The Stability of Dividends and Wages: Effects of Competitor Inflexibility

The Stability of Dividends and Wages: Effects of Competitor Inflexibility

Daniel A. Rettl, Alex Stomper, Josef Zechner

Series number :

Serial Number: 
563/2018

Date posted :

June 14 2018

Last revised :

September 10 2019
SSRN Share

Keywords

  • risk-sharing within firms • 
  • payout stability • 
  • wage stability • 
  • competitor inflexibility

We analyze how industry-wide risks are shared between firms' employees and their owners. Focusing on the electricity industry, we study firms which are subject to similar risks but use different production technologies.

We document that firms are more exposed to industry shocks when their competitors use lower-cost production technologies, since this mitigates their response to negative demand shocks. This "competitor inflexibility" destabilizes payouts to equityholders, but there is no evidence that it compromises wage stability. Firms do not share systematic risk due to competitor inflexibility with their employees and set wages as if their shareholders' risk preferences were given.

Authors

Real name:
Daniel A. Rettl
Real name: 
Research Member
Department of Business Administration, University of Vienna