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A Dynamic Multitask Model: Fixed Wages, No Externalities, and Holdup Problems

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  • Meg Adachi-Sato

    (Royal Melbourne Institute of Technology University)

  • Kazuya Kamiya

    (Faculty of Ecocnomics, the University of Tokyo)

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    Abstract

    This article develops a multitask model in which the agent has to produce both verifiable and unverifiable outputs in a dynamic framework as observed in actual labor markets and practices. The model derives an important result regarding the timing and the length of a wage contract. A short-term wage contract allows for greater holdup, but it motivates the agent to engage in a task whose output is unverifiable. In contrast, a long-term wage contract does not allow for holdup and induces the first-best level effort for verifiable outputs, but it removes the incentive for unverifiable outputs. By studying an optimal wage profile and finding the optimal timing to sign a contract in a multitask framework, our model explains why individuals paid fixed wages have more frequent opportunities for wage negotiation compared with those paid through incentive pay. Furthermore, our model predicts that in industries where unverifiable outputs are valued, wage contracts are renewed more frequently.

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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2011/2011cf825.pdf
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    Bibliographic Info

    Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-825.

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    Length: 29 pages
    Date of creation: Nov 2011
    Date of revision:
    Handle: RePEc:tky:fseres:2011cf825

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    1. Fudenberg, Drew & Holmstrom, Bengt & Milgrom, Paul, 1990. "Short-term contracts and long-term agency relationships," Journal of Economic Theory, Elsevier, vol. 51(1), pages 1-31, June.
    2. Georg Noldeke & Klaus M. Schmidt, 1995. "Option Contracts and Renegotiation: A Solution to the Hold-Up Problem," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 163-179, Summer.
    3. Moore, John & Repullo, Rafael, 1990. "Nash Implementation: A Full Characterization," Econometrica, Econometric Society, vol. 58(5), pages 1083-99, September.
    4. Jonathan Levin, 2002. "Multilateral Contracting And The Employment Relationship," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 1075-1103, August.
    5. Holmstrom, Bengt, 1999. "Managerial Incentive Problems: A Dynamic Perspective," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 169-82, January.
    6. George Baker, 2002. "Distortion and Risk in Optimal Incentive Contracts," Journal of Human Resources, University of Wisconsin Press, vol. 37(4), pages 728-751.
    7. Itoh, Hideshi, 1992. "Cooperation in Hierarchical Organizations: An Incentive Perspective," Journal of Law, Economics and Organization, Oxford University Press, vol. 8(2), pages 321-45, April.
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