Optimal employment and wage policies of a monopolistic firm

This paper deals with the problem of finding optimal hiring/firing and wage policies for a profit-maximizing monopolistic firm. The crucial assumptions of the model are convex shortage costs permitting shortages in output capacity, nonlinear hiring and firing costs, and the wage rate as control variable being restricted by a minimal level. Due to the nonsmoothness of the revenue function occurring in the objective functional, a generalized maximum principle is required to analyze the optimal control problem. The resulting phase-diagram analysis provides an insight into the optimal recruitment, wage, and pricing policies.The authors would like to thank R. Hartl, E. Fehr, F. Hof, S. Jørgensen, R. Leban, N. Van Long, and R. Neck for helpful suggestions and comments to this and earlier versions of the paper.