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A Competitive Efficiency Wage Model with Keynesian Features

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  • Kahn, Charles
  • Mookherjee, Dilip

Abstract

The authors study a general equilibrium efficiency wage model characterized by fully optimizing agents, flexible prices, and imperf ect information. The model has a unique competitive equilibrium with underemployment in a sector (called manufacturing) with efficiency wages, relative to a self-employment sector. Since prices are flexible, the multiplier of manufacturing output, with respect to autonomous demand changes, may or may not exceed unity: demand changes lead to price effects, as well as income effects, that work opposite each other. Nevertheless, there always exist government policies that achieve Pareto improvements by switching demand toward the manufacturing sector. Optimal demand-switching policies are explicitly characterized. Copyright 1988, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 103 (1988)
Issue (Month): 4 (November)
Pages: 609-45

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Handle: RePEc:tpr:qjecon:v:103:y:1988:i:4:p:609-45

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Cited by:
  1. Tetsuya Nakajima, 2010. "A Simple Model Of Keynesian Unemployment," Metroeconomica, Wiley Blackwell, vol. 61(2), pages 239-256, 05.
  2. William Fuchs, 2007. "Contracting with Repeated Moral Hazard and Private Evaluations," American Economic Review, American Economic Association, vol. 97(4), pages 1432-1448, September.
  3. Kahn, Charles M. & Mookherjee, Dilip, 1995. "Market failure with moral hazard and side trading," Journal of Public Economics, Elsevier, vol. 58(2), pages 159-184, October.
  4. Jullien, B. & Picard, P., 1993. "A Classical Model of Involuntary Unemployment: Efficiency Wages and Macroeconomic Policy," Papers 9305, Paris X - Nanterre, U.F.R. de Sc. Ec. Gest. Maths Infor..
  5. Riveros, Luis A. & Bouton, Lawrence, 1991. "Efficiency wage theory, labormarkets, and adjustment," Policy Research Working Paper Series 731, The World Bank.
  6. Robert G. King, 2010. "Comment on "Noisy Business Cycles"," NBER Chapters, in: NBER Macroeconomics Annual 2009, Volume 24, pages 395-407 National Bureau of Economic Research, Inc.

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