Employer’s moral hazard and wage rigidity

albanese, marina and navarra, cecilia and Tortia, Ermanno (2013): Employer’s moral hazard and wage rigidity. Published in: DEM Discussion Papers (February 2013)

Abstract

The standard explanation of wage rigidity in principal agent and in efficiency wage models is related to worker risk-aversion. However, these explanations do not consider at least two important classes of empirical evidence: (1) In worker cooperatives workers appear to behave in a less risk averse way than in for profit firms and to accept fluctuating wages; (2) The emerging experimental evidence on the employment contract shows that most workers prefer higher but more uncertain wages to lower fixed wages. Workers do not appear to express a preference for fixed wages in all situations and different ownership forms, in our case worker cooperatives and for-profit firms, behave in different ways when dealing with the trade-off between wage rigidity and employment fluctuations. More specifically, worker cooperatives are characterized, in relative terms, by fixed employment levels and fluctuating wages, while for-profit firms are characterized by fixed wages and fluctuating employment. Our paper reinterprets these stylized facts by focusing on the relationship between wage rigidity and worker risk aversion in light of the presence of employer post contractual opportunism. Contractual incompleteness and private information on the side of the employer can compound in favouring the pursuit of the employer’s objectives, when they diverge from the employee’s ones. The idea of employer moral hazard is able to disentangle the observed behavioural differences in different ownership forms. By resorting to the standard efficiency wage framework, we show that, in the presence of employer moral hazard, employees in capitalistic firms generally prefer fixed wage, accepting this way a positive risk of lay-off. On the contrary, one of the main functions of fluctuating wages in worker cooperatives is to minimize the risk of lay-off.

• Item Type: MPRA Paper
• Language: English
• Keywords: risk aversion; employer contract; moral hazard; asymmetric information; hidden action; risk aversion; income insurance; employment insurance; worker cooperatives
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J31 - Wage Level and Structure ; Wage Differentials; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L23 - Organization of Production

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