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Limited Liability and Dynamic Incentives

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  • Allgulin, Magnus

    (Dept. of Economics, Stockholm School of Economics)

Abstract

If efficiency wages really exist, as proposed by Shapiro and Stiglitz (1984), why do we not see more job purchases? A conventional answer is that with multiple periods, low pay in initial periods serves as an implicit payment (Lazear (1981)). This paper presents a formal analysis of this issue. A major result is that the per period worker rents associated with efficiency wages are inversely related to the number of periods, but are never zero. The paper also discusses how remaining worker rents can be eliminated by implicit bonds, such as firm-specific human capital investments.

Suggested Citation

  • Allgulin, Magnus, 1999. "Limited Liability and Dynamic Incentives," SSE/EFI Working Paper Series in Economics and Finance 341, Stockholm School of Economics.
    • Handle: RePEc:hhs:hastef:0341
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    More about this item

    Keywords

    Monitoring; efficiency wages; implicit bond; entrance fee;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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