Labor-managed firms are noted for the ability of workers to make decisions such as the setting of salaries and the choice of investments. This paper analyzes the short-run salary, investment, and investment finance decisions of a Yugoslav labor-managed firm facing constraints such as credit rationing, upper limits on salaries, and social ownership of capital. These constraints create a discontinuous cost-of-capital schedule that favors firms with large amounts of retained earnings and causes switching between self-financed and credit-financed investment. While credit rationing and salary constraints offset a preference for credit finance, lax enforcement of an enterprise budget constraint strengthens it. © 1989.
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