The Illyrian Firm Revisited

Abstract

The labor managed firm (LMF) is viewed as a contract-based coalition of workers. The coalition contract defines the worker's membership in the LMF, gives credence to the short-run risk of layoffs, and identifies the LMF as being more than a mere neoclassical production function plus fixed cost. Our model embodies three key features: the rational worker's concern with income-employment risk, the LMF's maximization of the member's expected utility, and the distinction between the LMF's short-run workforce and its long-run membership size. The main result is twofold. First, the LMF's short-run output supply curve is upward sloping in its price, except in the range of very low output prices where revenues are so small relative to the fixed costs as to make the LMF's remuneration fall below the member's short-run reservation income. Second, of equal importance as determinants of the LMF's short-run behavior are the internal and external conditions of financing its short-run fixed cost. In this regard the article delineates the role of internal wage funds and the external insurance provisions in inducing an upward sloping pattern of LMF's output-employment responses in the short run .