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A Model of Involuntary Unemployment and Wage Rigidity: Worker Incentives and the Threat of Dismissal

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  • Sparks, Roger
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    Abstract

    This paper analyzes a model that highlights imperfect monitoring and the threat of dismissal as microeconomic underpinnings for the efficiency-wage hypothesis. The author's major innovation is to allow the rules for dismissal, as well as the wage, to be determined endogenously as the equilibrium of a Stackelberg game played between firms and workers. The key results are as follows: a nontrivial equilibrium (where positive output is produced) must involve involuntary unemployment in that employed workers are strictly better off than are the unemployed; in addition, the equilibrium wage is rigid with respect to exogenous shifts in productivity. Copyright 1986 by University of Chicago Press.

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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Labor Economics.

    Volume (Year): 4 (1986)
    Issue (Month): 4 (October)
    Pages: 560-81

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    Handle: RePEc:ucp:jlabec:v:4:y:1986:i:4:p:560-81

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    Web page: http://www.journals.uchicago.edu/JOLE/

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    Cited by:
    1. Campbell III, Carl M., 2006. "A model of the determinants of effort," Economic Modelling, Elsevier, vol. 23(2), pages 215-237, March.
    2. Erica L. Groshen & Mark E. Schweitzer, 1999. "Firms' wage adjustments: a break from the past," Review, Federal Reserve Bank of St. Louis, issue May, pages 93-111.
    3. Pau OLIVELLA, 1995. "Information Structures and the Delegation of Monitoring," Annales d'Economie et de Statistique, ENSAE, issue 39, pages 1-32.
    4. Benhassine, Najy & Fafchamps, Marcel & Söderbom, Måns, 2006. "Wage Gaps and Job Sorting in African Manufacturing," CEPR Discussion Papers 6003, C.E.P.R. Discussion Papers.
    5. Groshen, Erica L. & Schweitzer, Mark E., 1998. "Inflation and unemployment revisited: Grease vs. sand," CFS Working Paper Series 1999/06, Center for Financial Studies (CFS).
    6. Marcel Fafchamps & Måns Söderbom, 2004. "Wages and Labor Management in African Manufacturing," Development and Comp Systems 0409043, EconWPA.
    7. Soderbom, Mans & Teal, Francis, 2004. "Size and efficiency in African manufacturing firms: evidence from firm-level panel data," Journal of Development Economics, Elsevier, vol. 73(1), pages 369-394, February.
    8. Altenburg, Lutz & Straub, Martin, 2001. "Taxes on labour and unemployment in a shirking model with union bargaining," Labour Economics, Elsevier, vol. 8(6), pages 721-744, December.
    9. Måns Söderbom & Francis Teal & Anthony Wambugu, 2004. "Does firm size really affect earnings?," Development and Comp Systems 0409011, EconWPA.
    10. Eva Pichler, 1997. "How to beat the average," Quality & Quantity: International Journal of Methodology, Springer, vol. 31(3), pages 217-231, August.
    11. Francis Teal & Måns Söderbom, 2002. "Size and Efficiency in African Manufacturing Firms: Evidence from Firm-Level Panel Data," Economics Series Working Papers WPS/2002-07, University of Oxford, Department of Economics.
    12. Thomas Groll & Christopher J. Ellis, 2013. "Dynamic Commercial Lobbying," CESifo Working Paper Series 4114, CESifo Group Munich.
    13. Francis Teal & Måns Söderbom, 2002. "Does firm size really affect earnings?," Economics Series Working Papers WPS/2002-08, University of Oxford, Department of Economics.
    14. Fernandez, Jose & Nahata, Babu, 2009. "Pay What You Like," MPRA Paper 16265, University Library of Munich, Germany.

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