Abstract
This paper examines the tie between the popular “black box” neoclassical quantity-setting firm under demand uncertainty and a firm with a rudimentary but explicit “employee relation” organizational structure in which workers are offered fixed wages for following management directives. Surprisingly, the quantity-setting firm unambiguously mimics optimal employment relation hiring and work rules when the contract is incentive-compatible ex post. The attitude toward risk is shown to be the key determinant of whether or not the quantity-setting firm replicates the optimal employment relation contract when ex post incentive-compatibility is relaxed.
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Turnbull, G.K. Incentive compatibility and the quantity-setting competitive firm under demand uncertainty. Journal of Economics Zeitschrift für Nationalökonomie 58, 77–90 (1993). https://doi.org/10.1007/BF01234802
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DOI: https://doi.org/10.1007/BF01234802