Whether Employees Capture Some of the Rent Earned by Their Employers?

2021-05-12 07:59:45
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The research tries to find out whether employees capture some of the rent earned by their employers. Further, it examines the impact of rent-sharing by employees on investment. The research is relevant to the investment world because investors aim at recouping their investment the shortest time possible. After making an investment, the cost of investment remains irrelevant in decision making hence, important to determine the factors that may affect an investment in the long-run for future and current investments. The effect of the rent-sharing has been presumed in the past studies to have led to under investments and hence increase the need to understand its impact on investments for better decision making. The research will help employers in understanding the relationship between rent-sharing and investment.

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Literature review

The previous studies carried out indicate that there is a relationship between rent-sharing and investment. Rent-sharing and hold up associated lead to reduced investment value as per Grout (1984) literature. The capital invested in properties is sunk and mostly irreversible. Once an employer invests in long-term projects, they are unable to reverse the capital and hence rent-sharing affects the performance of the projects. Though there is a relationship between wages increase and profits earned, rent-sharing is determined by the bargaining put forward by the employer and the employee. The effect of negotiation on rent sharing leads to effect on the unionized firms. The competitors who are non-unionized are not affected by the holdup associated with rent-sharing. The past studies find that the non-unionized firms, for example studies by Addisonet al. (2007) are not affected by the rent-sharing and the value of the investments remains higher than when rent-sharing is in place.,


The research employs models that clearly indicate the revenues generated when bargaining of rent sharing takes place. The setup model shows a sample of bargaining for two periods of a union of workers. The workers analyzed in the model are in the same level of needs and wages. The model assumes employment is permanent and employees aim at remaining with the employer for an extended period of time. The bargaining of rent-sharing contract is assumed to short contract over the employment period of the employees. Capital investment when it cannot be altered and used in another way, and bargaining takes time holdups are experienced. The model assumes these factors involving bargaining are factors in in the model. The model further assumes that when a bargain succeeds, the employees receive wage and the investment in the period receives a fraction of the wage and capital. If the bargain fails, an outside option is considered. In the second period of the model, the same process is repeated. The model assumes that the revenue received from the investment also depends on the number of employees in the union and who the bargain succeeds. In case, the bargain fails and staff go for an outside option the employer pays an additional wages. The model considerations are relatively good to reflect the situation an investment faces in rent-sharing. The employees have options to barging in the rent sharing and when there are delays, the investments experiences holdup. The employees have an opportunity cost in every successful bargain in the income they forfeiture. The model reflects good considerations of the investment considerations that the employer may take in case they fail in bargaining. The model assist in coming up with the real impacts that an investment may have in rent-sharing.

Identification strategy

The research sources of data from Italian companies. The wages in Italy determines by use of bargaining system after some time depending on the level of the employee. Data identification was done from firm financial data, individual earning records and minimum wages according to contracts. Most of the data collection were done from Veneto Workers History database that is updated once in two years. The collection of the data also experienced challenges in getting of important data from some sectors such as chemicals and some small sectors. The updating of the data in the data possesses challenge of the accuracy and the up to the date of the data. The failure to get important information from some sectors makes conclusion a bit hard. It was not easy to know whether an employee was covered by a union and therefore, the model was used to measure premiums received by the workers resulting from the union agreement. From the premiums, the research was able to ascertain if the employees were covered by the union or not.

Data used

The data used in the research had several advantages that could lead to a good conclusion on the rent-sharing conclusion. Data was collected from the individuals data, employers data base and Social Security earnings database. The sources of data gave self-verification of the data easy. It was because the same data could be sourced from different stakeholders hence, enabling easy verifications by comparing. The sources of the data also gave the wider scope of data within which broad conclusion would result. The data collected was highly correlated with rent-sharing, and hence, it would facilitate sound conclusion. Data clearly showed the class of the employees and the sectors of operation hence the higher chances of deriving a specific conclusion.

The data collection, however, had some disadvantages that may limit conclusion drawn. The data did not include all sectors within the operations of the organization. The data includes some assumptions that may not reflect the actual picture of the organizations set up. The assumptions may have an adverse effect on the level accuracy of the rent-sharing conclusion made.

Econometric specifications

The research uses a statistical method to determine the validity of the data. The method identifies data with unusual values. The values may have been abnormally low or high for an individual worker. The data found to be outside 1% to 99% of the other data was deleted before analysis. 40 % of the data in the Social Security database was found to match. Data from the sectors were matched and 70% passed the test. The data analysis using the econometric specifications involved calculation of basic statistical figures that were useful in evaluation of the data. The used of the econometric specifications helps in application of the models and determination of the rent-sharing relationships of the data. The method are critical in the research because they help in coming up with a valid data that leads to clear conclusion

Empirical results

The results of the research indicated that there was some evidence of rent-sharing with profitability. The firms with higher market power were discovered to have more rent-sharing. In Table 6, results analyze firms depending on the size of the firm. Larges firm are the ones that have employees from 100 and above while the small firms are those with less than 100 workers. The data indicate that rent-sharing was more significant in lager firms than smaller firms. The value added per worker is 0.202 in large firms and 0.068 in small firms a clear indication of the effects of the rent sharing in the large firms. The results shown in the table indicate a true picture of the setup of the organization since in large firms it is difficult for an individual to bargain for rent-sharing terms in comparison to small firms. Table 6 also uses data from past studies to remedy the challenge highlighted in the collection of the data in identification of unions. The past studies data helps in identifying that union that unions increase the possibility of data having rent-sharing. The unions are important agents in the bargaining for rent-sharing, especially in the large firms. The results also indicate that there is a difference in the rent-sharing levels depending on the sectors of operation. The data in the same sector indicate some similarity in the data rent-sharing. In the manufacturing industry, where around 75 % of the data used was collected from indicated a lot of similarities in the rent-sharing and the industry. The other sectors, however, indicated had similarity in rent-sharing. Generally, rent-sharing is common in large firms, and the data does not show an association between a union and the holdups. There is insignificance holdup shown from the data collected in the research.

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