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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. Marcel Fafchamps & Måns Söderbom, 2004. "Wages and Labor Management in African Manufacturing," Development and Comp Systems 0409043, EconWPA.
    2. Thomas Groll & Christopher J. Ellis, 2013. "Dynamic Commercial Lobbying," CESifo Working Paper Series 4114, CESifo Group Munich.
    3. 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.
    4. 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.
    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 & Mans Söderbom & Najy Benhassine, 2009. "Wage Gaps and Job Sorting in African Manufacturing," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 18(5), pages 824-868, November.
    7. Francis Teal & Måns Söderbom, 2002. "Does firm size really affect earnings?," Economics Series Working Papers WPS/2002-08, University of Oxford, Department of Economics.
    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. Fernandez, Jose & Nahata, Babu, 2009. "Pay What You Like," MPRA Paper 16265, University Library of Munich, Germany.
    10. Campbell III, Carl M., 2006. "A model of the determinants of effort," Economic Modelling, Elsevier, vol. 23(2), pages 215-237, March.
    11. Olivella, P., 1993. "Information Structures and the Delegation of Monitoring," UFAE and IAE Working Papers 201.93, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    12. Måns Söderbom & Francis Teal & Anthony Wambugu, 2004. "Does firm size really affect earnings?," Development and Comp Systems 0409011, EconWPA.
    13. 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.
    14. Eva Pichler, 1997. "How to beat the average," Quality & Quantity: International Journal of Methodology, Springer, vol. 31(3), pages 217-231, August.

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