A Model of a Price-setting Duopoly with a Wage-rise Contract

This paper considers a wage-rise contract between a firm and its employees as the firm's strategy, and suggests a wage-rise-contract policy. The policy is a promise by the firm that it will announce a certain output level and a wage premium rate, and if it actually produces more than the announced output level, then it will pay each employee a wage premium uniformly. First, this paper examines the case in which one of two firms unilaterally offers the wage-rise-contract policy by using a two-stage price-setting duopoly model. It is then shown that there exists an equilibrium which coincides with the Stackelberg solution where the firm adopting the policy is the leader. Next, this paper examines the case in which both firms can offer the wage-rise-contract policy in the model. It is then shown that there exists an equilibrium which is more profitable for both firms than in the unilateral case.     

On the stability of the cooperative type of organization

The stability of producer cooperatives in market economies is analyzed in a dynamic context. It is shown that, when permitted to hire wage laborers, a producer cooperative, even if its labor productivity is higher than in an otherwise equivalent capitalist firm, is likely to lose its cooperative character because members' personal income will be maximized when “expensive” members are replaced by “inexpensive” wage-laborers. Producer cooperatives will maintain their organizational character best when they operate in a marginal industry where cooperation enhances members' productivity so that their earnings exceed their opportunity wages. In general, competitive markets for membership are not a sufficient condition to prevent the transformation of cooperatives into capitalist firms.     

Trade costs, wage rates, technologies, and reverse imports

Abstract .  This paper explores the effects of transport costs, tariffs, and foreign wage rates on the domestic economy in the presence of reverse imports, with special emphasis on inter-firm cost asymmetry in an international oligopoly model. To serve the domestic market, a foreign firm produces in the foreign country, while two domestic firms produce either at home or abroad. Surprisingly, an increase in the foreign wage rate may increase the profits of a firm producing in the foreign country. Even if all firms produce in the foreign country, an increase in the foreign wage rate may improve domestic welfare.     

The political economy of public employment programs

What are the welfare implications of a political equilibrium where the choice of active labor market programs (ALMPs) have to please the employed majority? This issue is examined in an equilibrium model featuring matching frictions and worker–firm wage bargaining. It turns out that the welfare consequences depend on the nature of ALMPs and the political weight attributed to firm interests. If firm values carry little political weight and programs contribute to wage pressure, the employed will opt for excessive program activity.     

TRAINING, JOB SECURITY AND INCENTIVE WAGES

This paper considers the optimal level of firm‐specific training by taking into account the positive effect of training on the expected duration of workers' current employment. In the framework of an efficiency wage model, a short expected job tenure represents a disamenity that reduces the penalty from shirking. As this disamenity increases, workers have an incentive to continue providing a positive level of effort only if they are compensated by a higher wage. We endogenize the employment separation rate by introducing firm‐specific training. Firm‐specific training creates a rent that is lost if the worker is separated from the firm. As a result, the firm will be more reluctant to fire its trained workforce in a recession. This implies that firm‐specific training can decrease current wages because it represents a commitment to lower future labour turnover.     

Employee share ownership in a unionised duopoly

Profit sharing schemes have been analysed assuming Cournot competition and decentralised wage negotiations, and it has been found that firms share profits in equilibrium. This paper analyses a different remuneration system: employee share ownership. We find that whether firms choose to share ownership or not depends on both the type of competition in the product market and the way in which workers organise to negotiate wages. If wage setting is decentralised, under duopolistic Cournot competition both firms share ownership. If wage setting is centralised, only one firm shares ownership if the degree to which goods are substitutes takes an intermediate value; otherwise, the two firms share ownership. In this case, if the union sets the same wage for all workers neither firm shares ownership. Therefore, centralised wage setting discourages share ownership. Finally, under Bertrand competition neither firm shares ownership regardless of how workers are organised to negotiate wages.     

Equilibrium Wage Dispersion,Firm Size,and Growth

This paper analyzes a model of equilibrium wage dynamics and wage dispersion across firms. It considers a labor market where firms set wages and workers use on-the-job search to look for better paid work. It analyzes a perfect equilibrium where each firm can change its wage paid at any time, and workers use optimal quit strategies. Firms trade off higher wages against a lower quit rate, and large firms (those with more employees) always pay higher wages than small firms. Non-steady-state dispersed price equilibria are also analyzed, which describe how wages vary as each firm and the industry as a whole grow over time. Journal of Economic Literature Classification Numbers: D43, J41.     

Another possible source of wage stickiness

A number of hypotheses have been advanced to explain wage stickiness. This article explores another reason why wage stickiness might be in an employer's interest: the relationship between productivity and the wage rate. If the wage enters the short-run production function, a cost-minimizing firm will leave its wage offer unchanged, no matter how its output varies, if and only if the wage enters the production function in a labor-augmenting way.     

Labour contracts in a stock market economy

In this paper, labour contracts are examined in the context of a general stock market economy where all shareholders are risk averse, and firms act in shareholders interest. The problem considered is whether some firm can offer a wage contract that will make all its shareholders better off. We show by example that, contrary to the arguments in the partial equilibrium framework, it is possible that no such contract will exist, even when there are potential gains to risk sharing. A sufficient condition for the existence of a feasible pareto improving contract is given. It is shown that contract trading will arise provided some firm has no large shareholders.     

Does Employee Body Weight Affect Employers' Behavior?

In this paper, we study the possible segregation of overweight individuals already established in the labor market when firms make decisions on hiring, firing, and promoting. Most existing studies use wage equations to document wage differences, but little is known about the reason for the differences and the sorting of workers. Using an equilibrium search model, search frictions are taken into account. Additionally, sorting is examined using a logit model. We find that wage differences between workers who have a normal weight and workers who are overweight or obese can be explained by differential firm behavior, with respect to both the job‐offer arrival rate and the probability of being promoted.     

INFORMATION SHARING IN UNION–FIRM RELATIONSHIPS*

Large firms often negotiate wage rates with labor unions. When they do, an ex ante agreement to share information should make it more likely that they will reach an agreement and capture the gains from trade. However, if the firm refuses to share information, the union may shade down its wage demand to increase the probability of acceptance. This reduction in the wage can increase the joint surplus of the agents and increase social welfare. As a result, there are some circumstances in which bargaining with incomplete information can be better for the agents and society than bargaining with complete information.     

DIRECTED SEARCH AND FIRM SIZE*

Standard directed search models predict that larger firms pay lower wages than smaller firms, contrary to the data. This article proposes one way to obtain this positive size–wage differential in a directed search setting. I posit that there is an optimal size associated with a firm: A firm suffers a penalty by not operating at its optimal size. I show that if this penalty is sufficiently large the size–wage differential will be obtained. My model also gives a new way to look at the data because it highlights the importance of the distinction between intended and realized firm sizes.     

WHY FOREIGN OWNERSHIP MAY BE GOOD FOR YOU*

We develop a two‐country model with heterogeneous producers and rent‐sharing at the firm level. We identify two sources of a multinational wage premium: A composition effect because multinational firms are more productive, make higher profits, and pay higher wages, and a firm‐level wage effect, because a firm makes higher global profits and thus pays higher wages in its home market when becoming multinational. With two identical countries, the wage premium is fully explained by firm characteristics. Allowing for technology differences between countries, a residual wage premium exists in the technologically backward country but not in the advanced country.     

Entry Deterrence in a Unionized Oligopoly

We investigate wage determination between an incumbent firm and its labour union under threat from another firm entering its product market. In equilibrium, it may be optimal for a labour union of the incumbent firm to lower its wage demand. This may make it possible for the incumbent firm to maintain a higher employment level, in that the lower wages can help the firm deter the entry of a rival firm. This will yield a higher profit for the incumbent firm and a lower utility level for the labour union compared with those in an equilibrium with no threat of entry.
JEL Classification Numbers: J51, L10     

Monetary policy under flexible exchange rates: When is expansion contractionary?

This paper studies whether the observed instability in the effects of monetary policy could be due to the way in which the behavior functions have been specified in an open economy context. Accordingly, special emphasis is on the specification of the behavior functions to correspond to their foundations in closedeconomy macrotheory. The demand for real money balances, in terms of the expenditure basket of goods, is specified as a function of income in terms of the same basket. Imports are specified as a function of expenditures, being functionally part of expenditures. The supply of labor is specified as a function of the expenditure price.It is shown that the exchange rate overshoots but output declines, to eventually rise above its original level in response to monetary expansion in the real wage model. In the money wage model, output and the exchange rate overshoot their steady-state levels if the expansion eventually leads to an increase in nominal wealth. If it leads to a decrease, both variables undershoot. However, if interest payments on foreign securities are not small relative to the trade balance, many of the effects are reversed. Thus the overshooting result is far from robust even in a standard model with an exogenous money supply.     

A general equilibrium analysis of corporate control and the stock market

This paper studies a general equilibrium model with an investor-controlled firm. Shareholders can vote on the firm??s production plan in an assembly if they dislike management??s decision. Prior to that they may trade shares on the stock market. Since stock market trades determine the distribution of votes, trading is strategic. There is always an equilibrium, where share trading leads to an ownership structure that supports competitive behavior. But there may also be equilibria, where monopolistic behavior prevails.     

On-the-job search and strategic bargaining

This paper studies wage bargaining in a simple economy in which both employed and unemployed workers search for better jobs. The axiomatic Nash bargaining solution and standard strategic bargaining solutions are inapplicable because the set of feasible payoffs is nonconvex. I instead develop a strategic model of wage bargaining between a single worker and firm that is applicable to such an environment. I show that if workers and firms are homogeneous, there are market equilibria with a continuous wage distribution in which identical firms bargain to different wages, each of which is a subgame perfect equilibrium of the bargaining game. If firms are heterogeneous, I characterize market equilibria in which more productive firms pay higher wages. I compare the quantitative predictions of this model with Burdett and Mortensen's [1998. Wage differentials, employer size and unemployment. International Economic Review 39, 257-273.] wage posting model and argue that the bargaining model is theoretically more appealing along important dimensions.     

Involuntary unemployment,macroeconomic policy,and a behavioral model of the firm: Why high real wages need not cause high unemployment

The perspective of modern macroeconomic theory, be it new classical or old and new Keynesian, is that unemployment can be reduced only if real wages are cut. The modern Keynesians, basing themselves upon the microfoundations of efficiency wage theory, argue that real wages cannot and will not be cut by firms for efficiency wage reasons. This generates involuntary unemployment based on a market coordination problem. A behavioral model that contrasts with efficiency wage theory is presented here which suggests that reducing real wages need not affect the marginal cost of labor and, therefore, the number of individuals employed. In the behavioral model, wherein there exists some linearity in the relationship between real wages and working conditions and labor productivity, a lower real wage rate is not a necessary condition for reducing the unemployment rate nor is a higher real wage an obstacle to reducing it. In this scenario, unemployment, to the extent that it is demand-side induced, is not related to movements in real wages. Therefore, restoring full employment after a negative demand shock becomes a matter for demand management, not demand management that must be coordinated with measures designed to reduce real wages.     

Tax Policies,Regional Trade Agreements and Foreign Direct Investment: A Welfare Analysis

In this paper, we develop a partial equilibrium three‐country model to examine the relationship between regional trade agreements (RTAs) and foreign direct investment (FDI) in an environment with double taxation. Our analysis shows that FDI is welfare‐improving for at least one or both of the two regional countries if wage asymmetry is significantly large. FDI and an RTA are also welfare‐improving for the high‐wage country and the region if the wage differential is not small. We also examine the role of repatriation taxes in affecting the determination of firm location under an RTA. Our results suggest that the signing of an RTA may induce relocation from the high‐wage country to the low‐wage country unless an increase in the repatriation tax rate also occurs.     

The formal sector wage premium and firm size

We show theoretically that when larger firms pay higher wages and are more likely to be caught defaulting on labor taxes, then large-high wage firms will be in the formal and small-low wage firms will be in the informal sector. The formal sector wage premium is thus just a firm size wage differential. Using data from Ecuador we illustrate that firm size is indeed the key variable determining whether a formal sector premium exists.