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Risk Aversion and the Efficiency Wage Contract

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  • Ouassila Chouikhi
  • Shyama V. Ramani

Abstract

. The efficiency wage model of Shapiro and Stiglitz (American Economic Review 74: 433–444, 1984) has not always been confirmed by empirical investigations. This could be due to informational problems. Reformulating the Shapiro and Stiglitz model as a sequential game, this paper examines the relations between the terms of the efficiency wage contract offered by a firm and the responses of a worker, under incomplete information about the degree of risk aversion of the firm and the worker. It shows that under incomplete information about the degree of risk aversion of the worker, shirking can emerge as an equilibrium phenomenon. For any efficiency wage contract, a worker will shirk if the degree of risk aversion of the worker is less than that corresponding to the contract.

Suggested Citation

  • Ouassila Chouikhi & Shyama V. Ramani, 2004. "Risk Aversion and the Efficiency Wage Contract," LABOUR, CEIS, vol. 18(1), pages 53-73, March.
    • Handle: RePEc:bla:labour:v:18:y:2004:i:1:p:53-73
    DOI: 10.1111/j.1121-7081.2004.00258.x
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    References listed on IDEAS

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    1. Sparks, Roger, 1986. "A Model of Involuntary Unemployment and Wage Rigidity: Worker Incentives and the Threat of Dismissal," Journal of Labor Economics, University of Chicago Press, vol. 4(4), pages 560-581, October.
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    4. Lawrence F. Katz, 1986. "Efficiency Wage Theories: A Partial Evaluation," NBER Chapters, in: NBER Macroeconomics Annual 1986, Volume 1, pages 235-290, National Bureau of Economic Research, Inc.
    5. Bowles, Samuel, 1985. "The Production Process in a Competitive Economy: Walrasian, Neo-Hobbesian, and Marxian Models," American Economic Review, American Economic Association, vol. 75(1), pages 16-36, March.
    6. Albrecht, James W & Vroman, Susan B, 1998. "Nash Equilibrium Efficiency Wage Distributions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(1), pages 183-203, February.
    7. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
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    Cited by:

    1. Seeun Jung & Kenneth Houngbedji, 2014. "Shirking, Monitoring, and Risk Aversion," Working Papers halshs-00965532, HAL.
    2. Seeun JUNG, 2014. "Risk Attitudes and Shirking on the Quality of Work under Monitoring: Evidence from a Real-Effort Task Experiment," THEMA Working Papers 2014-26, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.

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