heterogeneity tournaments and hierarchies tournament contracts are characterized that simultaneously elicit first best efficient effort levels and self selection of risk neutral heterogeneous workers into ability specific contracts comparisons across self selected ability types are shown to be sometimes necessary to attain efficiency rationales are explored for not commonly observing such contracts in hierarchical organizations

investments holdup and the form of market contracts the authors analyze incomplete contracts to induce efficient investment with exogenous switching costs fixed price contracts are efficient generate some rigidity in prices are renegotiated intermittently by possibly small amounts and when inflation is positive generate asymmetric responses to shocks all consistent with evidence on prices and wages with two sided specific investments efficiency requires prices to have sufficient escalator clauses to avoid renegotiation as observed in many long term contracts a third case with one sided specific investments can generate take or pay contracts and explain why firms sometimes pay for specific investments that appear to benefit employees directly

contributory infringement rule and patents abstract the contributory infringement rule assesses liability to a third party that contributes to the infringement of a patent not only are firms that directly infringe liable but those that indirectly contribute are also liable we investigate how this rule affects the creation of a network of members e g an e commerce network we find that the enforcement of indirect liability does not induce more trials in equilibrium firms settle out of court but because of the threat of trial the network size decreases and the social welfare is reduced surprisingly we find that if the compensation paid by the indirect infringers is high the rule does not benefit the patentholder and may not even give enough r d incentives ex ante it is possible to find a direct compensation for the patentholder that is socially preferable

on union preferences and labour market models insiders and outsiders this paper constructs a model of trade union behavior in which there is a distinction between insiders and outsiders this is used to examine one of the most troublesome issues in macroeconomic theory namely the extent to which a rise in aggregate demand might generate wage increases rather than growth in employment a generalization of the most widely used union utility function is presented the analysis reveals the conditions under which insiders will agree to let outsiders into employment derives two step wage preferences and proves a new result on wage rigidity copyright 1987 by royal economic society

manufacturer liability for harms caused by consumers to others should the manufacturer of a product be held legally responsible when a consumer while using the product harms someone else we show that if consumers have deep pockets then manufacturer liability is not desirable if homogeneous consumers have limited assets then the best rule is residual manufacturer liability where the manufacturer pays the shortfall in damages not paid by the consumer residual manufacturer liability distorts the market quantity when consumers willingness to pay is correlated with their propensity to cause harm it distorts product safety when consumers differ in their wealth levels in both cases consumer only liability may be preferred

a nonuniform pricing model of union wages and employment unlike implicit contracts models the nonuniform pricing model of unions assumes that firms can always shut down ex post to avoid any payments to the union under this restriction employment can differ from a first best even if both workers and firms are risk neutral in general the union chooses to offer quantity discounts on labor and needs to use a seniority rule that regulates the order in which workers are hired to implement these discounts unions lower almost all workers employment probabilities and increase the cyclical volatility of employment and the union nonunion average wage differential will move countercyclically workers preferences over union wage profiles conditional on their seniority exhibit within limits a convenient unanimity property

job duration seniority and earnings an important stylized fact about labor markets is that workers with longer seniority with their current employer have higher earnings than other workers with the same total labor market experience this study shows that workers in longer jobs earn more throughout than workers in a series of shorter jobs and that the measured positive cross sectional return seniority is largely a statistical artifact due to the correlation of seniority with an omitted variable representing the quality of the worker the job or the worker employer match the implication is tha t earnings do not in fact rise very much with seniority copyright 1987 by american economic association

trade union efficiency and overemployment with seniority wage scales inefficient unemployment of union members depends upon the inability of the union to bargain over employment as well as wages the issue of union membership limitations has received less attention as seen in the survey by oswald i 983 grossman i983 considers endogenous membership size with mixed efficiency results but he imposes a number of severe restrictions on allowable contracts in the current paper we examine the issue of union membership size under very general contracts where unions negotiate over wage rates employment levels and compensation payments to laid off workers and further can negotiate differential treatment of seniority groups these general contracts represent a useful benchmark case recognising that the results will change as various limitations on the contract are imposed the treatment of seniority is crucial and we model this by an overlapping generations approach continuing workers at the firm negotiate the contract to be applicable to the following period new hires over that period in the number stipulated in the contract then gain seniority and negotiate the contract for the period after the formulation of the problem with the exception of the treatment of new hirings is similar to that in the implicit contracting literature and many of the results will be familiar unemployment of union members only occurs when the marginal value product of labour fails below the opportunity cost leisure value

employment in the british coal industry a test of the labour demand model the authors test the conventional model of labor demand against the alternative that bargaining takes place over both wages and employme nt for a time series cross section data set covering the british coal industry they note the difficulty of identifying the contract curve under the alternative hypothesis and suggest the use of variables affecting the union and management status quo points as instruments for the endogenous wage they find that outside variables such as benefits and manufacturing wages are important in determining the level of employment thus rejecting the labor demand model copyright 1988 by royal economic society

insiders and outsiders in wage determination a firm starts with a group of insiders or seasoned workers there is also a large pool of outsiders who are initially less productive but are transformed into insiders after one period of employment the firm gains from having a large pool of insiders some of whom may be laid off in bad years insiders gain from keeping their numbers small if the insiders set their wage unilaterally they will choose a path that in this extreme case prevents employment of outsiders even if future employment prospects are good if the wage path is set by bilateral bargaining the extra advantage to the firm permits employment of some outsiders in some situations

work incentives hierarchy and internal labor markets this paper argues that contracts with payment based on a ranking of employee performance can provide performance incentives even under asymmetric information that prevents payment based on individual performance only being enforceable such contracts also fit with five features of labor markets that have aroused considerable interest 1 hierarchical wage structures 2 internal promotion 3 wage rates that rise with seniority and experience more than productivity 4 the variance of earnings increasing with experience and 5 wage rates attached to jobs rather than individuals with differentials set by administrative procedures rather than by reference to external market wages

how high is the private gain from wage indexation the effects of firm specific shocks on the gain from writing state contingent wage contracts are examine in an extension of the model in gottfries 1992 it is shown that the introduction of firm specific uncertainty increases the gain from indexation to prices only moderately moreover nominal wage contracts should be more prevalent when unemployment benefits are high or unemployment spells are short

do wages rise with job seniority many previous studies have found a strong positive effect of job seniority tenure on wages this paper re examines the evidence using a simple instrumental variables scheme to deal with the fact that tenure is likely to be related to unobserved individual and job characteristics that affect the wage we use the variation of tenure over a given job match as the principal instrumental variable for tenure the variation in tenure over the job is uncorrelated by construction with the fixed individual and job match specific components of the error term of the wage equation our main finding is that the partial effect of tenure on wages is small and that general labour market experience and job shopping account for most wage growth over a career the strong cross section relationship between tenure and wages is due primarily to heterogeneity bias prior researchers see mincer and jovanovic 1981 bartel and borjas 1981 borjas 1981 cline 1979 and mellow 1981 and many others have established that job seniority has a strong positive relationship with wage rates in a cross section or a cross section time series of individuals in this paper we re evaluate the evidence concerning the partial effects on wages of job seniority tenure and total labour market experience the extent to which wages rise with tenure is important for several reasons first and foremost the wage tenure profile is a fundamental question about the structure of earnings over careers second the wage tenure profile is a key determinant of the extent to which the earnings power of individuals is tied to specific jobs and it is important for assessment of the losses suffered by displaced workers hamermesh 1984 third evidence that wages rise with job tenure has been used to explain the decline in quits with tenure since the wage growth on the current job lowers the probability that the worker will locate a superior alternative a growing theoretical literature surveyed in parsons 1984 has taken the evidence of a strong wage tenure profile at face value and sought to provide an explanation for the relationship the most prominent explanation is the theory of specific human capital oi 1962 becker 1962 mincer 1974 parsons 1972 kuratani 1973 and hashimoto 1980 in which the growth of wages with tenure holding experience constant is attributed to the worker s share of investments in firm specific skills more recently lazear 1981 has presented a supervision model of wage growth in which firms defer compensation as a means of inducing workers not to shirk freeman 1977 and harris and holmstrom 1982 provide an explanation for wage growth based on an insurance motive salop and salop 1976 nickell 1976 and guasch and weiss 1982 present adverse selection models of wage growth in which firms use a wage tenure profile as a

do trade unions reduce job opportunities of non members this paper examines the structure of the optimal contract that would be chosen by a self interested trade union that represents the interests of some set of m members when it is assumed that there exists a pool of unemployed workers outside the union whose opportunity cost of working is such that they would at least in some states of demand have been employed in a competitive labor market the authors compare wage and employment levels under such a contract with those that would be observed in competitive markets in particular focusing on the impact of the union on the employment opportunities and welfare of non union members copyright 1989 by royal economic society

membership seniority and wage setting in democratic labour unions the dynamic behavior of a democratic monopoly labor union that allocates employment on a length of service basis is studied in the context of a simple model the author shows that a median voter equilibrium can exist in a union consisting of senority ranked workers when voting membership depends on past employment the closed form wage rule of such a union induces a unit root in the autoregressive representation of employment even if the underlying determinants of labor demand are strictly stationary on the other hand chesire cat or disappearing union phenomena are likely to be limited by the forward looking behavior of union members and the sensitivity of union membership to employment copyright 1990 by the london school of economics and political science

seniority and distribution in a two worker trade union unlike existing models that rely heavily on assumptions regarding unions distributional preferences we present a simple model in which union seniority layoff rules and rising seniority wage profiles result from optimal price discrimination against the firm surprisingly even when cash transfers among union members are ruled out unions optimal seniority wage profiles are likely to be completely unaffected by their distributional preferences because of a kink in the utility possibility frontier this suggests that the simple technology of price discrimination may play a key role hitherto unappreciated in explaining union policies that affect the relative well being of different union members

taxation fines and producer liability rules efficiency and market structure implications this paper analyzes the comparative efficiency of producer liability rules and regulatory policy in short run and long run competitive equilibria with endogenous product safety pigouvian taxes on output and safety provision fail to achieve the long run social optimum an appropriately designed policy involving fines on accidents and subsidies on safety provision achieves efficiency however the optimal policy may involve the taxation not the subsidization of product safety tort liability also leads to efficient outcomes but may be associated with perverse structural changes for example increased liability exposure may induce de novo entry in hazardous sectors even with fully capitalized firms the control of external diseconomies created by worker consumer and environmental exposure to hazardous substances is a pervasive problem in many industries consumers and workers are routinely exposed to health risks associated with radiation cigarette smoking diethylstilbestrol des asbestos saccharin dioxin vinyl chloride beta napthylamine benzidine coke oven emissions and various occupational carcinogens arising from the use of basic materials such as pesticides petroleum coal paraffin iron ore nickel and chromium other industries involved with petroleum production nuclear power generation metal mining and smelting pulp milling and solid waste disposal pose the threat of contamination through accidental spills into the environmental medium the unifying feature of these problems is that the extent of external damages whether embodied in the probability of product failure or in the likelihood of human and environmental exposure to hazardous substances is determined jointly by a producer s choice of output and safety provision two important forms of externality control in hazardous sectors of the economy are producer liability rules and direct regulatory control through the use of output pigouvian taxation and fines on injuries this paper provides a comparative analysis of the relative efficiency properties of producer liability rules and regulatory policy in both short run and long run competitive equilibria the essential feature of the model is that the provision of product safety in the hazardous sector is endogenized as a choice variable of the firm the extent or magnitude of external damages can be limited for example by removing carcinogens from consumer products by following re entry guidelines after the application of pesticides by requiring safety

trade unions and seniority employment rules abstract some but not all trade union and insider outsider models assume that a seniority employment rule is used we investigate when firm and union members gain from such a rule and the consequences of their adopting one generally providing a seniority wage scale is also used they gain if union membership is not too large relative to demand and union bargaining power not too great moreover when outsiders are hired under a seniority employment rule employment is at the competitive level these results might explain why bargaining over employment is relatively uncommon and typically occurs only in industries with declining employment

union wages temporary lay offs and seniority it is widely believed that the seniority system in conjunction with the collective bargaining process contributes significantly to the determination of the unemployment level in unionized sectors causa i empiricism suggests that real wage demands often remain buoyant in these sectors in the face of seemingly high rates of unemployment among union members james medoff 1979 p 380 convincingly documents the evidence that adjustment through lay offs is substantially greater in unionized firms than in comparable non unionized firms the usual but somewhat informal explanation is that the outcome of union voting is greatly influenced by senior workers who are fairly certain that they will not be laid off when normal shifts in the industry s demand for labour occur 2 these inframarginal workers are believed to vote for higher wage settlements than they would if their own jobs were not so secure

product safety liability r d and signaling the authors develop a monopoly model of product design and safety signaling incorporating a parametric liability specification the firm first engages in rd injuries lead to losses which are allocated by the liability system the authors vary the liability system s allocation of losses and trace out the implications for r d investment and the price safety relationship copyright 1995 by american economic association

unionized contracts with fixed wage rates and state contingent employment levels a union sets a state independent wage the firm sets employment along the state contingent demand for labor curve the union s maximand is the welfare of its cu rrent members however it sets a wage at which outsiders are recruit ed in good states so as to protect insiders employment prospects in bad states if these newly recruited workers join the union there m ay exist an equilibrium membership comparative statics results are o btained for government policy measures copyright 1988 by the london school of economics and political science

seniority earnings and unions this paper uses a new data source to investigate whether wages rise more with seniority in unionized or non unionized workplaces the data distinguish workers who are covered by incremental wage scales with automatic progression by seniority for union workers with seniority scales the union wage differential increases with seniority this is not the case for union workers without seniority scales taking account of this heterogeneity we are able to reconcile previous paradoxical empirical findings the results provide support for discriminating monopoly models of the trade union and have important efficiency and distributional implications

on the welfare cost of permanent inflation most work on inflation and welfare relies on some variant of the optimal tax framework by the straightforward application of the static optimal tax literature helpman and sadka 1979 attempt to present sufficient conditions under which the optimal rate of inflation is positive in a second best world though they do not discuss the level of optimal inflation as stressed by siegel 1978 in the static problem there is an infinite set of tax rates that minimize welfare costs and hence a value of optimal inflation cannot be determined all we can say is that friedman s optimum quantity of money rule is generally not optimal in a second best world in an intertemporal framework however an optimal inflation rate can be determined summers 1981 presents an explicit expression for the optimal rate of inflation under ad hoc formulations of savings behavior in general the optimal rate of inflation will be determined implicitly by a combination of references and technology the difficulty in saying anything explicit about the optimal rate of inflation is now generally recognized an alternative approach is to explore the welfare cost of inflation more systematically if the welfare cost of inflationary finance is relatively small compared with other distortionary taxes the optimal rate of inflation may well be high the welfare effects are examined by starting with the expenditure function and comparing the