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Competition and Relational Contracts: The Role of Unemployment as a Disciplinary Device

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  • Brown, Martin
  • Falk, Armin
  • Fehr, Ernst

Abstract

When workers are faced with the threat of unemployment, their relationship with a particular firm becomes valuable. As a result, a worker may comply with the terms of a relational contract that demands high effort even when performance is not enforceable by a third party. But can relational contracts motivate high effort when workers can easily find alternative jobs? We examine how competition for labor affects the emergence of relational contracts and their effectiveness in overcoming moral hazard in the labor market. We show that effective relational contracts do emerge in a market with excess demand for labor. Long-term relationships turn out to be less frequent when there is excess demand for labor than they are in a market characterized by exogenous unemployment. However, stronger competition for labor does not impair labor market efficiency: higher wages induced by competition lead to higher effort out of concerns for reciprocity.

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Bibliographic Info

Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 359.

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Date of creation: May 2011
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Handle: RePEc:trf:wpaper:359

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Keywords: Relational Contracts; Involuntary Unemployment;

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References

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  1. Wu, Steven Y. & Roe, Brian E., 2007. "Discretionary Latitude and Relational Contracting," IZA Discussion Papers 2879, Institute for the Study of Labor (IZA).
  2. James Andreoni & Marco Castillo & Ragan Petrie, 2003. "What Do Bargainers' Preferences Look Like? Experiments with a Convex Ultimatum Game," American Economic Review, American Economic Association, vol. 93(3), pages 672-685, June.
  3. Peter AUER & Sandrine CAZES, 2000. "The resilience of the long-term employment relationship: Evidence from the industrialized countries," International Labour Review, International Labour Organization, vol. 139(4), pages 379-408, December.
  4. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  5. Steffen Huck & Andrew J. Seltzer & Brian Wallace, 2011. "Deferred Compensation in Multiperiod Labor Contracts: An Experimental Test of Lazear's Model," American Economic Review, American Economic Association, vol. 101(2), pages 819-43, April.
  6. Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, vol. 80(1), pages 123-129, July.
  7. Brown, Martin & Falk, Armin & Fehr, Ernst, 2003. "Relational Contracts and the Nature of Market Interactions," IZA Discussion Papers 897, Institute for the Study of Labor (IZA).
  8. Flabbi, Luca & Ichino, Andrea, 1998. "Productivity, Seniority and Wages: New Evidence from Personnel Data," CEPR Discussion Papers 1966, C.E.P.R. Discussion Papers.
  9. James L. Medoff & Katharine G. Abraham, 1980. "Experience, Performance, and Earnings," NBER Working Papers 0278, National Bureau of Economic Research, Inc.
  10. Hoyt Bleakley & Ann E. Ferris & Jeffrey C. Fuhrer, 1999. "New data on worker flows during business cycles," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 49-76.
  11. Roe, Brian E. & Wu, Steven Y., 2009. "Do the Selfish Mimic Cooperators? Experimental Evidence from Finitely-Repeated Labor Markets," IZA Discussion Papers 4084, Institute for the Study of Labor (IZA).
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Cited by:
  1. Robert Dur & Jan Tichem, 2012. "Social Relations and Relational Incentives," Tinbergen Institute Discussion Papers 12-054/1, Tinbergen Institute.
  2. Werner, Peter & Bolton, Gary & Ockenfels, Axel, 2013. "How managerial wage transparency may reduce shareholder returns Evidence from an experiment," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79766, Verein für Socialpolitik / German Economic Association.
  3. Björn Bartling & Ernst Fehr & Klaus Schmidt, 2013. "Use and Abuse of Authority - A Behavioral Foundation of the Employment Relation," CESifo Working Paper Series 4068, CESifo Group Munich.
  4. Schmidt, Klaus M., 2009. "Social Preferences and Competition," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 298, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  5. Ernst Fehr & Martin Brown & Christian Zehnder, 2009. "On Reputation: A Microfoundation of Contract Enforcement and Price Rigidity," Economic Journal, Royal Economic Society, vol. 119(536), pages 333-353, 03.
  6. Dur, Robert & Tichem, Jan, 2013. "Altruism and Relational Incentives in the Workplace," IZA Discussion Papers 7363, Institute for the Study of Labor (IZA).
  7. Vogt, Nora & Reeson, Andrew F. & Bizer, Kilian, 2013. "Communication, competition and social gift exchange in an auction for public good provision," Ecological Economics, Elsevier, vol. 93(C), pages 11-19.
  8. Bartling, Björn & Fehr, Ernst & Schmidt, Klaus M., 2012. "Use and Abuse of Authority," Discussion Papers in Economics 14243, University of Munich, Department of Economics.
  9. Martin G. Kocher & Wolfgang J. Luhan & Matthias Sutter, 2012. "Testing a forgotten aspect of Akerlof’s gift exchange hypothesis: Relational contracts with individual and uniform wages," Working Papers 2012-02, Faculty of Economics and Statistics, University of Innsbruck.
  10. Charness, Gary & Du, Ninghua & Yang, Chun-Lei & Yao, Lan, 2013. "Promises in contract design," European Economic Review, Elsevier, vol. 64(C), pages 194-208.
  11. repec:dgr:uvatin:2012054 is not listed on IDEAS
  12. Schram, Arthur & Brandts, Jordi & Gërxhani, Klarita, 2010. "Information, bilateral negotiations, and worker recruitment," European Economic Review, Elsevier, vol. 54(8), pages 1035-1058, November.

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