Financing Skilled Labor

Abstract

Skilled workers often have strong bargaining positions in compensation negotiations. This paper studies the implications for firm financing, workers' compensation structure, and turnover. There are three main insights. First, workers in strong bargaining positions demand equity-based compensation. While individually optimal, such compensation increases workers' incentives to leave when other key workers are leaving. Second, firms can reduce contagious departures by securing credit lines and offering fixed wages. Third, the paper shows an efficient way for workers to play firms making different types of compensation offers against each other. The evidence supports the predicted relation between bargaining power and compensation structure.