13.04.2023 The Firm#

Chapter 6

Firm: a business organization

  • employs people

  • inputs to outputs

  • price > cost of production

  • concentration of power in owners / managers

Structure#

separation of ownership (shareholders) and control (managers)

  • a principal Agent Problem

graph TD subgraph The Firm 1(Board of Directors) --control--> 2((Manager)) 2 --> 3(Worker 1) & 4(Worker 2) & 5(...) end shareholders --elect--> 1

inner firm is different to markets:

  • market = voluntarily,

  • Work = involuntarily

firms are structured around contracts, without price mechanism

Contract#

Contract: legal understanding, that specifies a set of actions that parties must undertake

  • transfer of authority, not ownership!

  • in wage relations = incomplete

    • do not specify every aspect

    • not always perfectly enforceable

    • firms do not force employess to stay on job

Employment rent#

how to compensate workers? with wage!

  • employment rent > reservation wage (alternative)

  • cost of job loss

  • induce workers to stay on job

also includes calculation regarding unemployment benefit

2023-04-17_17-35-22

Labor Discipline#

why do high wages motivate us?

  • higher wage

  • higher employment rent

  • higher cost of job loss

  • more motivation

=> workers choose effort based on wage!

Workers best response curve to wage offer

img

Workers Best Response Function: $\( e = E(\underset{+}{w},\underset{-}{a}, \underset{+}{p},\underset{-}{b}, \underset{+}{d}) \)$

  • e = effort Level

  • w = wage

  • a = disutility of effort

  • p = probability of getting fired

  • b = unemplyment benefits

  • d = duration fo unemployment

Profit#

firms maximize profit $\( profit = \underbrace{R(N \times e)}_{Revenue} - \underbrace{N\times w}_{Costs} \\ \implies profit = R(N*w*\frac{e}{w})- (N*w) \)$ the higher the effort per wage dollar, the higher the profit

img

Wage#

gets determined at MRS = MRT

but shift at policy shocks:

  • higher benefits = less effort

  • higher unemployment = more effort

higher wages can be profitable for firm (adverse selection, turnover, …)