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Hidden effort, learning by doing, and wage dynamics

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  • Arantxa Jarque

Abstract

Many occupations are subject to learning by doing: Effort at the workplace early in the career of a worker results in higher productivity later on. In such occupations, if effort at work is unobservable, a moral hazard problem also arises. We study a particular specification of learning by doing in which the conditional distribution of output depends on the sum of undepreciated efforts. With this specification, we can overcome the technical difficulties for solving for the optimal contract that arise because of the persistent effects of effort in time. Our numerical example shows that effort is frontloaded over the contractual relationship, and follows a steeper decreasing pattern than in the case without learning by doing. On the other hand, the properties of wage dynamics remain unchanged with respect to those of the optimal contract without learning by doing.

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Bibliographic Info

Article provided by Federal Reserve Bank of Richmond in its journal Economic Quarterly.

Volume (Year): (2010)
Issue (Month): 4Q ()
Pages: 339-372

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Handle: RePEc:fip:fedreq:y:2010:i:4q:p:339-372:n:vol.96no.4

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Related research

Keywords: Labor market;

References

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  1. Christopher Phelan & Robert M Townsend, 2010. "Computing Multi-Period, Information Constrained Optima," Levine's Working Paper Archive 117, David K. Levine.
  2. Jarque, Arantxa, 2010. "Repeated moral hazard with effort persistence," Journal of Economic Theory, Elsevier, vol. 145(6), pages 2412-2423, November.
  3. Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-90, September.
  4. MUKOYAMA, Toshihiko & SAHIN, Aysegül, 2004. "Repeated Moral Hazard with Persistence," Cahiers de recherche 01-2004, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  5. W. Bentley MacLeod & Daniel Parent, 1999. "Job characteristics, wages, and the employment contract," Review, Federal Reserve Bank of St. Louis, issue May, pages 13-27.
  6. Ana Fernandes & Christopher Phelan, 1999. "A recursive formulation for repeated agency with history dependence," Staff Report 259, Federal Reserve Bank of Minneapolis.
  7. Laurence Ales & Maziero Pricila, . "Accounting for Private Information," GSIA Working Papers 2010-E58, Carnegie Mellon University, Tepper School of Business.
  8. Illoong Kwon, 2006. "Incentives, wages, and promotions: theory and evidence," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 100-120, 03.
  9. 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.
  10. Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 599-617, October.
  11. Edward S. Prescott, 1999. "A primer on moral-hazard models," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 47-78.
  12. Phelan, J.C., 1990. "Incentives, Insurance And The Variability Of Con Somption And Leisure," Working papers 90-26, Wisconsin Madison - Social Systems.
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