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Deferred Compensation in Multiperiod Labor Contracts: An Experimental Test of Lazear's Model

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  • Steffen Huck
  • Andrew J. Seltzer
  • Brian Wallace

Abstract

This paper provides the first experimental test of Edward Lazear's (1979) model of deferred compensation. We examine the relationship between firms' wage offers and workers' effort supply in a multi-period environment. If firms can ex ante commit to a wage schedule with deferred compensation, workers should respond by supplying sufficient effort to avoid dismissal. We contrast this full-commitment case to controls with no commitment and computer-generated wages in order to examine the roles of monetary incentives, social preferences, and reciprocity. Finally, we examine a setup without formal commitment, but where firms can build a reputation for paying deferred wages. (JEL D86, J22, J31, J33, J41)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 101 (2011)
Issue (Month): 2 (April)
Pages: 819-43

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Handle: RePEc:aea:aecrev:v:101:y:2011:i:2:p:819-43

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  1. Topi Miettinen, 2008. "Contracts and Promises - An Approach to Pre-play Agreements," Jena Economic Research Papers 2008-088, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  2. M. Rabin, 2001. "Incorporating Fairness into Game Theory and Economics," Levine's Working Paper Archive 511, David K. Levine.
  3. Akerlof, George A, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 97(4), pages 543-69, November.
  4. Gokhale, Jagadeesh & Groshen, Erica L & Neumark, David, 1995. "Do Hostile Takeovers Reduce Extramarginal Wage Payments?," The Review of Economics and Statistics, MIT Press, vol. 77(3), pages 470-85, August.
  5. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, Springer, vol. 10(2), pages 171-178, June.
  6. Georg Kirchsteiger & Ernst Fehr & Simon Gächter, 1997. "Reciprocity as a contract enforcement device: experimental evidence," ULB Institutional Repository 2013/5911, ULB -- Universite Libre de Bruxelles.
  7. Guth, Werner & Schmittberger, Rolf & Schwarze, Bernd, 1982. "An experimental analysis of ultimatum bargaining," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 367-388, December.
  8. Ernst Fehr & Armin Falk, 2003. "Wage Rigidity in a Competitive Incomplete Contract Market," Labor and Demography, EconWPA 0305001, EconWPA.
  9. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
  10. Georg Kirchsteiger & Ernst Fehr & Arno Riedl, 1993. "Does Fairness Prevent Market Clearing? An Experimental Investigation," ULB Institutional Repository 2013/5927, ULB -- Universite Libre de Bruxelles.
  11. Seltzer, Andrew & Merrett, David T, 2000. "Personnel Policies at the Union Bank of Australia: Evidence from the 1888-1900 Entry Cohorts," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 18(4), pages 573-613, October.
  12. Lazear, Edward P, 1979. "Why Is There Mandatory Retirement?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(6), pages 1261-84, December.
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Cited by:
  1. Hoppe, Eva I & Schmitz, Patrick W, 2013. "Contracting under Incomplete Information and Social Preferences: An Experimental Study," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9287, C.E.P.R. Discussion Papers.
  2. Macpherson, David A. & Prasad, Kislaya & Salmon, Timothy C., 2014. "Deferred compensation vs. efficiency wages: An experimental test of effort provision and self-selection," Journal of Economic Behavior & Organization, Elsevier, vol. 102(C), pages 90-107.
  3. Casoria Fortuna & Riedl Arno, 2012. "Experimental labor markets and policy considerations: Incomplete contracts and macroeconomic aspects," Research Memorandum 058, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  4. Nieken, Petra & Schmitz, Patrick W., 2012. "Repeated moral hazard and contracts with memory: A laboratory experiment," Games and Economic Behavior, Elsevier, vol. 75(2), pages 1000-1008.
  5. Martin Brown & Armin Falk & Ernst Fehr, 2012. "Competition And Relational Contracts: The Role Of Unemployment As A Disciplinary Device," Journal of the European Economic Association, European Economic Association, European Economic Association, vol. 10(4), pages 887-907, 08.

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