Research Discussion Papers, Bank of Finland
No 16/2000:
Capital Structure, Wage Bargaining and Employment
Erkki Koskela and Rune Stenbacka
Abstract: We offer a unified framework to analyze the determination
of employment, employee effort, wages, profit sharing and capital structure
when firms face stochastic revenue shocks. We apply a generalized Nash
bargaining solution, which extends the wage bargaining literature by
incorporating efficiency wage considerations, profit sharing and capital
structure. The profit sharing instrument is demonstrated to have positive
effort-augmenting and wage-moderating effects, which exactly offset the
negative dilution effect in equilibrium. Leverage is shown to reduce
employment and to have a strategic commitment value as a wage-moderating
mechanism for firms facing unions in bilateral wage negotiations. Finally,
some implications for equilibrium unemployment are discussed.
Keywords: wage bargaining; profit sharing; capital structure; employment; (follow links to similar papers)
JEL-Codes: G32; J41; J51; (follow links to similar papers)
38 pages, November 1, 2000
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