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Abstract

If a worker's output is observed by the market only when the worker invests in self-promoting activities, then workers overinvest in self-promotion. The efficient contract is one in which firms (i) offer to match outside offers strategically and (ii) guarantee a minimum wage. The model predicts that, in the spot market and under the efficient contract, wage declines with seniority even when conditioning on high ability. This prediction is consistent with the stylized fact regarding the decline of wages with seniority in academia. The model can also explain how the seniority wage premium may vary across disciplines, time, and schools.

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Article provided by Mohr Siebeck, Tübingen in its journal Journal of Institutional and Theoretical Economics.

Volume (Year): 164 (2008)
Issue (Month): 3 (September)
Pages: 381-406

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Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200809)164:3_381:si_2.0.tx_2-

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Find related papers by JEL classification:

• C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
• C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
• L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

References

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