Internal Bargaining, Labor Contracts, and a Marshallian Theory of the Firm

Abstract

The theme of this paper is due to Alfred Marshall who states that nearly the whole income of a business may be regarded as a ... composite quasi-rent divisible among different persons in the business by bargaining supplemented by custom and by notion of fairness... [And] the division of quasi-rents entails de facto some sort of profit-loss sharing between almost every business and its employees (Principles of Economics, 8th ed., Book VI, ch. VIII, Sec. 10, pp. 520-21). Marshall emphasizes that a significant portion of composite quasi rent is derived from the organization of business and would be lost if employer-employee connections were dissolved. In this view, bargaining can even be tacit insofar as there is an organizational basis which ensures agreement among the concerned parties. Consequently, internal bargaining models of the firm may be applicable to the analysis of European-style codetermination and Japanese-style labor management. Also, as the relative bargaining strength between labor and management changes, such a view of the firm admits as its extrema, the organization of a labor-managed firm (LMF), and the textbook case of a profit-maximizing firm (PMF). Masahiko Aoki (1980, 1982) and Jan Svejnar (1982) have recently explored models of an internal bargaining firm. Their analyses, however, consider the firm's long-run behavior only under restricted circumstances without market uncertainty. The relevance of the internal bargaining approach to profit sharing and labor management would be enhanced if we integrated the firm's short-run wage-employment policies with its long-run plans for the rate of growth and capital-labor substitutions. This I do by underscoring the firm's organizational basis, which is essentially a long-term contractual association between workers and management. I combine Costas Azariadis' (1975) and Martin Baily's (1974) apparatus of labor contracting with efficient bargaining to investigate the effect of varying degrees of labor's bargaining power upon the firm's shortand long-run policies under uncertainty. These results are then contrasted with the empirical findings of collective bargaining (for example, Richard Freeman and James Medoff, 1981), conventional results of LMF models (Jaroslav Vanek (1970); Benjamin Ward, 1958), and the recent macroeconomic approaches to wage-employment adjustments (Ian McDonald and Robert Solow, 1981).

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