PROJECT ABSTRACT The main project in this proposal explores the organization and functioning of firms whose employees have sufficient power to negotiate their individual employment terms. Employment relations of this type are obviously widespread. In many or even most firms, the terms of employment of certain key employees are determined in direct bargaining between the employee and the firm. But, more importantly, there are many firms in which relations of this form encompass a substantial subset of a firm's workforce. The latter category includes firms that employ highly skilled labor such as high-technology firms, law firms, universities, professional sports teams, and perhaps even small firms that employ less-skilled labor. This situation is clearly distinct from those addressed by the standard textbook models, in which workers are assumed to possess no bargaining power, on the one hand, and the fully unionized firm's model, on the other hand. Yet despite the obvious relevance of this situation, there is only one theoretical analysis that considers it. The purpose of the proposed research is to develop an understanding of how such employment relations work and how their presence affects economically interesting magnitudes. Specifically, it explores whether and under what circumstances employment relations of this type have a systematic effect on the level of employment (and hence production), and how they affect the hiring practices and the organization of the work within the firm. A central step in the research entails the development of a new model of the firm that combines the dynamic evolution of the firm's work-force with the process of contracting and recontracting between the firm and its employees. The dynamic nature of the model is necessitated by the recognition that the firm's opportunities of replacing employees play a major role in shaping the outcomes of such employment relations. Preliminary analysis establishes that, despite the inherent complexity of the scenarios under consideration, it is possible to obtain relatively transparent models that capture some of the main ingredients of the situation and can serve as the basic framework for empirical investigation. More importantly, the preliminary analysis also shows that the predictions regarding wage and employment outcomes are indeed systematically and significantly different from the predictions of existing theories.
