Introduction

Smooth neo-classical equilibrium models may be useful for analysing some problems, they do not give an adequate picture of all aspects of real life labour markets. For the present chapter, two of these aspects not explained in the competitive model are of interest. First, the widespread use of nominal contracts is hard to square with a competitive auction market model. Second, the model offers no rationale for the existence of corporatist institutions. Since a Walrasian market yields an efficient allocation of labour, resources spent on writing contracts or maintaining corporatist institutions are a waste. Abolishing these institutions would increase efficiency. In this chapter we will argue that if nominal contracts have an efficiency promoting role then corporatist structures can support this role.

Many theories of corporatism start at a relatively high level of aggregation. But we will work bottom-up and start from the micro level. We take a basis in some existing models at the lowest level of aggregation: an employment relation between a worker and a firm. These models explain why contracts are a more efficient institution than the Walrasian auctioneer. Providing a rationale for the role of nominal contracts is the key to understanding the role of corporatist institutions. The basic notion is that many employment relations are characterized by a one-to-one relation between worker and firm. Such relations emerge when specific investments are required. Contracts and corporatist institutions play a crucial role in the distribution of surplus created by these investments.