jr. & Prescott, Edward C., 1974. "Equilibrium search and unemployment," Journal of Economic Theory, Elsevier, vol. 7(2), pages 188-209, February.
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    More about this item

    Keywords

    Bargaining; Firm Size; Minimum Wages; Search; Unions;
    All these keywords.

    JEL classification:

    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General

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