Recursive Contracts, Firm Longevity, and Rat Races: Theory and Experimental Evidence
AbstractThis paper investigates the relationship between firm longevity and rat races in an environment where long-lived firms are operated by overlapping generations of short-lived players. We first present a complete information model in which workers in the young generation are offered employment contracts designed by the firms' owners who belong to the old generation. When old, employed workers are granted ownnership rights as long as the firm continues to operate. We test the theoretical predictions of the model in a laboratory experiment. In line with our model's predictions, as firm longevity increases, the recursive nature of the contracts leads to a rat race characterized by low wages, high effort levels, and rent dissipation
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Bibliographic InfoPaper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 1122.
Length: 30 pages
Date of creation: 2011
Date of revision: 2011
Contact details of provider:
Postal: Department of Economics, The University of Melbourne, 5th Floor, Economics and Commerce Building, Victoria, 3010, Australia
Phone: +61 3 8344 5289
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Web page: http://www.economics.unimelb.edu.au
More information through EDIRC
Overlapping-generations models; Recursive contracts; Rat races; Experiments;
Find related papers by JEL classification:
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- D02 - Microeconomics - - General - - - Institutions: Design, Formation, and Operations
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
- D92 - Microeconomics - - Intertemporal Choice - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-09-05 (All new papers)
- NEP-BEC-2011-09-05 (Business Economics)
- NEP-CBE-2011-09-05 (Cognitive & Behavioural Economics)
- NEP-DGE-2011-09-05 (Dynamic General Equilibrium)
- NEP-EXP-2011-09-05 (Experimental Economics)
- NEP-HRM-2011-09-05 (Human Capital & Human Resource Management)
- NEP-LAB-2011-09-05 (Labour Economics)
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