Efficiency Wages and Futures Markets

Kit P. Wong and Udo Broll ()
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Kit P. Wong: affiliation not available

No 28, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper places the competitive firm a la Sandom in a standard efficiency wage model, wherein the work effort of labor depends on the wage rate set by the firm. Irrespective of the availability of hedging opportunities, we show that the Solow condition under which the equilibrium effort-wage elasticity equals unity is a norm. Thus, the optimal wage rate paid by the firm is invariant to the risk attitude of the firm and to the incidence of output price uncertainty. We further show that hedging activities induce the firm to hire more labor as a result of a reduction in its risk exposure. Thus, the introduction of futures markets is a beneficial in that employment is increased and output is enhanced.

Keywords: efficiency wages; price uncertainty; futures markets (search for similar items in EconPapers)
JEL-codes: D21 J31 (search for similar items in EconPapers)
Pages: 14 pages
Date: 1999-01
New Economics Papers: this item is included in nep-fin and nep-lab
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