Microeconomic Policies in the New Economy

Competition policy, Technology policy, Network industries

Agency Cost of Debt and Lending Market Competition: Is there a Relationship?

We address the question of how lending market competition, measured by the bargaining power of banks, affects the agency costs of debt finance. It is shown that intensified lending market competition will lead to lower lending rates and investment return distributions which are shifted towards lower, but less risky returns. Consequently, it follows that increased lending market competition will reduce the agency cost of debt financing. Hence, our analysis does not lend support to the commonly held view that there would be a trade-off between more intensive lending market competition and higher agency costs of debt finance.Bank competition, agency cost of debt

Product Market Competition, Profit Sharing and Equilibrium Unemployment

We investigate the implications of product market imperfections on profit sharing, wage negotiation and equilibrium unemployment. The optimal profit share, which the firms use as a wage-moderating commitment device, is below the bargaining power of the trade union. Intensified product market competition decreases profit sharing, but increases the negotiated base wage, because the wage-increasing effect of reduced profit sharing dominates the wage-reducing effect associated with a higher wage elasticity of labor demand. Finally, we show that intensified product market competition does not necessarily reduce equilibrium unemployment, because it induces both higher wage mark-ups and lower optimal profit shares.product market competition, profit sharing, wage bargaining, equilibrium unemployment

Equilibrium unemployment under negotiated profit sharing

We study employment, employee effort, wages and profit sharing when firms face stochastic revenue shocks and when base wages and profit shares are determined through collective bargaining. The negotiated profit share depends positively on the relative bargaining power of the trade union and has effort-enhancing and wage-moderating effects. We show that higher profit sharing reduces equilibrium unemployment under circumstances with sufficiently ‘rigid’ labour market institutions, ie sufficiently high benefit- replacement ratios and relative bargaining powers of trade unions. Conversely, profit sharing seems to be destructive from the point of view of employment when the labour market ‘rigidities’ are sufficiently small.wage bargaining; profit sharing; efficiency wages; equilibrium unemployment

Equilibrium Unemployment with Outsourcing and Wage Solidarity under Labour Market Imperfections

We evaluate the effects of outsourcing and wage solidarity on wage formation and equilibrium unemployment in a heterogeneous labour market, where wages are determined by a monopoly labour union. We find that outsourcing promotes the wage dispersion between the high-skilled and low-skilled workers. When the labour union adopts a solidaristic wage policy, it will magnify, and not dampen, this tendency. Further, higher outsourcing will increase equilibrium unemployment among the high-skilled workers, whereas it will reduce it among the low-skilled workers. Overall, outsourcing will reduce economy-wide equilibrium unemployment under the reasonable condition that the proportion of high-skilled workers is sufficiently low.outsourcing, wage solidarity, labour market imperfections, equilibrium unemployment

Equilibrium Unemployment with Credit and Labour Market Imperfections

We study the role of labour and credit market imperfections for the determination of equilibrium unemployment. In the credit market loan contracts are negotiated between financiers and firms, both possessing bargaining power, while the firms and organized labour bargain over the base wage. The sequential labour and credit market negotiations are assumed to take place conditional on the firm having committed itself to use performance-related profit sharing in addition to the negotiated base wage. It is shown that in the presence of profit sharing intensified credit market competition will raise equilibrium unemployment, because it induces wage-enhancing effects causing an increase in the outside option available to union members. Equilibrium unemployment is also an increasing function of firms' bankruptcy risks. It is, however, independent of the degree credit market imperfections if the compensation system is unrelated to firms' profits or if there is a monopoly union in the labour market.Wage and loan bargaining, compensation systems, equilibrium unemployment

Equilibrium unemployment under negotiated profit sharing

We study employment, employee effort, wages and profit sharing when firms face stochastic revenue shocks and when base wages and profit shares are determined through collective bargaining. The negotiated profit share depends positively on the relative bargaining power of the trade union and has effort-enhancing and wage-moderating effects. We show that higher profit sharing reduces equilibrium unemployment under circumstances with sufficiently ‘rigid’ labour market institutions, ie sufficiently high benefit- replacement ratios and relative bargaining powers of trade unions. Conversely, profit sharing seems to be destructive from the point of view of employment when the labour market ‘rigidities’ are sufficiently smallwage bargaining, profit sharing, efficiency wages, equilibrium unemployment

Two at the Top: Quality Differentiation in Markets with Switching Costs

We explore the effects of switching costs on the subgame perfect quality decisions of oligopolists with repeated price competition. We establish a strong strategic quality premium. We show that competition for the establishment of customer relationships will eliminate low-quality firms in period 1 and that low-quality firms can survive only based on poaching profits. The equilibrium configuration is characterized by an agglomeration of two providers of top-quality as soon as switching cost heterogeneity is sufficiently significant. We demonstrate a finiteness property, according to which the two top-quality firms dominate the market with a joint market share exceeding 50 %.quality choice; switching costs; poaching; natural oligopoly

Capital Structure, Wage Bargaining and Employment

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.wage bargaining; profit sharing; capital structure; employment

Compensation and Bargaining with Entrpreneurship as the Outside Option

We analyze the impact of entrepreneurship as an outside option on compensation contracts between a principal and an agent with bargaining power. In the first stage the parties bargain over the base wage and the profit share. In the second stage the principal determines the capital investment and the agent decides on effort. It is shown that while negotiated base wage increases in the degree of the competitiveness in the market for outside equity funding, the profit share is invariant both to the imperfections prevailing in the equity market and to the relative bargaining power of the negotiating parties.Wage bargaining, outside option, entrepreneurship