The Stability of Dividends and Wages: Effects of Competitor Inflexibility
60 Pages Posted: 26 Oct 2016 Last revised: 13 Jun 2018
Date Written: May 26, 2018
We analyze how risk sharing between a firm’s employees and owners depends on its competitors’ response to industry-wide shocks. Focusing on the electricity industry, we obtain a sample of firms with exposure to similar industry risks but different production technologies. We document that firms are more exposed to industry shocks, when their competitors use lower-cost production technologies. This "competitor inflexibility" destabilizes payouts to equityholders, but there is no evidence that it compromises wage stability. Firms do not share systematic risk due to competitor inflexibility with their employees and set wages as if their shareholders’ risk preferences were given.
Keywords: risk-sharing within firms, payout stability, wage stability, competitor inflexibility
JEL Classification: D22, G35, J33, J41, L13, L94
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