wage employment contracts this paper studies the efficient agreements about the dependence of workers earnings on employment when the employment level is controlled by firms the firms superior information about profitability conditions is responsible for this form of contract governance under plausible assumptions such agreements will cause employment to diverge from efficiency as a byproduct of their attempt to mitigate risk it is shown that if leisure is a normal good and firms are risk neutral employment is always above the efficient level such a one period implicit contracting model cannot therefore be used to explain unemployment as a rational byproduct of risk sharing between workers and a risk neutral firm under conditions of asymmetric information

rank order contracts for a principal with many agents for a principal with many agents rank order contracts remain incentive compatible even when information about agents performance is known only to the principal because the total payment from the principal to all agents taken together is independent of the outcome that occurs under wider conditions than those considered previously in the literature there is shown to exist a rank order contract equivalent exactly or approximately to any nonlinear piece rate contract under those conditions therefore results that depend on the unenforceability of piece rates under such asymmetric information disappear if rank order contracts can be used in principal agent models compensation paid to agents is based on their outputs because their inputs are not public information in this context information is public if it is verifiable in court so that a contract contingent on it is legally enforceable rank order contracts also called tournaments and contests make each agent s compensation a function solely of the ranking of his output relative to the outputs of other agents in contrast individual piece rate contracts make each agent s compensation a function only of his own output lazear and rosen 1981 green and stokey 1983 and nalebuff and stiglitz 1983 all have results comparing the two when agents actions are not observed by the principal but only for the case in which the principal is risk neutral and the utility function of agents additively separable in income and action the main purpose of the present paper is to show that for the case of a continuum of agents these two kinds of contract are in fact formally equivalent or in some cases approximately equivalent under somewhat more general conditions than those considered so far in the

the role of market forces in assuring contractual performance the conditions under which transactors can use the market repeat purchase mechanism of contract enforcement are examined increased price is shown to be a means of assuring contractual performance a necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted steam of rents on future sales which is greater than the wealth increase from nonperformance this will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm specific assets advertising investments thereby become a positive indicator of likely performance

efficiency wage models of unemployment one view h lorne carmichael persistent wage rigidity and involuntary unemployment appear to be recurrent problems in most economies what could be preventing the wage adjustment necessary to clear the labor market many recent papers claim to have found the answer in efficiency wage models this paper surveys this literature and attempts to evaluate its accomplishments it concludes that the efficiency wage models fail to explain wage rigidity or persistent involuntary unemployment persistent involuntary unemployment of workers is a recurrent problem in labor markets all over the world unemployed workers seem unable to find work even though they are willing to accept lower wages than those being paid employed workers with similar skills what could be preventing wages from adjusting to clear these markets many recent papers known collectively as the efficiency wage literature now claim to have the answer this paper will survey the efficiency wage literature and critically evaluate some of its accomplishments efficiency wage models have already been examined by yellen 1984 katz 1986 and stiglitz 1987 and have received generally favorable reviews this paper is more critical its overall conclusion is that efficiency wage models provide some useful insights into the workings of the labor market but they do not provide a satisfactory account of wage rigidity or involuntary unemployment there are at least five separate versions of the efficiency wage model they share a common structure however and this is outlined in the first section of the paper this section also attempts to relate efficiency wage models to other recent models of unemployment section ii examines and criticizes the different approaches in detail section iii evaluates the achievements of this approach and suggests some directions for future work i a general efficiency wage model efficiency wage models as the name suggests are first of all models of wages they generate unemployment by showing that firms will sometimes want to set wages at non market clearing levels it is useful to begin therefore by reviewing how wages and employment are determined in some related models in a perfectly competitive labor market the wage for each type of labor is adjusted constantly to maintain equality of supply and demand overall employment fluctuates in response to demand changes as workers move up and down their labor supply curves unemployment is voluntary in that anyone who is not working prefers that state to employment at the going wage for people of his skills as well the value of a worker s marginal product is equal to the marginal value of his leisure so there are no unexploited wage bargains between unemployed workers and firms this model is successful in predicting the long term response of wages to shifts in demand and supply but it is clear that in the short run its depiction of voluntary unemployment and flexible wages is unrealistic a natural way to generate more realism is to assume that wages are inflexible in the short run in this case a reduction in demand away from a long run equilibrium will lead to rationing of jobs by employers as they attempt to stay on their labor demand curves the unemployment here is involuntary in that the unemployed would prefer to be working at the going wage and is inefficient in that there are lost gains from trade between these workers and firms the weakness of this model is that it is silent about the mechanism that keeps wages rigid unemployed workers who offer to work for less than the fixed wage ought to find work the early implicit contract models of azariadis 1975 baily 1974 and gordon 1974 provide one explanation for wage rigidity these models introduced the idea that wages can do more than just clear the market for labor wages in an implicit contract model are used to shift the risk generated by uncertain output market conditions from risk averse workers to the risk neutral firm

chasing after good jobs do they exist and does it matter if they do most people believe that there are such things as good jobs jobs that a worker would consider herself lucky to get but for economists the existence of good jobs is debatable in this paper i provide a definition of a good job based on various theories of the labour market a job that involves a surplus captured partly by the worker i use that definition to guide an empirical investigation of the existence and importance of good jobs i conclude that good jobs do exist that the labour market does not just function according to a roy model with wage differentials reflecting only skill differentials compensating differentials or bond posting and that their impact on the overall wage structure is substantial finally i discuss the implications of the existence of good jobs for policy setting and for assessments of the justice of a society resume la chasse aux bons emplois est ce qu ils existent et est ce que cela importe qu ils existent la plupart des gens croient qu il y a telles choses que de bons emplois des emplois qu un travailleur se trouverait chanceux d avoir mais pour les economistes l existence de bons emplois est discutable dans ce texte l auteur propose une definition de bon emploi fondee sur diverses theories du marche du travail un emploi qui engendre un surplus capture en partie par le travailleur il utilise cette definition pour guider son enquete empirique sur l existence et l importance de bons emplois on conclut que les bons emplois existent que le marche du travail ne fonctionne pas seulement selon le modele de roy avec des differentiels de salaires qui refletent seulement les differentiels d habiletes les differentiels compensatoires ou le depot d une caution et que leur impact sur la structure globale des salaires est substantielle finalement l auteur discute les implications de l existence de bons emplois sur la definition de politiques et sur l evaluation du caractere juste d une societe

an equilibrium analysis of wage productivity gaps we develop a model in which each firm chooses a hiring standard as well as a wage schedule and an application fee we then characterize the set of nash equilibria and establish necessary and sufficient conditions for the existence of equilibrium if the distribution of productivities within each ability type is gaussian workers who pass the test will be paid more than the value of their marginal product while workers who fail the test will receive a wage net of the application fee below the value of their marginal product

the existence of self enforcing implicit contracts implicit contracts are nontrivial nash equilibria to the post hiring trading game between a worker and the employer these are supported by intrafirm rather than labor market reputations the existence of an implicit contract that supports efficient trade is proved in a simple model

a model of involuntary unemployment and wage rigidity worker incentives and the threat of dismissal this paper analyzes a model that highlights imperfect monitoring and the threat of dismissal as microeconomic underpinnings for the efficiency wage hypothesis my major innovation is to allow the rules for dismissal as well as the wage to be determined endogenously as the equilibrium of a stackelberg game played between firms and workers the key results are as follows a nontrivial equilibrium where positive output is produced must involve involuntary unemployment in that employed workers are strictly better off than are the unemployed in addition the equilibrium wage is rigid with respect to exogenous shifts in productivity

moral hazard asset specificity implicit bonding and compensation the case of franchising i introduction there is a large and growing interest in the structuring of compensation to deal with the moral hazard problem much of this literature treats various forms of income sharing such as piece rates and sharecropping as a means for a principal to provide incentives to an agent this literature has been extended to the case of two sided moral hazard where both parties to an exchange may shirk another mechanism to induce effort discussed in the literature is bonding where workers post a bond that is forgone if effort is inadequate klein 1980 and klein and leffler 1981 treat the possibility of specific assets as constituting an implicit bond where poor performance by a firm is penalized by bankruptcy and sale of assets at a loss this paper studies a situation where these issues coalesce the case of compensation arrangements in franchising the typical franchise contract calls for the sharing of franchise income between franchisee and franchisor additionally franchisees may be terminated for poor performance if franchise assets have a degree of specificity the ensuing sale of assets at a loss provides a penalty for poor performance we examine the determinants of franchise royalty rates and fees in this setting while there is a literature on two sided moral hazard and some empirical work on franchising based on this idea none incorporates the potential influence of asset specificity we explicitly consider the role of implicit bonding and asset specificity in conjunction with moral hazard on the part of both trading parties we go beyond previous work in franchising by estimating the effects of asset specificity and other influences on the royalty rate further part of our empirical work utilizes improved micro data on actual franchise contracts our approach and its implications are discussed in section ii consistent with previous work we expect the royalty rate to decrease increase as the importance of the franchisee s franchisor s input increases however more specific capital with the threat of termination acts as an implicit bond and substitutes for a reduced royalty rate in inducing franchisee effort thus we expect royalty rates to increase with asset specificity also unlike other approaches we do not necessarily expect an inverse relationship between the royalty rate and the franchise fee for example the greater the importance of franchisor effort the higher the royalty rate but the franchise fee may also increase if franchise revenue rises by enough our hypotheses are tested using two different data sets an original firm level data set is taken from federal trade commission ftc required uniform franchise offering circulars ufoc 1 in addition data are obtained from bond s 1989 the source book of franchise opportunities the data are discussed and the results presented in section iii we find substantial support for our approach for example factors that increase the importance of the franchisee s effort such as the number of employees supervised lower the royalty rate and increase the franchise fee also a reduction in the specificity of the franchisee s investment due to leasing lowers the royalty rate and raises the franchise fee 2 section iv summarizes our findings and concludes the paper ii the approach and the hypotheses the typical franchising contract consists of a two part payment by the franchisee to the franchisor the franchisee pays an up front nonrefundable franchisee fee and a continuing royalty payment usually a percentage of sales in return the franchisee receives the right to use the franchisor s brand name capital and a method of operation in addition the franchisor provides on going support to the franchisee however the franchisor maintains the right to unilaterally terminate the contract if the franchisor determines that the franchisee is not delivering a product consistent with the quality guaranteed by the brand name

premiums to employment in larger establishments evidence from peru abstract examination of the employer size wage effect for males in urban peru suggests the following higher wages in larger establishments do not merely compensate for higher worker quality or inferior working conditions size differences in the use of rising wage tenure profiles cannot provide a market clearing explanation for the employer size wage effect unless workers are extremely impatient thus larger employers appear to pay premiums unionization explains none of the premiums and minimum wage compliance explains at best a small fraction shirking based efficiency wage explanations for premiums are implausible because peruvian job security legislation greatly inhibits dismissals in larger establishments explanations meriting further research involve the use of high wages to reduce turnover and to improve productivity enhancing morale

involuntary unemployment and worker moral hazard this paper critically examines the hypothesis that layoffs are involuntary in implicit labour contracts because they are used by employers to punish inferior worker performance in repeated moral hazard situations workers typically bear risk associated with whether they are chosen to be laid off even though the latter is uninformative about previous effort choices and wages are performance contingent however the hypothesis is unsatisfactory as optimal contracts involve involuntary retentions rather than involuntary layoffs in a wide variety of circumstances the theory of implicit labour contracts as developed over the past decade has thrown considerable light on the nature of long term employment relationships by emphasizing that firm owners are usually less risk averse than workers and thus have an incentive to insure workers against fluctuations in the demand for the firm s product the theory manages to explain the emergence of long term contracts characterized by downward real wage rigidity see holmstrom 1983 however the theory also typically implies that workers will be indifferent about whether they are to be retained or laid off this runs contrary to the common observation that there is an element of involuntariness in layoff decisions i e within any job category with given skill and performance history if a proportion of randomly chosen workers are to be laid off in a recession the laid off workers would strictly prefer to be retained not only is this phenomenon of involuntary layoffs interesting to explain per se it also seems relevant to the keynesian notion of involuntary unemployment interpreted as unequal treatment of similar workers where some are employed while others are not and unemployed workers would strictly prefer to be employed it thus seems worthwhile to examine if the theory of implicit contracts can be extended to explain this phenomenon satisfactorily as a test of its plausibility and as a possible source of a consistent microfoundation for keynesian propositions to explain why the firm does not insure workers against the risk associated with selection of those to be laid off it is natural to think of possible informational asymmetries this has been attempted by geanakoplos and ito 1981 and moore 1985 geanakoplos and ito introduce the realistic feature that a firm does not observe spot market opportunities available ex post to a laid off worker this permits only incomplete insurance against the risk of layoff however their model produces the paradoxical conclusion that with decreasing absolute risk aversion workers strictly prefer ex ante being laid off moore allows workers to have better ex ante information about their spot market opportunities but finds a similar tendency toward involuntary retentions rather than involuntary layoffs in this paper we explore the alternative hypothesis that firms cannot perfectly observe effort decisions of employed workers and use the threat of involuntary layoff as a discipline device the analysis of stiglitz and weiss 1983 shapiro and stiglitz 1984 and singh 1982 of principal agent relations in the absence of demand fluctuations suggests that the threat of contract termination may be used as an incentive device in their models

involuntary unemployment in dynamic contract equilibria in this paper the set of bilateral wage contracts in a dynamic model with observable effort is characterized our first result demonstrates that bond payments and severance pay do not increase the size of the set of incentive compatible contracts second we show that unobservable effort can lead to voluntary unemployment this abstract was borrowed from another version of this item

unemployment and the efficiency wage hypothesis there has been much recent discussion of the reasons why prices in certain markets and in particular in labour markets may not adjust to eliminate excess supply the absence of speedy adjustment of prices is an essential feature of the recent models of disequilibrium macroeconomics but for the most part no explanation for this absence is provided from within those models one explanation that has been around in the literature for some time and has been receiving increasing attention recently is the efficiency wage hypothesis initially applied to developing economies see leibenstein i957 it has more recently been adapted to developed economies by weiss i 980 and used in the context of a keynesian macroeconomic model by hart i 980 similar concepts have been applied to the credit market by stiglitz and weiss i98i the purpose of the present paper is to explore further the conditions under which the notion of an efficiency wage is applicable and can provide an explanation of involuntary unemployment the essential feature of the efficiency wage hypothesis is that the productivity of a firm s employees increases as their wage is increased at least over an economically relevant part of its range if the wage paid by the firm is denoted by w the number of employees by l and the productivity of each employee by p w where p w o then the effective labour force of the firm e can be represented by

inequality as a determinant of malnutrition and unemployment policy this paper explores the policy implications that are obtained once it is recognized that at low nutrition intakes a person s productivity is an increasing function of intake in the context of a fully general equilibrium model it is shown that if aggregate assets in an economy are neither large nor small certain patterns of lorenz improving asset redistributions or nutrition transfers increase aggregate output and reduce the volume of involuntary unemployment and the incidence of undernourishment copyright 1987 by royal economic society

work incentives hierarchy and internal labor markets this paper argues that contracts with payment based on a ranking of employee performance can provide performance incentives even under asymmetric information that prevents payment based on individual performance only being enforceable such contracts also fit with five features of labor markets that have aroused considerable interest 1 hierarchical wage structures 2 internal promotion 3 wage rates that rise with seniority and experience more than productivity 4 the variance of earnings increasing with experience and 5 wage rates attached to jobs rather than individuals with differentials set by administrative procedures rather than by reference to external market wages

macroeconomic adjustment with segmented labor markets this paper analyzes the macroeconomic effects of fiscal and labor market policies in a developing economy with an informal sector and a heterogeneous work force a permanent reduction in government spending on nontraded goods leads in the long run to a deprecia tion of the real exchange rate a fall in the market clearing wage for unskilled labor an increase in output of traded goods and a lower stock of net foreign assets a permanent reduction in the minimum wage improves competitiveness and expands the formal sector the effect of changes in unemployment benefits are also analyzed q 1999 elsevier science

a theory of the optimal cost barrier to corporate takeovers this paper characterizes financial and employment contracts in the presence of both worker moral hazard and the threat of opportunistic takeovers firms in which worker efforts or specific investments are of greater importance are shown to exhibit a greater degree of deferred compensation supported by governance structures that allow managers to resist hostile takeovers more vigorously this effect is most pronounced in firms where workers pay for their job by accepting low wages early in their careers firms in which large deferred payments cannot be offset by low starting wages will offer less resistance to a hostile bidder copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

inside informality the links between poverty microenterprises and living conditions in nairobi s slums summary using households rather than enterprises as the analytical unit this study of 1 755 households in nairobi s slums reveals that informal household microenterprises are indeed helping offset poverty microenterprises are helping households that are a priori more likely to be poor better microenterprise performance is associated with certain business related factors such as sales area time in and sector of operation but living conditions residential tenure and infrastructure access also strongly influence both creation and success of microenterprises interventions that improve infrastructure and reduce tenure insecurity and rent induced pressures to move may be crucial for incubating microenterprises and reinforcing their contribution to poverty alleviation in nairobi s slums

the mystery of capital formation in sub saharan africa women property rights and customary law summary economists such as hernando de soto have argued that clearly defined property rights are essential to capital formation and ultimately to economic growth and poverty alleviation this article traces two impediments to the clear definition of property rights in the african context customary law and the status of women both of these issues interfere with the attempt of african countries to rearticulate property law with the goal of capital formation constructive attempts to define property rights must address the problem of enforcement in under resourced environments where changes may not be welcomed

updated notes on the interindustry wage structure 1890 1990 the author documents and analyzes changes in wage structure across manufacturing industries over the years 1890 1990 interindustry differentials in wages were highly stable over that period for production workers but much less stable for nonproduction workers interindustry wage patterns were very similar for production and nonproduction workers in 1990 though this similarity dates back only to 1958 although dispersion of wages across industries followed varying trends over the period it was higher in 1990 than at any previous time in this century the variables that have been most strongly correlated with wage growth are productivity growth rising union density rising capital intensity and profit growth

efficiency wage models of unemployment keynesian economists hold it to be self evident that business cycles are characterized by involuntary unemployment but construction of a model of the cycle with involuntary unemployment faces the obvious difficulty of explaining why the labor market does not clear involuntarily unemployed people by definition want to work at less than the going wage rate why don t firms cut wages thereby increasing profits

a note on overemployment underemployment in labor contracts under asymmetric information abstract models of labor contracts under asymmetric information may predict either overemployment or underemployment this paper shows that this result depends crucially on whether or not leisure is a normal good if firms are risk neutral

a model of the natural rate of unemployment since the publication of edmund phelps volume the new macroeconomics has treated the labor market as a dynamic process of rational search by unemployed workers for available vacancies wages are viewed as at least potentially flexible though free contracting between workers and firms may lead to fixed wages in the short run imperfect information is a crucial element of the theory for it implies both a need for contracting and a need for rational search rather than simple market clearing in each period a positive rate of frictional unemployment may exist in equilibrium denoted as the natural rate this unemployment is due to the frictions in the search process and imperfections in information rather than to any deficiency in aggregate demand milton friedman defined the natural rate as the level that would be ground out by the walrasian system of general equilibrium equations provided there is embedded in them the actual structural characteristics of the labor and commodity markets including market imperfections stochastic variability in demands and supplies the cost of gathering information about job vacancies and labor availabilities the costs of mobility and so on p 8 this paper reexamines the micro foundations of the natural rate in a model of labor market equilibrium in which turnover flows and imperfect information are explicitly considered workers may quit their current jobs to enter the unemployment pool in order to search among available vacancies for a more preferred position firms economize on turnover by an appropriate wage policy

the agent agents problem payment by relative output this paper begins an investigation into the incentive problems at a firm when the effort of the employer and the employees combines to determine final output the major conclusion is that optimal reward functions in this circumstance will in general value the performance of a worker relative to that of his peers the paper thus joins a growing literature associated with the work of lazear and rosen on rank order tournaments

heterogeneous firms and the organization of production firms in the same industry exhibit systematic differences in the organization of production and the structure of employment entrepreneurial ability is the specific scarce input that limits the size of a firm this input must be allocated to two activities coordinating production and monitoring workers able entrepreneurs can convert calendar time into larger supplies of coordinating effort that enable them to assemble large firms greater ability implies a higher shadow price of time which increases the implicit costs of monitoring a dispersion of entrepreneurial abilities generates an equilibrium size distribution of firms differences in monitoring costs affect the choice of worker productivities the design of products and the organization of production the monitoring cost hypothesis advanced in this paper goes a long way in explaining the equilibrium of an industry containing heterogeneous firms that differ in size and behavior

implicit contracts incentive compatibility and involuntary unemployment this paper considers the enforceability of employment contracts when employees performance cannot be verified in court so that piece rate contracts are not legally enforceable part i shows that there exists a variety of self enforcing implicit contracts modelled as perfect equilibria in a repeated game and characterizes all the wage and performance outcomes that can be implemented implementation requires a strictly positive surplus from employment the form of the contract depending on how this surplus is divided between firm and employee piece rate contracts and contracts with an informally agreed bonus can be made self enforcing but the use of severance pay and bonding does not extend the set of implementable allocations the resulting contracts resemble actual labor contracts more than do the contracts in standard principal agent models part ii analyses market equilibrium with these contracts also modelled as perfect equilibria in a repeated game and shows that many such equilibria exist unfilled vacancies and unemployed workers can co exist despite the existence of contracts that are potentially mutually beneficial for those jobs that are filled any division of the potential surplus is possible so that the market can have at the same time involuntary unemployment and vacancies that are unfilled despite filled jobs earning positive profits as a criterion for selecting equilibria a notion of renegotiation proofness is applied then either all workers are employed or all jobs filled but any division of the potential surplus is still possible the paper explores what further restrictions on beliefs give rise to a walrasian outcome in which all the potential surplus goes to the short side of the market and to an efficiency wage type outcome in which the potential surplus goes to the long side

profit sharing risk sharing and firm size implications of efficiency wages by taking account of output fluctuations this paper constructs a synthesis of profit sharing and efficiency wage models to highlight the role of the risk attitudes of the firm and its employees we show contrary to the traditional efficiency wage theory that in a profit sharing economy unemployment is no longer a necessary device to induce work effort and consequently the labor market equilibrium may be characterized by full employment such a result is more likely to be true when the economy is characterized by small sized firms in addition we also provide a preliminary sketch of the situations in which the firm chooses a profit sharing program or a fixed wage one and discuss how a firm determines its pay parameters and employment in response to output fluctuations

some evidence on the relationship between performance related pay and the shape of the experience earnings profile we investigate the relationship between performance related pay prp and the shape of workers experience earnings profiles in particular we argue that the slope of the profile depends critically upon the degree of equity held by workers in their enterprise as measured by the extent of prp the implication is that the slope of the profile for prp workers falls between those of their zero equity fixed wage and one hundred per cent equity self employed counterparts our empirical analysis of three british data sets namely the british social attitudes survey the british household panel survey and the british family expenditure survey supports this prior in this paper we explore the shape of the experience earnings profile for individuals employed under different types of contracts fixed wage performance related pay prp and self employment contracts we follow lazear 1979 1981 and lazear and moore 1984 in hypothesizing that the slope of the experience earnings profile reflects agency costs and the reduction thereof with increased agency costs inducing steeper profiles if monitoring costs are high firms may implement compensation schemes designed to encourage employees to self select behavior in the firms interests one such scheme defers a substantial amount of compensation until the later years of tenure the resulting experience earnings profile provides a penalty for shirking lazear and moore 1984 we therefore presume that the profiles of workers employed under fixed wage contracts are steeper than those of self employees for whom the issue of agency does not arise because of the duality of principal and owner lazear and moore 1984 the interesting case is that of workers employed under prp if such contracts represent a hybrid between fixed wage and self employment then one would expect their experience earnings profiles to lie somewhere between these two extreme