Utility Maximization Function and Optimum Wage-Investment Split in a Labor Managed Firm



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This paper presents a theoretical model showing how a labor managed firm (LMF) would determine the optimum trade-off between salary levels and investment decisions with the maximization of total utility of its workers as the objective. This study is based on the premise that labor managed firms have an inherent incentive structure that respects the rights of all individuals who are associated with it and thus contributes to a model for the theory of the firm that is consistent with 21st century moral codes. The dehumanized models of the neo- classical theory of the firm entirely ignore the issues of rights and dignity of people within economic organizations thus legitimizing this practice for real world businesses. In this model, we demonstrate that the LMF derives positive utility from salary rather than regarding this as a cost to be minimized. Economic literature of the LMF has traditionally overlooked the role that wages play and this study attempts to compensate for this discrepancy by demonstrating the importance of wages for understanding the short run behavior of the LMF.



worker ownership, Mondragon, utility function, labor-managed firm, profit-sharing, shared capitalism