Unit 6

Cooperative

A firm that is mostly or entirely owned by its workers, who hire and fire their managers. Because profits are paid out to workers, there is less need for supervision and monitoring.

Contracts

A legal document or understanding that specifies a set of actions that parties to the contract must undertake.

Firm

A business organization which employs people, purchases inputs to produce market goods and services, sets prices greater than the cost of production.

Involuntary Unemployment

Being out of work, but preferring to have a job at the wages and working conditions that otherwise identical employed workers have.

Principal-Agent Models

Capture interactions under incomplete contracts. This relationship exists when one party (the principal) would like another party (the agent) to act in some way, or have some attribute that is in the interest of the principal, and that cannot be enforced or guaranteed in a binding contract.

Firms, markets

The division of labour is coordinated in two ways: _____, _____.

Employment Rent

Cost of job loss including lost income while searching for a job, costs required to start a job, loss of non-wage benefits, social costs

Incomplete Contract

Does not specify, in an enforceable way, every aspect of the exchange

verifiable information

Information that can be used to enforce a contract.

Assymetric information

Information that is relevant to the parties in an economic interaction, but is known by some but not by others.

incomplete

The contract between a firm and its employees is _____.

Firm-specific asset

Something that a person owns or can do that has more value in the individual's current firm than in their next best alternative.

Separation of Ownership and control

The attribute of some firms by which managers are a separate group from the owners.

worker's best response function (to wage)

The optimal amount of work that a worker chooses to perform for each wage that the employer may offer.

Division of labour

The specialization of producers to carry out different tasks in the production process.

Efficiency Wage

Wages set higher than the reservation wage so workers will care about losing their job and provide more effort.

Reservation Wage

What an employee would get in alternative employment, or from an unemployment benefit or other support, were he or she not employed in his or her current job.

Hidden Action Problem

occurs when there is a conflict of interest between the principal and the agent over some action that may be taken by the agent and this action cannot be subjected to a complete contract.