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A Dynamic Efficiency-Wage Model with Continuous Effort and Externalities

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  • M Guerrazzi

Abstract

This paper provides a general equilibrium efficiency-wage model in which employment evolves according to the rules of the Shapiro-Stiglitz?s (1984) shirking model. The proposed framework allows us to endogenise in a continuous manner the effort decision undertaken by the individual worker and it may resolve the indeterminacy arising from a model with exogenous (and constant) effort. Moreover, by exploiting an externality argument, we allow the model to capture different local dynamic patterns in which are found convergent fluctuations and persistent cycles. Finally, we show that in our framework unemployment may actually act as a worker discipline device, i.e., equilibria with higher (lower) unemployment rates are also characterised by higher (lower) effort levels.

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Bibliographic Info

Article provided by Economic Issues in its journal Economic Issues.

Volume (Year): 13 (2008)
Issue (Month): 2 (September)
Pages: 37-58

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Handle: RePEc:eis:articl:208guerrazzi

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  1. Benhabib Jess & Farmer Roger E. A., 1994. "Indeterminacy and Increasing Returns," Journal of Economic Theory, Elsevier, vol. 63(1), pages 19-41, June.
  2. Christophre Georges, 2002. "An Efficiency Wage Model With Persistent Cycles," Economics Bulletin, AccessEcon, vol. 5(3), pages 1-6.
  3. Solow, Robert M., 1979. "Another possible source of wage stickiness," Journal of Macroeconomics, Elsevier, vol. 1(1), pages 79-82.
  4. Miles S. Kimball, 1989. "Labor Market Dynamics When Unemployment Is A Worker Discipline Device," NBER Working Papers 2967, National Bureau of Economic Research, Inc.
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  8. Farmer Roger E. A. & Guo Jang-Ting, 1994. "Real Business Cycles and the Animal Spirits Hypothesis," Journal of Economic Theory, Elsevier, vol. 63(1), pages 42-72, June.
  9. Allgulin, Magnus & Ellingsen, Tore, 1998. "Monitoring and Pay," Working Paper Series in Economics and Finance 245, Stockholm School of Economics, revised 22 Nov 1999.
  10. Peter Cramton & Joseph S. Tracy, 1992. "Strikes and Holdouts in Wage Bargaining: Theory and Data," Papers of Peter Cramton 92aer, University of Maryland, Department of Economics - Peter Cramton, revised 09 Jun 1998.
  11. Faria, Joao Ricardo, 2000. "Supervision and effort in an intertemporal efficiency wage model: the role of the Solow condition," Economics Letters, Elsevier, vol. 67(1), pages 93-98, April.
  12. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
  13. Uhlig, H.F.H.V.S. & Xu, Y., 1996. "Effort and the Cycle: Cyclical Implications of Efficiency Wages," Discussion Paper 1996-49, Tilburg University, Center for Economic Research.
  14. Rui Coimbra, . "Efficiency Wages, Increasing Returns and Endogenous Fluctuations," Discussion Papers 99/6, Department of Economics, University of York.
  15. Alexopoulos, Michelle, 2004. "Unemployment and the business cycle," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 277-298, March.
  16. Gomme, Paul, 1999. "Shirking, Unemployment and Aggregate Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(1), pages 3-21, February.
  17. Pisauro, Giuseppe, 1991. "The effect of taxes on labour in efficiency wage models," Journal of Public Economics, Elsevier, vol. 46(3), pages 329-345, December.
  18. Danthine, Jean-Pierre & Donaldson, John B., 1990. "Efficiency wages and the business cycle puzzle," European Economic Review, Elsevier, vol. 34(7), pages 1275-1301, November.
  19. Mortensen, Dale T, 1982. "Property Rights and Efficiency in Mating, Racing, and Related Games," American Economic Review, American Economic Association, vol. 72(5), pages 968-79, December.
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Cited by:
  1. Guerrazzi, Marco, 2011. "The animal spirits hypothesis and the Benhabib-Farmer condition for indeterminacy," MPRA Paper 30673, University Library of Munich, Germany.
  2. Guerrazzi, Marco, 2012. "On involuntary unemployment: notes on efficiency-wage competition," MPRA Paper 38140, University Library of Munich, Germany.

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