THE BROTHER‐IN‐LAW EFFECT* |
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| Authors: | David K. Levine Federico Weinschelbaum Felipe Zurita |
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| Affiliation: | 1. Washington University in Saint Louis, U.S.A.;2. Universidad de San Andrés, Argentina;3. Pontificia Universidad Católica de Chile, Chile;4. We are grateful to NSF grant SES‐03‐14713 for financial support and to James Schmitz and participants at various seminars for useful comments. Please address correspondence to: David Levine, Department of Economics, Washington University in Saint Louis, Campus Box 1208, St. Louis, MO 63130‐4899, USA. E‐mail: david@dklevine.com. |
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| Abstract: | When a firm is forced to pay abnormally high wages, hiring transfers rents. This effectively endows the employer with the ability to grant favors, and he may wish to do so even at some cost to efficient production. We refer to this as the brother‐in‐law effect. This article analyzes its consequences. When the brother‐in‐law effect is due to unionization, decisions regarding both the number and type of workers employed could be inefficient; overemployment could obtain even relative to the workforce that would be employed without unionization. We also identify cases in which nepotism improves efficiency. |
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