Short or long-term contract? Firm’s optimal choice

This article studies the behaviour of a firm searching to fill a vacancy. The main assumption is that the firm can offer two different kinds of contracts to the workers, either a short-term contract or a long-term one. The short-term contract acts as a probationary stage in which the firm can learn about the worker. After this stage, the firm can propose a long-term contract to the worker or it can decide to look for another worker. We show that, if the short-term wage is fixed endogenously, it can be optimal for firms to start a working relationship with a short-term contract, but that this policy decreases unemployment and welfare. On the contrary, if the wage is fixed exogenously, this policy could be optimal also from a welfare point of view.     

Incentive Regulation of Prices When Costs are Sunk

We present a model featuring irreversible investment, economies of scale, uncertain future demand and capital prices, and a regulator who sets the firm’s output price according to the cost structure of a hypothetical replacement firm. We show that a replacement firm has a fundamental cost advantage over the regulated firm: it can better exploit the economies of scale because it has not had to confront the historical uncertainties faced by the regulated firm. We show that setting prices so low that a replacement firm is just willing to participate is insufficient to allow the regulated firm to expect to break even whenever it has to invest. Thus, unless the regulator is willing to incur costly monitoring to ensure the firm invests, revenue must be allowed in excess of that required for a replacement firm to participate. This contrasts with much of the existing literature, which argues that the market value of a regulated firm should equal the cost of replacing its existing assets. We also obtain a closed-form solution for the regulated firm’s output price when this price is set at discrete intervals. In contrast to rate of return regulation, we find that resetting the regulated price more frequently can increase the risk faced by the firm’s owners, and that this is reflected in a higher output price and a higher weighted-average cost of capital.     

Efficient risk sharing,non-marketable labor income and fixed-wage contracts

This paper seeks to explain fixed-wage labor contracts. The traditional rationale that fixed wages represent an implicit sale of ‘wage insurance’ by risk-neutral firms to risk-averse workers is rejected as being incompatible with the fact that firms are owned by risk-averse investors. Instead, it is shown that fixed-wage contracts might arise from the non-marketability of labor income. When human capital is not marketable, it becomes optimal to shift all the risk in production onto the firm, since trading in equity markets enables efficient allocation of the uncertainty. The fixed-wage contract shifts the risk to equity owners and in fact replicates the first-best equilibrium that would emerge if individuals were paid their realized marginal product and allowed to trade shares in human capital.     

How Does the Minimum Wage Affect Firm Investments in Fixed and Human Capital? Evidence from China

This paper empirically analyzes the impact of Chinese minimum wage regulations on the firm decision to invest in physical and human capital. We exploit the geographical and inter‐temporal variations of county‐level minimum wages in a panel data set of all state‐owned and all above‐scale non‐state‐owned Chinese firms covering the introduction of the new Chinese minimum wage regulations in 2004. In our basic regressions including all Chinese firms, we find significant negative effects of the minimum wage on human capital investment rates and no overall effects on fixed capital investment rates. When grouping firms by their ownership structure, we find that these results hold for most firms. Foreign‐owned firms are an exception to some extent, because the likelihood that they invest in human capital has not decreased in response to the policy.     

Knightian uncertainty and moral hazard

This paper presents a principal-agent model in which the agent has imprecise beliefs. We model this situation formally by assuming the agent?s preferences are incomplete as in Bewley (1986) [2]. In this setting, incentives must be robust to Knightian uncertainty. We study the implications of robustness for the form of the resulting optimal contracts. We give conditions under which there is a unique optimal contract, and show that it must have a simple flat payment plus bonus structure. That is, output levels are divided into two sets, and the optimal contract pays the same wage for all output levels in each set. We derive this result for the case in which the agent?s utility function is linear and then show it also holds if this utility function has some limited curvature.     

A model of the socialist firm in transition to a market economy

This paper models the dynamic adjustment path of a socialist firm in transition to a market economy by a price shock that renders old capital obsolete. The firm can adjust with investment in more productive capital equipments. The optimal time paths of investment, output, and employment are analyzed and the impact of fiscal incentives like investment subsidies and a reduced corporate income tax rate are studied. Like output, the aggregate capital stock follows a J-curve. The conditions for viability of firms and the impact of variables such as wage increases on the value of the firm are discussed.     

Does Price Stability Exacerbate Labour Market Rigidities in the EMU?

How will the commitment to price stability affect labour market rigidities in the European Monetary Union? I explore a model where firms choose between fixed wage contracts (where the employer cannot lay off the worker, and the wage can only be changed by mutual consent), or contracts where employment is at will, so that either party may terminate employment (with strong similarities to temporary jobs). A fixed wage contract provides better incentives for investment and training, while employment at will facilitates efficient mobility. Inflation erodes the real value of a fixed contract wage over time, and badly matched workers are more likely to quit for other jobs. Disinflation has opposing effects on labour market rigidity: fixed wage contracts become more rigid in real terms, but fewer firms will choose fixed wage contracts.     

Welfare reducing licensing

In this paper, we characterize situations where licensing a cost reducing innovation to a rival firm using two-part tariff contracts (a fixed fee plus a linear per unit of output royalty) reduces social welfare. We show that it occurs if (i) the firms compete in prices, (ii) the innovation is large enough but not drastic, and (iii) the goods are close enough substitutes. Moreover, we show that, regardless of the type of competition, first, the optimal contract always includes a positive royalty and, second, even drastic innovations are licensed whenever the goods are not homogeneous.     

Tax policy, venture capital, and entrepreneurship

The paper studies the effects of tax policy on venture capital activity. Entrepreneurs pursue a single high risk project each but have no own resources. Financiers provide funds, covering investment cost plus an upfront payment, in exchange for a share in the firm. The contract must include incentives to enlist full effort of entrepreneurs. Venture capitalists also assist with valuable business advice to enhance survival chances. The paper develops a general equilibrium framework with a traditional and an entrepreneurial sector and investigates the effects of taxes on the equilibrium level of managerial advice, entrepreneurship and welfare. It considers differential wage and capital income taxes, a comprehensive income tax, progressive taxation as well as investment and output subsidies to the entrepreneurial sector.     

NONSTATIONARY RELATIONAL CONTRACTS WITH ADVERSE SELECTION*

I develop a model of nonstationary relational contracts in order to study internal wage dynamics. Workers are heterogeneous, and each worker’s ability is both private information and fixed for all time. Learning therefore occurs within employment relationships. The inferences, however, are confounded by moral hazard. Incentive provision is restricted by an inability to commit to long‐term contracts. Relational contracts, which must be self‐enforcing, must therefore be used. The wage dynamics in the optimal contract, which are pinned down by the tension between incentive provision and contractual enforcement, are intimately related to the learning effect.     

Unfair incentives: A behavioural note on sharecropping

We conducted a laboratory‐in‐the‐field experiment with real‐life tenants in Ethiopia to test the incentive effects of fixed wage, sharecropping, fixed rent, and ownership contracts. The experimental task resembles a common process in agricultural production. The sharecropping contract is a piece rate scheme framed as a profit‐sharing agreement. Sharecropping output was about 12 percent smaller than the fixed rent output. Surprisingly, it is statistically indistinguishable from the fixed wage output, despite substantial piece rates. This effect is driven by real‐life sharecroppers. Their sharecropping output was smaller than that of non‐sharecroppers, especially in a region where a controversial land reform took place. We argue that our subjects dislike sharecropping contracts because of the unfair profit sharing and the disputed allocation of land. Fairness concerns, therefore, may be another impediment to efficiency under the sharecropping contract.     

Endogenous Choice of Strategic Contracts in a Mixed Duopoly with Bargaining Over Managerial Delegation Contracts

We revisit the endogenous choice problem of strategic contracts for the public firm and the private firm in a managerial mixed duopoly with differentiated goods. We consider the situation wherein the managerial delegation contracts are determined by maximising social welfare within the public firm, which is equal to the objective function of its owner, and through bargaining over the content of managerial delegation contracts between the owner and manager within the private firm. We show that, in equilibrium, when the manager of the private firm has high bargaining power relative to that of the owner, the public firm chooses a price contract, while the private firm chooses a quantity contract. However, there is no equilibrium market structure under the pure strategic contract class when the manager has sufficiently low bargaining power relative to that of the owner.     

Regulating a manager whose empire-building preferences are private information

We obtain the optimal contract for the government (principal) to regulate a manager (agent) who has a taste for empire-building that is his/her private information. This taste for empire-building is modeled as a utility premium that is proportional to the difference between the contracted output and a reference output. We find that output is distorted upward when the manager’s taste for running large firms is weak, downward when it is strong, and equals a reference output when it is intermediate (in this case, the participation constraint is binding). We also obtain an endogenous reference output (equal to the expected output, which depends on the reference output), and find that the response of output to cost is null in the short-run (in which the reference output is fixed), whenever the manager’s type is in the intermediate range, and negative in the long-run (after the adjustment of the reference output to equal expected output).     

Working time and wage rate differences: Revisiting the role of preferences and labor scarcity

In the labor economics literature, discrimination is often defined as occurring when identically productive workers, placed in the same working conditions, are assigned contracts involving, in particular, different hourly wage rates. This paper applies contract theory to explain how in some circumstances such differences take place, even if contract discrimination and productivity differences are strictly ruled out. It is assumed that worker types differ only in their consumption/leisure preferences and in their availability. A labor cost-minimizing firm offers a menu of labor contracts, and lets workers self-select. The model reveals external effects between types and the possibility of a paradoxical situation in which less demanding workers obtain a higher wage rate. A mixed employment regime always requires a minimum number (a quantum) of most demanding workers.     

Productivity, innovation and R&D: Micro evidence for Italy

By exploiting a rich firm level data-base, this paper presents novel empirical evidence on the effect of process and product innovations on productivity, as well as on the role played by R&D and fixed capital investment in enhancing the likelihood of introducing innovations at the firm level. Our results imply that process innovation has a large impact on productivity. Furthermore, R&D spending is strongly positively associated with the probability of introducing a new product, whereas fixed capital spending increases the likelihood of introducing a process innovation. The latter result might reflect the fact that new technologies are frequently embodied in new capital goods. However, the effect of fixed investment on the probability of introducing a process innovation is magnified by R&D spending internal to the firm. This implies that R&D can affect productivity growth by facilitating the absorption of new technologies.     

企业人力资本投资的困境

本文以产权理论为依据,分析了企业人力资本投资的困境.人力资本的天然私有性使得企业进行培训投资的直接结果是受训者人力资本水平的提高,企业在与培训后雇员的谈判关系中处于不利地位,企业必须将培训的部分收益给予雇员,形成企业人力资本投资的困境,从而对企业事前的培训投资产生一定的扭曲.只有当预期未来收益足够高时,企业才会提供培训.各种影响企业获得收益的因素都会对企业的培训产生影响.     

ON THE USE OF FIRM FIXED EFFECTS AS A PRODUCTIVITY MEASURE FOR ANALYZING LABOR MARKET MATCHING

The present note evaluates the performance of firm fixed effects as a productivity measure when identified from wage regressions with two‐way fixed effects in matched employer‐employee data. This setting is frequently applied to study the matching between workers and firms. Exploiting wage and production data from a large administrative German data set, I find that the correlation between firm fixed effects (FFE) and total factor productivity is close to zero. Once TFP is used, the matching pattern is positive assortative, whereas the two‐way fixed effect technique yields the opposite result.     

Optimal employment contracts with bankruptcy constraints

Consider the optimal incentive compatible contract offered by a firm with private information to its risk-averse employees. If the firm is subject to a binding limited liability or bankruptcy constraint then the contract will yield underemployment in low productivity states (relative to full-information efficiency). Such contracts either yield underemployment in all states, or excessively high variability in employment.     

Unions and Efficient Training

The paper examines the optimal level of training investment when trained workers are mobile, wage contracts are time-consistent, and training comprises both specific and general skills. The firm has ex post monopsonistic power that drives trained workers' wages below the social optimum. The emergence of a trade union bargaining at the firm-level can increase social welfare, by counterbalancing the firm's ex post monopsonistic power in wage determination. Local union-firm wage bargaining ensures that the post-training wage is set sufficiently high to deter at least some quits, so that the number of workers the firm trains is nearer the social optimum     

Shareholders and Stakeholders: Human Capital and Industry Equilibrium

Producing high technology output and supplying sophisticated services often involves costly investment in industry-specific skills. But the threat of poaching means that it is the individual 'stakeholder', not the firm, who must bear the cost. We investigate various mechanisms for funding human capital investment in an industry equilibrium framework where capital market imperfections would (in the absence of intervention) result in underinvestment. The main result is that government provision of loan guarantees (conditional on no-bankruptcy) leads to wage hikes which raises profits in a socially inefficient manner: income contingent loans and levy subsidy schemes, meanwhile, can result in a socially efficient outcome