Employer Moral Hazard, Wage Rigidity, and Worker Cooperatives: A Theoretical Appraisal

Cecilia Navarra and Ermanno Tortia

Journal of Economic Issues, 2014, vol. 48, issue 3, 707-726

Abstract: We study the impact of employer's opportunism on wage rigidity in capitalist companies by arguing that the need to fix wages is crucially influenced by the asymmetric distribution of decision-making power and information in favor of the stronger contractual party — the employer, and against the weaker contractual party — employees. The capitalist entrepreneur can make decisions, whose negative consequences are borne by workers in terms of lower wages and more intense work pace. Excessive wage reductions in the face of negative exogenous shocks or too risky investment decisions represent the main instances of such opportunistic behavior. Fixed wages can represent workers' best response to the emerging risk of the employer moral hazard, but this implies a heightened risk of layoffs since wages and employment levels cannot be fixed at the same time. Besides discussing piece rate contracts, profit-sharing and codetermination as counterexamples, we observe worker cooperatives which depart from the presence of contrasting interests and private information in the principal-agent framework. Indeed, several empirical studies have shown greater employment stability and wage flexibility in worker cooperatives vis-à-vis the capitalist firm.

Date: 2014
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Working Paper: Employer moral hazard, wage rigidity and worker cooperatives: A theoretical appraisal (2013)
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DOI: 10.2753/JEI0021-3624480306

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