Conflict, Wages, and Multiple Equilibria

Documentos de Trabajo, No. 8

27 Pages Posted: 25 Jan 2010

See all articles by Hernando Zuleta

Hernando Zuleta

Universidad del Rosario

Veneta Andonova

Universidad de los Andes, Colombia

Date Written: October 1, 2006

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

Suggested Citation

Zuleta, Hernando and Andonova, Veneta, Conflict, Wages, and Multiple Equilibria (October 1, 2006). Documentos de Trabajo, No. 8, Available at SSRN: https://ssrn.com/abstract=1541957 or http://dx.doi.org/10.2139/ssrn.1541957

Hernando Zuleta (Contact Author)

Universidad del Rosario ( email )

Calle 12 No. 6-25
Bogota, DC
Colombia

Veneta Andonova

Universidad de los Andes, Colombia ( email )

Carrera Primera # 18A-12
Bogota, DC D.C. 110311
Colombia

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