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Self-selection and Monitoring in Dynamic Incentive Problems with Incomplete Contracts

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Author Info
Hosios, Arthur J
Peters, Michael

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Abstract

A dynamic trading problem is examined in which a monopsonistic employer hires workers with private information. The employer chooses between two mutually exclusive outcomes. In the mar ket outcome, the employer offers long-term contracts and information is conveyed entirely through self-selection and delayed production. In the monitoring outcome, the employer offers short-term contracts and contract renegotiation is conditioned by an employee's past performance. A simple characterization theorem is provided that illustrates surprising effects of improvements in information. For example, an employer who is initially offering short-term contracts may stop monitoring and shift to market screening when the monitoring technology becomes more informative. Copyright 1993 by The Review of Economic Studies Limited.

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Article provided by Blackwell Publishing in its journal Review of Economic Studies.

Volume (Year): 60 (1993)
Issue (Month): 1 (January)
Pages: 149-74
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Handle: RePEc:bla:restud:v:60:y:1993:i:1:p:149-74

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  1. Flinn, C.J., 1993. "Equilibrium Wage and Dismissal Processes," Working Papers 93-38, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
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  2. Pinoli, Sara, 2008. "Screening ex-ante or screening on-the-job? The impact of the employment contract," MPRA Paper 11429, University Library of Munich, Germany. [Downloadable!]
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