IDEAS home Printed from https://ideas.repec.org/p/ris/crcrmw/1998_003.html
   My bibliography  Save this paper

Information structure, labor contracts and the strategic use of debt

Author

Listed:
  • Dachraoui, Kais

    (HEC Montreal, Canada Research Chair in Risk Management)

  • Dionne, Georges

    (HEC Montreal, Canada Research Chair in Risk Management)

Abstract

We introduce information structure as a variable to explain differences in salary profiles and rates of separation among firms. More specifically, we prove that in the case of symmetrical information in the worker-firm relation the salary contract is of the spot type and firm's financial structure is irrelevant in wage setting. In the case where workers have private information on their type, the work contract is such that firms integrate a higher total wages bill into their future investment decisions. We also show that debt can improve welfare and permit the establishment of optimal work contracts. Moreover, in this case, debt is higher in the most specific firms. We also show how the quality of workers within a firm affects its financial structure, which identifies another determinant of debt-equity ratio. Two conclusions are drawn from this work: (i) the affirmation that more specific firms have lower debt ratios (Williamson, 1985) and offer flatter tenure-salary profiles is not always true; and (ii) the benefits of seniority in the firm may be explained as part of a contractual solution meant to sort out smart applicants from others.

Suggested Citation

  • Dachraoui, Kais & Dionne, Georges, 1999. "Information structure, labor contracts and the strategic use of debt," Working Papers 98-3, HEC Montreal, Canada Research Chair in Risk Management.
    • Handle: RePEc:ris:crcrmw:1998_003
    as

    Download full text from publisher

    File URL: https://www.risksresearch.com/_files/ugd/a6eed3_bb198284e9a84310bd6d4f5a14778981.pdf
    File Function: Full text
    Download Restriction: no
    ---><---

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Dachraoui, K. & Dionne, G., 1999. "Capital Structure and Compensation Policies," Ecole des Hautes Etudes Commerciales de Montreal- 99-03, Ecole des Hautes Etudes Commerciales de Montreal-Chaire de gestion des risques..

    More about this item

    Keywords

    Debt; labor contracts; information structure; seniority; self-selection;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ris:crcrmw:1998_003. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Claire Boisvert (email available below). General contact details of provider: https://edirc.repec.org/data/hecmtca.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.