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Contract Form, Wage Flexibility, and Employment


  • Thomas Lemieux
  • W. Bentley MacLeod
  • Daniel Parent


We begin with two uncontroversial hypotheses - firm productivity is expensive to measure and employment entails relationship-specific investments. These assumptions imply that firms would optimally choose fixed-wage contracts, and complement these with bonus pay when measuring employee performance is not too costly. These assumptions imply that under an optimal employment contract hours of work is less responsive, while total compensation is more responsive to shocks under bonus-pay contracts compared to fixed wage contracts. Using data from the Panel Study of Income Dynamics (PSID) where shocks are proxied using the local unemployment rate, we find strong support for these two implications.

Suggested Citation

  • Thomas Lemieux & W. Bentley MacLeod & Daniel Parent, 2012. "Contract Form, Wage Flexibility, and Employment," American Economic Review, American Economic Association, vol. 102(3), pages 526-531, May.
  • Handle: RePEc:aea:aecrev:v:102:y:2012:i:3:p:526-31

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    References listed on IDEAS

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    Cited by:

    1. Nucci, Francesco & Riggi, Marianna, 2013. "Performance pay and changes in U.S. labor market dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2796-2813.
    2. Colin P. Green & John S. Heywood, 2016. "Don't Forget the Gravy! Are Bonuses Just Added on Top of Salaries?," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 55(3), pages 490-513, July.
    3. Ana Abras & Renata Narita, 2016. "Informalidade, Desigualdade E Pagamento Por Performance No Brasil," Anais do XLII Encontro Nacional de Economia [Proceedings of the 42ndd Brazilian Economics Meeting] 230, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
    4. Balazs Reizer, 2016. "Do Firms Pay Bonuses to Protect Jobs?," IEHAS Discussion Papers 1612, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.

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