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Financial Markets and Wages

  • Claudio Michelacci
  • Vincenzo Quadrini

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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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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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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