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Turning a Blind Eye: Costly Enforcement, Credible Commitment and Minimum Wage Laws

  • ArnabK. Basu
  • NancyH. Chau
  • Ravi Kanbur

In many countries, non-compliance with minimum wage legislation is widespread and authorities may be seen as having turned a blind eye to legislation they have themselves passed. We show that turning a blind eye can indeed be an equilibrium phenomenon with "ex post" credibility, in a model of minimum wage policy with imperfect competition, imperfect enforcement and imperfect commitment. Since credible enforcement requires costly "ex post" transfer of income from employers to workers, a government concerned only with efficiency but not with distribution is shown, paradoxically, to be unable to credibly elicit efficiency improvements via a minimum wage reform. Copyright © The Author(s). Journal compilation © Royal Economic Society 2009.

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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 120 (2010)
Issue (Month): 543 (03)
Pages: 244-269

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Handle: RePEc:ecj:econjl:v:120:y:2010:i:543:p:244-269
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