Lecture 7 - Many relationships can be taken as a...

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Many relationships can be taken as a partnership in which two partners provide an input towards an outcome that they will share. For example, in a firm, the employer and the worker provide capital, know-how, and effort to produce a good that will generate a revenue, which will be divided between the employer and the worker according to the parties’ relative bargaining power, or an existing contract that reflects these bargaining powers. Many times, the generated value depends on the parties’ inputs in a way that is not additively separable. For example, the marginal increase in the revenue as we change the worker’s effort level depends on the level of capital and the machinery employed by the firm. Similarly, the value of an additional machine depends on the effort level of the worker. In most cases, there is a synergy between the parties, i.e., a party’s marginal input is more valuable when the other party provides higher input. This is also true in a grander level when the firms and the workers choose the technologies and the education levels. In an environment with few skilled workers who can operate computers, computerization of the production process will have low return as the firm will have to pay a lot for few skilled workers or employ low-skill workers who will not be able to utilize the computerized system skillfully. Similarly, the value of higher education will be low when there are few firms that can utilize the skills obtained
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This note was uploaded on 04/05/2012 for the course ECON 406 taught by Professor Sjostrom during the Spring '12 term at Rutgers.

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Lecture 7 - Many relationships can be taken as a...

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