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Present bias in the labor market – when it pays to be naive

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  • Fahn, Matthias
  • Seibel, Regina

Abstract

We study optimal employment contracts for present-biased employees if firms cannot commit to long-term contracts. Assuming that an employee's effort increases his chances to obtain a future benefit, we show that individuals who are naive about their present bias will actually be better off than sophisticated or time-consistent individuals. Moreover, firms might benefit from being ignorant about the extent of an employee's naiveté. Our results also indicate that naive employees might be harmed by policies such as employment protection or a minimum wage, whereas sophisticated employees are better off.

Suggested Citation

  • Fahn, Matthias & Seibel, Regina, 2022. "Present bias in the labor market – when it pays to be naive," Games and Economic Behavior, Elsevier, vol. 135(C), pages 144-167.
    • Handle: RePEc:eee:gamebe:v:135:y:2022:i:c:p:144-167
    DOI: 10.1016/j.geb.2022.06.003
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    More about this item

    Keywords

    Present bias; Labor markets; On-the-job search; Moral hazard;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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