EFFICIENCY WAGES AND SUBJECTIVE PERFORMANCE PAY

Huanxing Yang

71 citations0/0 files storedEconomic Inquiry

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Labor market dynamics and wage inequality Experimental Behavioral Economics Studies Economic theories and models

Abstract

This paper studies optimal relational contracts in motivating workers in a market setting. We find that labor markets with higher turnover costs will use more subjective performance pay and less efficiency wages and that in those markets, the total wage payment is lower and the equilibrium employment level is higher. Surprisingly, under certain conditions, an increase in turnover costs leads to higher social welfare. Incorporating workers’ search costs, we show that wages are procyclical in booms and are either rigid or countercyclical during recessions. The predictions of the model are consistent with some empirical evidence. (JEL D82, J33, J41, J63)

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References

1970Migration unemployment and development: a two-sector analysis.1986Equilibrium Unemployment as a Worker Discipline Device 1995Migration, Unemployment and Development: A Two-Sector Analysis 2003Relational Incentive Contracts 1994Subjective Performance Measures in Optimal Incentive Contracts 1993Subjective Performance Measures in Optimal Incentive Contracts 1982A Theory of Wage Dynamics 1989Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment

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