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Search, Concave Production, and Optimal Firm Size

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  • Smith, Eric

Abstract

This paper presents a simple search and bargaining economy in which firms use concave production. Because a firm and worker negotiate over the worker's marginal productivity, the firm's wage is a function of its labour force. Reacting to this wage function, firms choose an excessively large and inefficient number of workers. They overemploy, but because too few firms exist in equilibrium, aggregate employment and vacancies are suboptimal. Imposing a fixed exogenous wage, for example by legislating a minimum wage or through union contracting, reduces this inefficiency.

Suggested Citation

  • Smith, Eric, 1994. "Search, Concave Production, and Optimal Firm Size," CEPR Discussion Papers 882, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:882
    as

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    References listed on IDEAS

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    1. David Card, 1992. "Using Regional Variation in Wages to Measure the Effects of the Federal Minimum Wage," ILR Review, Cornell University, ILR School, vol. 46(1), pages 22-37, October.
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    4. Martin Chalkley, 1991. "Monopsony Wage Determination and Multiple Unemployment Equilibria in a Non-Linear Search Model," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(1), pages 181-193.
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    More about this item

    Keywords

    Bargaining; Firm Size; Minimum Wages; Search; Unions;
    All these keywords.

    JEL classification:

    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General

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