Employer moral hazard and wage rigidity. The case of worker owned and investor owned firms

Marina Albanese (), Cecilia Navarra and Ermanno Tortia

International Review of Law and Economics, 2015, vol. 43, issue C, 227-237

Abstract: 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.

Keywords: Employment contract; Risk aversion; Moral hazard; Asymmetric information; Hidden action; Income insurance; Employment insurance; Worker cooperatives (search for similar items in EconPapers)
JEL-codes: D81 D82 D86 J54 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Working Paper: Employer moral hazard and wage rigidity. The case of worker-owned and investor-owned firms (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:irlaec:v:43:y:2015:i:c:p:227-237

DOI: 10.1016/j.irle.2014.08.006

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