DP1708 The Labour Market and Corporate Structure

Author(s): Daron Acemoglu, Andrew Newman
Publication Date: October 1997
Keyword(s): Corporate Structure, Efficiency Wages, Labour Market Regulation, Monitoring, Moral Hazard
JEL(s): J41, L23
Programme Areas: International Macroeconomics
Link to this Page: http://www.cepr.org/pubs/dps/DP1708
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This paper analyses the impact of labour demand and labour market regulations on the corporate structure of fims. It finds that higher wages are associated with lower monitoring, irrespective of whether these high wages are caused by labour market regulations, unions or higher labour demand. These comparative static results are in line with the broad trends in the data. The paper also finds that the organization of firms has important macroeconomic implications. In particular, monitoring is a type of ‘rent-seeking’ activity and the decentralized equilibrium spends excessive resources on monitoring. Labour market regulations that reduce monitoring by pushing wages up may increase net output or reduce it only by a small amount even though they reduce employment.