Title: Efficiency wages and futures markets
Reference Number: 1007
Publication Date: February 2000
JEL Classifcation: D21; J31
Author(s):

Udo Broll
University of Saarland

Kit Pong Wong
University of Hong Kong

Abstract:
This paper places the competitive firm a la Sandmo in a standard efficiency wage model, wherein the work effort of labor depends on the wage rate set by the firm. Irrespective of the availability of hedging opportunities, we show that the Solow condition under which the equilibrium effort-wage elasticity equals unity is a norm. Thus, the optimal wage rate paid by the firm is invariant to the risk attitude of the firm and to the incidence of output price uncertainty. We further show that hedging activities induce the firm to hire more labor as a result of the reduction in its risk exposure. Thus, the introduction of futures markets is beneficial in that employment is increased and output is enhanced.

Key words: Efficiency wages; Price uncertainty; Futures markets

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Last modified: 07/12/2003