Abstract
This paper examines worker incentives in the labor managed firm (LMF) and derives implications for the response of employment and work effort to changes in output price. The proposed model assumes that worker effort is monitored imperfectly and that workers individually choose how much effort to supply on the job. However, the LMF collectively chooses the employment level and dismissal rule. It is shown that the optimal employment level for the LMF increases with relative output price, which is a reversal of the finding in conventional theory. Our model also implies that work effort varies inversely with output price.
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