The Labor Market and Corporate Structure

We analyze the impact of labor demand and labor market regulations on the corporate structure if firms. We find that higher wages are associated with lower monitoring, irrespective of whether these high wages are caused by labor market regulations, unions or higher labor demands. These comparative static results are in line with the broad trends in the data. We also find that the organization of firms has important macroeconomic implications. In particular, monitoring is a type of rent-seeking activity and the decentralized equilibrium spends excessive resources on monitoring. Labor market regulations that reduce monitoring by pushing wages up may increase net output or reduce it only by a small amount even thought they reduce employment