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High Compensation Creates a Ratchet Effect

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Author Info
Hans Gersbach
Amihai Glazer

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Abstract

Consider a firm which pays a (credit-constrained) worker for his effort over two periods. The more the firm pays in one period, the wealthier is the worker in the following period, and so the more he must then be paid for a given effort. We describe the profit-maximising contract under these conditions, showing how this wealth-ratchet effect can raise wages over time, and cause the firm to fire older workers. Copyright © The Author(s). Journal compilation © Royal Economic Society 2009.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0297.2009.02256.x
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Publisher Info
Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 119 (2009)
Issue (Month): 539 (07)
Pages: 1208-1224
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Handle: RePEc:ecj:econjl:v:119:y:2009:i:539:p:1208-1224

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  1. Kanemoto, Yoshitsugu & MacLeod, W Bentley, 1992. "The Ratchet Effect and the Market for Secondhand Workers," Journal of Labor Economics, University of Chicago Press, vol. 10(1), pages 85-98, January. [Downloadable!] (restricted)
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  2. O. Attanasio & H. W. Hoynes, . "Differential mortality and wealth accumulation," Institute for Research on Poverty Discussion Papers 1079-96, University of Wisconsin Institute for Research on Poverty. [Downloadable!]
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  3. Clark, Andrew E., 1999. "Are wages habit-forming? evidence from micro data," Journal of Economic Behavior & Organization, Elsevier, vol. 39(2), pages 179-200, June. [Downloadable!] (restricted)
  4. Medoff, James L & Abraham, Katharine G, 1980. "Experience, Performance, and Earnings," The Quarterly Journal of Economics, MIT Press, vol. 95(4), pages 703-36, December. [Downloadable!] (restricted)
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  5. Gibbons, Robert & Murphy, Kevin J, 1992. "Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 468-505, June. [Downloadable!] (restricted)
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  6. Judith K. Hellerstein & David Neumark & Kenneth R. Troske, 1996. "Wages, Productivity, and Worker Characteristics: Evidence from Plant-Level Production Functions and Wage Equations," NBER Working Papers 5626, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Aron, Debra J, 1987. "Worker Reputation and Productivity Incentives," Journal of Labor Economics, University of Chicago Press, vol. 5(4), pages S87-106, October. [Downloadable!] (restricted)
  8. Lazear, Edward P, 1979. "Why Is There Mandatory Retirement?," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1261-84, December. [Downloadable!] (restricted)
  9. John M. Abowd & Francis Kramarz & David N. Margolis, 1994. "High-Wage Workers and High-Wage Firms," CIRANO Working Papers 94s-23, CIRANO. [Downloadable!]
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  10. Fudenberg, Drew & Holmstrom, Bengt & Milgrom, Paul, 1990. "Short-term contracts and long-term agency relationships," Journal of Economic Theory, Elsevier, vol. 51(1), pages 1-31, June. [Downloadable!] (restricted)
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  11. Robert Gibbons & Kevin J. Murphy, 1992. "Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence," NBER Working Papers 3792, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Lazear, Edward P, 1986. "Salaries and Piece Rates," Journal of Business, University of Chicago Press, vol. 59(3), pages 405-31, July. [Downloadable!] (restricted)
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