Incentive compatibility and the quantity-setting competitive firm under demand uncertainty |
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Authors: | Professor Geoffrey K Turnbull |
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Institution: | (1) Present address: Department of Economics, Louisiana State University, 70803-6306 Baton Rouge, LA, USA |
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Abstract: | This paper examines the tie between the popular black box neoclassical quantity-setting firm under demand uncertainty and a firm with a rudimentary but explicit employee relation organizational structure in which workers are offered fixed wages for following management directives. Surprisingly, the quantity-setting firm unambiguously mimics optimal employment relation hiring and work rules when the contract is incentive-compatible ex post. The attitude toward risk is shown to be the key determinant of whether or not the quantity-setting firm replicates the optimal employment relation contract when ex post incentive-compatibility is relaxed. |
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