Information structure, labor contracts and the strategic use of debt

Kais Dachraoui and Georges Dionne ()
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Kais Dachraoui: HEC Montreal, Canada Research Chair in Risk Management

No 98-3, Working Papers from HEC Montreal, Canada Research Chair in Risk Management

Abstract: We introduce information structure as a variable to explain differences in salary profiles and rates of separation among firms. More specifically, we prove that in the case of symmetrical information in the worker-firm relation the salary contract is of the spot type and firm's financial structure is irrelevant in wage setting. In the case where workers have private information on their type, the work contract is such that firms integrate a higher total wages bill into their future investment decisions. We also show that debt can improve welfare and permit the establishment of optimal work contracts. Moreover, in this case, debt is higher in the most specific firms. We also show how the quality of workers within a firm affects its financial structure, which identifies another determinant of debt-equity ratio. Two conclusions are drawn from this work: (i) the affirmation that more specific firms have lower debt ratios (Williamson, 1985) and offer flatter tenure-salary profiles is not always true; and (ii) the benefits of seniority in the firm may be explained as part of a contractual solution meant to sort out smart applicants from others.

Keywords: Debt; labor contracts; information structure; seniority; self-selection (search for similar items in EconPapers)
JEL-codes: D80 J33 (search for similar items in EconPapers)
Pages: 26 pages
Date: 1999-10-01
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Related works:
Working Paper: Information structure, labour contracts and the strategic use of debt (1998)
Working Paper: Information Structure, Labour Contracts and the Strategic Use of Debt (1998)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:crcrmw:1998_003

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