Employer moral hazard and wage rigidity. The case of worker ownedand investor owned firms

tThis paper studies wage and employment rigidity in a labor relationship in different organizationalcontexts. In investor owned firms, if the contract allows for flexible wages, the employer may havean incentive to opportunistically claim low demand and cut wages. Anticipating the employer’s oppor-tunism, workers may demand a fixed-wage contract, which may lead to inefficient layoffs in the presenceof negative demand shocks. In contrast, in cooperatives, where the employer does respond to workers,the risk of employer’s opportunism diminishes and results in an equilibrium characterized by more flex-ible wages and fewer layoffs. By developing these arguments we challenge the traditional explanation ofworkers’ preference for fixed wages based on risk aversion. To support our claim, we develop a principalagent model in which there is incomplete information on both sides of the employment relation. Wemodel both the case of investor-owned firms and worker cooperatives.