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Positional Wages, Market Wages and Firm Size

Author

Listed:
  • Rene van den Brink

    (Department of Economics, Free University Amsterdam)

  • Pieter H.M. Ruys

    (Dept. of Econometrics & Operational Research, Tilburg University)

Abstract

We model a firm in an institutional market setting, consisting of a production technology and its governance. The governance consists of a hierarchical firm structure, a cost efficiency parameter,and an internal pay system. The depth of the firm is determined by profit maximization under the participation restriction that lowest wages meet reservation wages. Reservation wages are endogenously determined in the institutional market economy. We give conditions guaranteeing a finite optimal firm size. Using CES-production technologies we illustrate how firm size depends on labor substitutability, and show that a linear technology yields the deepest structure and a complementary the flattest structure.

Suggested Citation

  • Rene van den Brink & Pieter H.M. Ruys, 2005. "Positional Wages, Market Wages and Firm Size," Tinbergen Institute Discussion Papers 05-020/1, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20050020
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    Cited by:

    1. Ruys, P.H.M., 2005. "The Governance of Services," Other publications TiSEM bcf108dc-df19-4639-9d25-e, Tilburg University, School of Economics and Management.
    2. Ruys, P.H.M., 2005. "The Governance of Services," Other publications TiSEM 7bbd8514-cbab-4a89-9136-6, Tilburg University, School of Economics and Management.

    More about this item

    Keywords

    Optimal firm size; governance; hierarchy; internal organization structure; cooperative game; permission value; labor substitutability; general equilibrium;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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