LABOR MARKET SHARE CONTRACTS WHEN THE FIRM HAS TWO VARIABLE INPUTS

Authors

  • Christopher J. Ellis

    Search for more papers by this author
    • *Department of Economics, University of Oregon. I wish to thank Barry Naughton, Steve Haynes, Mike Grove, Chulsoon Khang, Joe Stone and three referees from this journal for their helpful comments.


Abstract

This paper extends Weitzman's analysis of share contracts. Firstly, a second variable input is introduced into a firm's production technology. Some share contracts give the firm an incentive to reduce worker compensation by manipulating the second variable input. This implies that contracts which possess this property cannot support the same long-run equilibrium as would be achieved with a wage contract. Secondly, a positively sloped labor supply curve is introduced. It is shown that while share contracts reduce involuntary unemployment, they may not reduce total unemployment vis-a-vis wage contracts. The paper identifies the factors which determine relative employment variability.

Ancillary