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Industry Profits, Wages and Competition under Incentive Labour Contracts with Unverifiable Effort

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Author Info

  • Nicola Meccheri

    ()
    (Department of Economics, University of Pisa, Italy; The Rimini Centre for Economic Analysis (RCEA), Italy)

  • Luciano Fanti

    ()
    (Department of Economics, University of Pisa, Italy)

Abstract

This paper studies the interaction between incentive labour contracts, competition à la Cournot and industry profits, in a context where workers’ effort is not verifiable and the probability of the unemployed getting a job can depend on their employment histories according to the degree of product market competition. It is shown that efficiency wages paid by each firm can decrease when competition becomes fiercer. With discretionary bonuses, instead, wages are generally uncorrelated with competition, but there exists an upper threshold for the number of competing firms, over which profits collapse to zero. Moreover, if information about firms’ misbehaviour in paying bonuses flows in the labour market at a low rate, firms can make positive profits only by paying efficiency wages.

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File URL: http://www.rcfea.org/RePEc/pdf/wp37_10.pdf
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Bibliographic Info

Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 37_10.

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Date of creation: Jan 2010
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Handle: RePEc:rim:rimwps:37_10

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Keywords: industry profits; Cournot competition; efficiency wages; performance pay;

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  1. Vicente Cuñat & Maria Guadalupe, 2005. "How does product market competition shape incentive contracts?," LSE Research Online Documents on Economics 19894, London School of Economics and Political Science, LSE Library.
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