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High Compensation Creates a Ratchet Effect

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  • Hans Gersbach
  • Amihai Glazer

Abstract

Consider a firm which pays a (credit‐constrained) worker for his effort over two periods. The more the firm pays in one period, the wealthier is the worker in the following period, and so the more he must then be paid for a given effort. We describe the profit‐maximising contract under these conditions, showing how this wealth‐ratchet effect can raise wages over time, and cause the firm to fire older workers.

Suggested Citation

  • Hans Gersbach & Amihai Glazer, 2009. "High Compensation Creates a Ratchet Effect," Economic Journal, Royal Economic Society, vol. 119(539), pages 1208-1224, July.
    • Handle: RePEc:wly:econjl:v:119:y:2009:i:539:p:1208-1224
    DOI: 10.1111/j.1468-0297.2009.02256.x
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    1. Hans Gersbach & Amihai Glazer, 2009. "High Compensation Creates a Ratchet Effect," Economic Journal, Royal Economic Society, vol. 119(539), pages 1208-1224, July.
    2. Kimiko Terai & Amihai Glazer, 2021. "How an ineffective agent can increase his budget," Economics and Politics, Wiley Blackwell, vol. 33(1), pages 133-147, March.

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    More about this item

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General

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