A Theory of the Firm with Non-Binding Employment Contracts
The purpose of this paper is ti develop the theory of the firm to get better understanding of situations in which individual employees enjoy some bargaining power in their relations with the firm, and in which the terms of employment are determined and adjusted through individual contracting and recontracting with the firm. The main elements of the situations studied here are that the employees are not organized, that the employment contracts are nonbinding or at least not for very long, and that the firm has opportunities to replace employees. The paper develops analyzes a dynamic model in which the processes of contarcting and re-contracting between the firm and its employees are intertwined with the dynamic evolution of the firm's workforce. The analysis of the model is somewhat complicated because the employmest level is a non-degenerate state variable that evolves over time and is affected by past decisions. The main analytical results characterize certain important equilibria: the profit maximizing, profit minimizing and stationary equilibria. The unique stationary equilibrium is markedly inefficient: it exhibits inefficient over-employment and the steady state wages coincide with the workers' reservation wage. It confirms earlier results derived by Stole and Zwiebel (1996a,b) in the contextof a static model and shows that they are very robust even when the firm has nearly frictionless hiring opportunities. In contrast, the profit maximizing equilibrium captures a very different pattern. The outcome is nearly efficient and the wage exhibits a mark-up over the reservation wage. The path of the wages exhibits an interesting behavior--it declines sharply when it reaches its steady state level
(This abstract was borrowed from another version of this item.)
|Date of creation:||Jun 1996|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.kellogg.northwestern.edu/research/math/Email:
More information through EDIRC
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jackson, Matthew O. & Wolinsky, Asher, 1996.
"A Strategic Model of Social and Economic Networks,"
Journal of Economic Theory,
Elsevier, vol. 71(1), pages 44-74, October.
- Matthew O. Jackson & Asher Wolinsky, 1995. "A Strategic Model of Social and Economic Networks," Discussion Papers 1098R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Matthew O. Jackson & Asher Wolinsky, 1994. "A Strategic Model of Social and Economic Networks," Discussion Papers 1098, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Henrick Horn & Asher Wolinsky, 1988.
"Bilateral Monopolies and Incentives for Merger,"
RAND Journal of Economics,
The RAND Corporation, vol. 19(3), pages 408-419, Autumn.
- Stole, Lars A & Zwiebel, Jeffrey, 1996. "Organizational Design and Technology Choice under Intrafirm Bargaining," American Economic Review, American Economic Association, vol. 86(1), pages 195-222, March.
- Stole, Lars A & Zwiebel, Jeffrey, 1996. "Intra-firm Bargaining under Non-binding Contracts," Review of Economic Studies, Wiley Blackwell, vol. 63(3), pages 375-410, July.
- Horn, Henrik & Wolinsky, Asher, 1988. "Worker Substitutability and Patterns of Unionisation," Economic Journal, Royal Economic Society, vol. 98(391), pages 484-97, June.
When requesting a correction, please mention this item's handle: RePEc:nwu:cmsems:1166. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Fran Walker)
If references are entirely missing, you can add them using this form.