Financial Markets and Wages

Claudio Michelacci () and Vincenzo Quadrini

No 116, 2004 Meeting Papers from Society for Economic Dynamics

Abstract: We study the optimal long-term contract offered to workers when firms are financially constrained in their investment plans. To alleviate the tightness of the financial constraints, firms promise an increasing wage profile to workers, that is, they pay lower wages today in exchange of higher future wages. Because firms with tighter financial constraints are also smaller, the wages paid in small firms are lower than the in large firms, and therefore, the model generates a positive relation between the size of the firm and the average wages paid to workers (wage-firm size relation). The model also captures other empirical regularities such as the lower wages paid by fast growing firms and firms in financial distress.

Keywords: Investment financing; long-term contracts; dynamics of wages (search for similar items in EconPapers)
JEL-codes: E24 G31 J31 (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (13)

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Related works:
Journal Article: Financial Markets and Wages (2009)
Working Paper: Financial Markets and Wages (2005)
Working Paper: Financial Markets and Wages (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed004:116

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