TY - JOUR
T1 - Employer moral hazard and wage rigidity. The case of worker owned and investor owned firms
AU - Albanese, Marina
AU - Navarra, Cécilia
AU - Tortia, Ermanno C.
PY - 2015/8/1
Y1 - 2015/8/1
N2 - This paper studies wage and employment rigidity in a labor relationship in different organizational contexts. In investor owned firms, if the contract allows for flexible wages, the employer may have an incentive to opportunistically claim low demand and cut wages. Anticipating the employer's opportunism, workers may demand a fixed-wage contract, which may lead to inefficient layoffs in the presence of negative demand shocks. In contrast, in cooperatives, where the employer does respond to workers, the risk of employer's opportunism diminishes and results in an equilibrium characterized by more flexible wages and fewer layoffs. By developing these arguments we challenge the traditional explanation of workers' preference for fixed wages based on risk aversion. To support our claim, we develop a principal agent model in which there is incomplete information on both sides of the employment relation. We model both the case of investor-owned firms and worker cooperatives.
AB - This paper studies wage and employment rigidity in a labor relationship in different organizational contexts. In investor owned firms, if the contract allows for flexible wages, the employer may have an incentive to opportunistically claim low demand and cut wages. Anticipating the employer's opportunism, workers may demand a fixed-wage contract, which may lead to inefficient layoffs in the presence of negative demand shocks. In contrast, in cooperatives, where the employer does respond to workers, the risk of employer's opportunism diminishes and results in an equilibrium characterized by more flexible wages and fewer layoffs. By developing these arguments we challenge the traditional explanation of workers' preference for fixed wages based on risk aversion. To support our claim, we develop a principal agent model in which there is incomplete information on both sides of the employment relation. We model both the case of investor-owned firms and worker cooperatives.
KW - Asymmetric information
KW - Employment contract
KW - Employment insurance
KW - Hidden action
KW - Income insurance
KW - Moral hazard
KW - Risk aversion
KW - Worker cooperatives
UR - http://www.scopus.com/inward/record.url?scp=84949324064&partnerID=8YFLogxK
U2 - 10.1016/j.irle.2014.08.006
DO - 10.1016/j.irle.2014.08.006
M3 - Article
AN - SCOPUS:84949324064
SN - 0144-8188
VL - 43
SP - 227
EP - 237
JO - International Review of Law and Economics
JF - International Review of Law and Economics
ER -