Compensation of Cooperating Factors

Abstract

alone. Problems may arise, however, if a firm employs more than one factor of production. This is because the firm's productivity derives from its ability to organize the collective behavior of its factors. This collective behavior often requires that the factors perform their tasks either simultaneously or consecutively and that their workdays bear some appropriate relationship to one another. Yet only by coincidence would the workdays preferred by each factor conform to this relationship. The firm would therefore hardly be content to offer each factor its going wage and allow it to choose for itself its hours of work. Yet this is precisely the way firms are assumed to behave in traditional theories of factor markets. We would expect instead that the firm will itself decide both the length of the workday and the rate of compensation for each factor. It must choose these wage-hours combinations not only to maximize its own productivity, but also to lure factors successfully away from competing opportunities elsewhere in the economy. These considerations complicate both the theory of the firm and the theory of the consumer, with results which we will see later in this paper. However, we should first note two alternative methods of reconciling the conflicting interests of firms and factors, methods which could conceivably justify the traditional theories of their behavior. The first method assumes heterogeneous preferences among consumers and heterogeneous technologies among firms. In that case, while the

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