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Privatization and efficiency wages

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Abstract

The impact of privatization is investigated in a shirking model of efficiency wages. Without trade unions, privatization — modeled as a stricter control of employees — lowers wages and raises employment, output, and profits, while effort and productivity effects depend on the employees' risk aversion. However, for a utilitarian monopoly union, facing a company characterized by a constant-elasticity labor-demand schedule, privatization raises efficiency wages. If privatization is modeled as a stronger profit orientation, wages, effort, and labor productivity will rise, while employment will shrink in a wage-setting firm. Again, wage and employment effects can be reversed in the case of wage negotiations.

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Goerke, L. Privatization and efficiency wages. Journal of Economics Zeitschrift für Nationalökonomie 67, 243–264 (1998). https://doi.org/10.1007/BF01234645

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