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Wage Trends as Performance Displays Productive Potential: A Model and Application to Academic Early Retirement

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  • Smith Freeman
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    Abstract

    Wage trends over the working career are explored in a two-period model assuming that workers have different intrinsic productivities which are manifested stochastically. Firms compete for a limited number of risk averse employees. The basic model, which was developed for the study of academic research employment, postulates that information on prospective productivity is symmetrically available to firm and worker. The "observed" pattern of academic wages is found to emerge: young faculty is underpaid and the less well paid older faculty is overpaid. The model is used to investigate early retirement plans intended to induce the latter group to retire. It is found that such plans can only be economically advantageous if the prorated overhead costs of a faculty member exceed the value of his output. The basic model is then reinterpreted to answer the general question: when and how should a firm discharge employees of low productivity? A contrasting asymmetrical information model is also introduced (employees have more information than employers). In the asymmetrical case, the composition of the labor force is endogenously determined by self-selection of prospective employees. Firing of employees with poor track records can also occur.

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    Bibliographic Info

    Article provided by The RAND Corporation in its journal Bell Journal of Economics.

    Volume (Year): 8 (1977)
    Issue (Month): 2 (Autumn)
    Pages: 419-443

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    Handle: RePEc:rje:bellje:v:8:y:1977:i:autumn:p:419-443

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    Cited by:
    1. Cater, Bruce & Lew, Byron & Pivato, Marcus, 2009. "Why tenure?," MPRA Paper 14823, University Library of Munich, Germany.
    2. Carolyn Pitchik, 2008. "Self-Promoting Investments," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 164(3), pages 381-406, September.
    3. Christopher Dougherty, 2000. "Impact of work experience and training in the current and previous occupations on earnings: micro evidence from the national longitudinal survey of youth," LSE Research Online Documents on Economics 20189, London School of Economics and Political Science, LSE Library.
    4. Ben T. Yu, 1984. "Comparative Productivity of Inventors in Emerging Research Organizations: Some Evidence from the U.S. Petroleum Industry," UCLA Economics Working Papers 331, UCLA Department of Economics.
    5. Huizinga, Harry, 2000. "Intrafirm information management and wage dynamics," European Economic Review, Elsevier, vol. 44(1), pages 163-180, January.
    6. John G. Sessions & Nikolaos Theodoropoulos, 2009. "Tenure, Wage Profiles and Monitoring," University of Cyprus Working Papers in Economics 4-2009, University of Cyprus Department of Economics.
    7. Giulio Zanella & Peter Rupert, 2010. "Revisiting Wage, Earnings, and Hours Profiles," 2010 Meeting Papers 1158, Society for Economic Dynamics.
    8. Huizinga, H.P., 1996. "Intrafirm Information Transfer and Wages," Discussion Paper 1996-18, Tilburg University, Center for Economic Research.
    9. William J. Moore & Robert J. Newman & Geoffrey K. Turnbull, . "The Experience-Earnings Profile: Productivity-Augmenting or Purely Contractual?," Departmental Working Papers 2002-13, Department of Economics, Louisiana State University.
    10. Harris, Milton & Holstrom, Bengt, 1982. "A Theory of Wage Dynamics," Review of Economic Studies, Wiley Blackwell, vol. 49(3), pages 315-33, July.
    11. P. Rupert & G. Zanella, 2014. "Revisiting wage, earnings, and hours profiles," Working Papers wp936, Dipartimento Scienze Economiche, Universita' di Bologna.
    12. Hubert, Franz, 1995. "Contracting with costly tenants," Regional Science and Urban Economics, Elsevier, vol. 25(5), pages 631-654, October.
    13. Senbongi, Shuichi & Harrington, Joseph E., 1995. "Managerial reputation and the competitiveness of an industry," International Journal of Industrial Organization, Elsevier, vol. 13(1), pages 95-110, March.
    14. C Dougherty, 2000. "Impact of Work Experience and Training in the Current and Previous Occupations on Earnings: Micro Evidence from the National Longitudinal Survey of Youth," CEP Discussion Papers dp0456, Centre for Economic Performance, LSE.
    15. Smith, John, 2009. "Cognitive dissonance and the overtaking anomaly: Psychology in the principal-agent relationship," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 38(4), pages 684-690, August.
    16. Lam, Kit-Chun & Liu, Pak-Wai, 2000. "Verifiable wage offers and recontracting: effect on wage and consumption profiles," Labour Economics, Elsevier, vol. 7(4), pages 449-462, July.
    17. Ourania Karakosta & Nikos Tsakiris, 2009. "Indirect Tax Reforms and Public Goods under Imperfect Competition," University of Cyprus Working Papers in Economics 5-2009, University of Cyprus Department of Economics.

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