14 The Firm Flashcards
Define contract
A legal document or understanding that specifies a set of actions that parties to the contract must undertake.
What is meant by the separation of ownership and control?
When managers decide on the use of other people’s funds.
How do contracts affect the firm?
Contracts between firms and employees are incomplete:
- tasks depend on future (unknown) events
- aspects of the job are different to measure and base wages on e.g. effort
What is piece pay work?
A type of employment in which the worker is paid a fixed amount for each product made (commission).
Pros and cons of piece pay work
Pros: incentive to work.
Cons: there are vulnerable to performance factors beyond their control, and possible without any guarantee there will always be a demand for their “piece”.
Define cooperative
A form that is mostly or entirely owned by its workers, who hire and fire the managers.
Pro and con of cooperativves
As profits are paid out to workers - less supervision/monitoring needed. But could lead to free rider problems.
What is employment rent?
The difference between the value of the job (inc. all benefits and costs) and the value of the next best option - like opportunity cost.
What does employment rent include? (4)
- Lost income while searching for a job
- Costs required to start a new job e.g. relocation
- Loss of non-wage benefits e.g. medical insurance
- Social costs (stigma of being unemployed)
Labour Discipline Model, simply put
Larger employment rent
→ large cost of job loss to worker
→ worker puts in more effort to reduce chance of termination
One way to increase the employment rent is for the firm to raise wages.
Labour Discipline Model diagram
Show how efficiency wages are calculated
Profits are maximised at the steepest isocost line, subject to the worker’s best response curve.
MRS = MRT
Best response curves based on unemployment
Define involuntary unemployment
Being out of work, but preferring to have a job that otherwise identical workers have.
What must be the case for the labour discipline model to work?
There is always unemployment in the labour discipline model.
