PRIVATIZATION AND EFFICIENCY WAGES

The impact of privatization is investigated in a shirking model of eff iciency wages. Without trade unions, privatization - modeled as a stri cter control of employees - lowers wages and raises employment, output , and profits, while effort and productivity effects depend on the emp loyees' risk aversion. However, for a utilitarian monopoly union, faci ng a company characterized by a constant-elasticity labor-demand sched ule, privatization raises efficiency wages. If privatization is modele d as a stronger profit orientation, wages, effort, and labor productiv ity will rise, while employment will shrink in a wage-setting firm. Ag ain, wage and employment effects can be reversed in the case of wage n egotiations.