Financing Skilled Labor
45 Pages Posted: 7 Aug 2018 Last revised: 30 Jan 2019
Date Written: January 29, 2019
This paper analyzes why some cash-constrained firms offer below-executive workers fixed wages, guaranteed by external financing, while others allow workers to become investors by offering equity-based compensation. The model shows that worker bargaining power plays a key role. When firms compete for their labor, workers demand equity-based compensation. Though such compensation exposes workers to negative events beyond their control and can lead to "workers runs," workers do not internalize this cost when individually negotiating their wages. Guaranteeing fixed wages through external financing avoids this problem, but makes cash-constrained firms compete more aggressively. The model's predictions are in line with the evidence and help explain several puzzling stylized facts.
Keywords: Financing wages, wage structure of non-executive employees, worker runs, worker bargaining power, noncompetition agreements.
JEL Classification: G32, M52, J54, J33
Suggested Citation: Suggested Citation