Organizational Design and Technology Choice with Nonbinding Contracts

Lars Stole and Jeffrey Zwiebel
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Jeffrey Zwiebel: Stanford University, GSB

Game Theory and Information from University Library of Munich, Germany

Abstract: We present a new methodology for studying the problem of labor contracting within a firm's boundaries where contracts provide only a minimal commitment to wages and employment. Given the peculiar contractual incompleteness of labor contracts, the resulting wages and profits under an interesting class of complete information bargaining games distort the technological and organizational decisions facing the owner of the firm's capital. We show that in such settings where labor contracts are nonbinding, these decisions are distorted in an economically distinct way compared to the standard neoclassical firm. Among other things, we demonstrate that a firm with a nonbinding contractual basis will, relative to a neoclassical firm, (i) overemploy labor, (ii) underemploy capital, (iii) choose inefficient ``frontloaded'' technologies, (iv) de-emphasize scale and scope economies, and (v) inefficiently allocate labor across productive assets. We apply our analysis to product market competition, unionization, hierarchical management, and horizontal mergers.

JEL-codes: C7 D8 (search for similar items in EconPapers)
Pages: 34 pages
Date: 1993-10-12, Revised 1993-10-13
Note: 34 pages, uuencoded postscript file
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Citations: View citations in EconPapers (3)

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