Conflict, Wages, and Multiple Equilibria

Abstract

Firms’ compensation practices affect the protection of investors’ interests and the degree of economic inequality by changing the stakes of engaging in appropriation activities versus respecting the status quo. We use a general equilibrium model where workers can either work peacefully or join a guerrilla movement that expropriates entrepreneurs. If workers are peaceful, they receive a competitive wage. If they join a guerrilla movement, they receive a share of the appropriated wealth, which depends positively on the number of guerrilla members. In this framework, we find one low-income, low-wage equilibrium with guerrilla activity and one peaceful, high-income, high-wage equilibrium. The peaceful equilibrium can be reached through redistribution policies such as efficiency wages, which are also used to control agency problems. In essence, through their compensation policies entrepreneurs might be able to control the internal principal-agent issues and simultaneously protect their assets against expropriation, while alleviating economic inequality.

Keywords: conflict, efficiency wages, general equilibrium, income distribution, multiple equilibria