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Deferred Compensation in Multiperiod Labor Contracts: An Experimental Test of Lazear's Model

  • Steffen Huck
  • Andrew J. Seltzer
  • Brian Wallace

This paper provides the first experimental test of Edward Lazear's (1979) model of deferred compensation. We examine the relationship between firms' wage offers and workers' effort supply in a multi-period environment. If firms can ex ante commit to a wage schedule with deferred compensation, workers should respond by supplying sufficient effort to avoid dismissal. We contrast this full-commitment case to controls with no commitment and computer-generated wages in order to examine the roles of monetary incentives, social preferences, and reciprocity. Finally, we examine a setup without formal commitment, but where firms can build a reputation for paying deferred wages. (JEL D86, J22, J31, J33, J41)

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 101 (2011)
Issue (Month): 2 (April)
Pages: 819-43

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Handle: RePEc:aea:aecrev:v:101:y:2011:i:2:p:819-43
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  1. Jagadeesh Gokhale & Erica L. Groshen & David Neumark, 1993. "Do Hostile Takeovers Reduce Extramarginal Wage Payments?," NBER Working Papers 4346, National Bureau of Economic Research, Inc.
  2. M. Rabin, 2001. "Incorporating Fairness into Game Theory and Economics," Levine's Working Paper Archive 511, David K. Levine.
  3. Fehr, Ernst & Kirchsteiger, George & Riedl, Arno, 1993. "Does Fairness Prevent Market Clearing? An Experimental Investigation," The Quarterly Journal of Economics, MIT Press, vol. 108(2), pages 437-59, May.
  4. Topi Miettinen, 2008. "Contracts and Promises - An Approach to Pre-play Agreements," Jena Economic Research Papers 2008-088, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  5. Lazear, Edward P, 1979. "Why Is There Mandatory Retirement?," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1261-84, December.
  6. Seltzer, Andrew & Merrett, David T, 2000. "Personnel Policies at the Union Bank of Australia: Evidence from the 1888-1900 Entry Cohorts," Journal of Labor Economics, University of Chicago Press, vol. 18(4), pages 573-613, October.
  7. Akerlof, George A, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, MIT Press, vol. 97(4), pages 543-69, November.
  8. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
  9. Ernst Fehr & Simon Gachter & Georg Kirchsteiger, 1997. "Reciprocity as a Contract Enforcement Device: Experimental Evidence," Econometrica, Econometric Society, vol. 65(4), pages 833-860, July.
  10. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  11. Guth, Werner & Schmittberger, Rolf & Schwarze, Bernd, 1982. "An experimental analysis of ultimatum bargaining," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 367-388, December.
  12. Ernst Fehr & Armin Falk, 2003. "Wage Rigidity in a Competitive Incomplete Contract Market," Labor and Demography 0305001, EconWPA.
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