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Labour Contracts, Product Market Oligopoly, and Involuntary Unemployment

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  • Kuhn, Kai-Uwe

Abstract

The simultaneous occurrence of (ex post) involuntary unemployment and underemployment is explained by strategic contracting of firms operating in oligopolistic product markets. Firms have an incentive to offer labor contracts in which wage payments (net of opportunity costs of labor) exceed layoff payments. Such contracts increase marginal costs in bad states, thus relaxing price competition in the product market. In equilibrium, this strategic incentive leads to inefficiently low expected employment, inefficiently high use of other inputs, and inefficient risk bearing by workers relative to the cost minimizing solution. When the product market becomes fragmented, the distortions in the input markets disappear. Copyright 1994 by Royal Economic Society.

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  • Kuhn, Kai-Uwe, 1994. "Labour Contracts, Product Market Oligopoly, and Involuntary Unemployment," Oxford Economic Papers, Oxford University Press, vol. 46(3), pages 366-384, July.
    • Handle: RePEc:oup:oxecpp:v:46:y:1994:i:3:p:366-84
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    Cited by:

    1. John S. Heywood & Guangliang Ye, 2009. "Delegation in a mixed oligopoly: the case of multiple private firms," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 30(2), pages 71-82.
    2. BOCCARD, Nicolas & WAUTHY, Xavier, 1999. "Relaxing Bertrand competition : capacity commitment beats quality differentiation," LIDAM Discussion Papers CORE 1999056, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    3. Boccard, N. & Wauthy, X.Y., 2010. "Equilibrium vertical differentiation in a Bertrand model with capacity precommitment," International Journal of Industrial Organization, Elsevier, vol. 28(3), pages 288-297, May.
    4. Kirstein, Roland & Kirstein, Annette, 2004. "Inefficient Intra-Firm Incentives Can Stabilize Cartels in Cournot Oligopolies," CSLE Discussion Paper Series 2004-09, Saarland University, CSLE - Center for the Study of Law and Economics.
    5. Kuhn, Kai-Uwe, 2002. "Technology choice and capital structure under rate regulation: a comment," International Journal of Industrial Organization, Elsevier, vol. 20(2), pages 269-278, February.

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