Search, Concave Production, and Optimal Firm Size

Eric Smith

No 882, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper presents a simple search and bargaining economy in which firms use concave production. Because a firm and worker negotiate over the worker's marginal productivity, the firm's wage is a function of its labour force. Reacting to this wage function, firms choose an excessively large and inefficient number of workers. They overemploy, but because too few firms exist in equilibrium, aggregate employment and vacancies are suboptimal. Imposing a fixed exogenous wage, for example by legislating a minimum wage or through union contracting, reduces this inefficiency.

Keywords: Bargaining; Firm Size; Minimum Wages; Search; Unions (search for similar items in EconPapers)
JEL-codes: J30 J41 J50 (search for similar items in EconPapers)
Date: 1994-01
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Citations: View citations in EconPapers (9)

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Journal Article: Search, Concave Production, and Optimal Firm Size (1999)
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