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Minimum wages and excessive effort supply

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  • Kräkel, Matthias
  • Schöttner, Anja

Abstract

It is well-known that, in static models, minimum wages generate positive worker rents and, consequently, inefficiently low effort. We show that this result does not necessarily extend to a dynamic context. The reason is that, in repeated employment relationships, firms may exploit workers' future rents to induce excessively high effort.

Suggested Citation

  • Kräkel, Matthias & Schöttner, Anja, 2010. "Minimum wages and excessive effort supply," Economics Letters, Elsevier, vol. 108(3), pages 341-344, September.
    • Handle: RePEc:eee:ecolet:v:108:y:2010:i:3:p:341-344
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    References listed on IDEAS

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    1. Kräkel, Matthias & Schöttner, Anja, 2008. "Relative Performance Pay, Bonuses, and Job-Promotion Tournaments," Bonn Econ Discussion Papers 16/2008, University of Bonn, Bonn Graduate School of Economics (BGSE).
    2. Schmitz, Patrick W., 2005. "Workplace surveillance, privacy protection, and efficiency wages," Labour Economics, Elsevier, vol. 12(6), pages 727-738, December.
    3. Schmitz, Patrick W. & Ohlendorf, Susanne, 2008. "Repeated Moral Hazard, Limited Liability, and Renegotiation," CEPR Discussion Papers 6725, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Müller, Daniel & Schmitz, Patrick W., 2015. "Overdeterrence of repeat offenders when penalties for first-time offenders are restricted," Economics Letters, Elsevier, vol. 129(C), pages 116-120.
    2. Christian Grund & Matthias Kräkel, 2012. "Bonus Payments, Hierarchy Levels, and Tenure: Theoretical Considerations and Empirical Evidence," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 64(2), pages 101-124, April.
    3. Susanne Ohlendorf & Patrick W. Schmitz, 2012. "Repeated Moral Hazard And Contracts With Memory: The Case Of Risk‐Neutrality," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(2), pages 433-452, May.
    4. Kräkel, Matthias & Schöttner, Anja, 2012. "Internal labor markets and worker rents," Journal of Economic Behavior & Organization, Elsevier, vol. 84(2), pages 491-509.
    5. Kräkel, Matthias & Müller, Daniel, 2015. "Merger efficiency and managerial incentives," International Journal of Industrial Organization, Elsevier, vol. 41(C), pages 51-63.
    6. Kräkel, Matthias & Müller, Daniel, 2013. "Bad Mergers Revisited: An Incentive Perspective," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79914, Verein für Socialpolitik / German Economic Association.
    7. Schmitz, Patrick W., 2013. "Job design with conflicting tasks reconsidered," European Economic Review, Elsevier, vol. 57(C), pages 108-117.
    8. Schmitz, Patrick W., 2012. "The hold-up problem, innovations, and limited liability," Economics Letters, Elsevier, vol. 117(3), pages 841-843.
    9. Kräkel, Matthias & Müller, Daniel, 2014. "Merger Performance and Managerial Incentives," Bonn Econ Discussion Papers 02/2014, University of Bonn, Bonn Graduate School of Economics (BGSE).

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    More about this item

    Keywords

    Bonuses Limited liability Minimum wages;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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