REVIEW OF ECONOMIC STUDIES costs relative to fluctuations in the wage income available elsewhere in the economy are large enough so that a strategy s, which satisfies(5) will satisfy the inequality(6) Strategy S2 is really the class of strategies with stochastic wage paths which the firm may wish to choose. The set of these which is feasible must also satisfy a feasibility con- straint as well as the labour supply condition. This is given by Er-12 U(w (1+p)+(e-112 the RHS of (6) The formulation has a slight musical chairs air to it, since everybody searches at and then joins a firm when period one starts. This feature results from the synchronization of everyone's actions, rather as the exact consumption loan model does. Let me try and relate the model a little more closely to reality as follows Workers enter the labour force or retire at random. Some workers quit to look for better conditions and some others come from other firms. What I am trying to capture in the labour supply condition is that, provided the firm offers an expected utility over a period equal to that available elsewhere in the economy, it will find that it can quits and retirements with new entrants and hiring. The feasibility condition is a of the amount of period by period freedom open to the firm resulting from the costs of the labour market The strategy S, is defined in terms of a constant wage. Constancy is stronger than certainty but it is the latter that is really the key feature of S,. This model has ignored such factors as capital accumulation and technical change. In a more general model or in thinking about the relevance of the results, one might plausibly generalize by allowing ing fluctuations around the trend. I have commented(and will comment) on uncertain or stochastic strategies compared with pre-announced, non-stochastic wage strategies in the course of the general discussion since it is the wage certainty not the wage constancy that is important. IIL EXPECTED PROFITS AND ALTERNATIVE STRATEGIES The firm will make a profit in period t given by: m+=P29(L4)-w:L The present value of expected profits evaluated at the beginning of period one is given by E(m)=∑(1+r)E{Pg(L1)-w2L4}, where r is the discount rate and the mappings (4)define the distributions of w, and Lt There is a minor complication introduced by the parameter p in the utility function and the discount rate r. i will set r= p to keep things simple. with the framework developed the following proposition can be shown come Proposition 1. Provided the feasibility constraint is satisfied, the strategy s, with tant wage and employment yields larger expected profits than S2 with a stochastic wage Notice that the worker's expected utility and the firm,s expected profits are evaluated at the beginning of period one, when future values of the state variables are unknown The expected values are, therefore, the prior or unconditional values. Developing the formal proof of the proposition for this case does not seem worth while result is constant capital nly for the long-run shutdown decision ssary if S1 was not deir t effects familiar isher interest theory but not central to the issues here