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A Dynamic Efficiency-Wage Model with Continuous Effort and Externalities

  • M Guerrazzi

This paper provides a general equilibrium efficiency-wage model in which employment evolves according to the rules of the Shapiro-Stiglitz?s (1984) shirking model. The proposed framework allows us to endogenise in a continuous manner the effort decision undertaken by the individual worker and it may resolve the indeterminacy arising from a model with exogenous (and constant) effort. Moreover, by exploiting an externality argument, we allow the model to capture different local dynamic patterns in which are found convergent fluctuations and persistent cycles. Finally, we show that in our framework unemployment may actually act as a worker discipline device, i.e., equilibria with higher (lower) unemployment rates are also characterised by higher (lower) effort levels.

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Article provided by Economic Issues in its journal Economic Issues.

Volume (Year): 13 (2008)
Issue (Month): 2 (September)
Pages: 37-58

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Handle: RePEc:eis:articl:208guerrazzi
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  1. Faria, Joao Ricardo, 2000. "Supervision and effort in an intertemporal efficiency wage model: the role of the Solow condition," Economics Letters, Elsevier, vol. 67(1), pages 93-98, April.
  2. Georges, Christophre, 1995. "Adjustment costs and indeterminacy in perfect foresight models," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 39-50.
  3. Farmer Roger E. A. & Guo Jang-Ting, 1994. "Real Business Cycles and the Animal Spirits Hypothesis," Journal of Economic Theory, Elsevier, vol. 63(1), pages 42-72, June.
  4. Magnus Allgulin & Tore Ellingsen, 2002. "Monitoring and Pay," Journal of Labor Economics, University of Chicago Press, vol. 20(2), pages 201-216, Part.
  5. Mortensen, Dale T, 1982. "Property Rights and Efficiency in Mating, Racing, and Related Games," American Economic Review, American Economic Association, vol. 72(5), pages 968-79, December.
  6. Pisauro, Giuseppe, 1991. "The effect of taxes on labour in efficiency wage models," Journal of Public Economics, Elsevier, vol. 46(3), pages 329-345, December.
  7. Holden, Steinar, 1997. "Wage Bargaining, Holdout, and Inflation," Oxford Economic Papers, Oxford University Press, vol. 49(2), pages 235-55, April.
  8. Gomme, Paul, 1999. "Shirking, Unemployment and Aggregate Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(1), pages 3-21, February.
  9. Solow, Robert M., 1979. "Another possible source of wage stickiness," Journal of Macroeconomics, Elsevier, vol. 1(1), pages 79-82.
  10. repec:dgr:kubcen:199649 is not listed on IDEAS
  11. Alexopoulos, Michelle, 2004. "Unemployment and the business cycle," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 277-298, March.
  12. Christophre Georges, 2002. "An Efficiency Wage Model With Persistent Cycles," Economics Bulletin, AccessEcon, vol. 5(3), pages 1-6.
  13. Uhlig, H.F.H.V.S. & Xu, Y., 1996. "Effort and the Cycle : Cyclical Implications of Efficiency Wages," Discussion Paper 1996-49, Tilburg University, Center for Economic Research.
  14. Peter Cramton & Joseph S. Tracy, 1992. "Strikes and Holdouts in Wage Bargaining: Theory and Data," Papers of Peter Cramton 92aer, University of Maryland, Department of Economics - Peter Cramton, revised 09 Jun 1998.
  15. Benhabib, Jess & Farmer, Roger E.A., 1991. "Indeterminacy and Increasing Returns," Working Papers 91-59, C.V. Starr Center for Applied Economics, New York University.
  16. Miles S. Kimball, 1989. "Labor Market Dynamics When Unemployment Is A Worker Discipline Device," NBER Working Papers 2967, National Bureau of Economic Research, Inc.
  17. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
  18. Tomoyuki Nakajima, 2003. "Unemployment and Indeterminacy," Working Papers 2003-24, Brown University, Department of Economics.
  19. Rui Coimbra, . "Efficiency Wages, Increasing Returns and Endogenous Fluctuations," Discussion Papers 99/6, Department of Economics, University of York.
  20. Danthine, Jean-Pierre & Donaldson, John B., 1990. "Efficiency wages and the business cycle puzzle," European Economic Review, Elsevier, vol. 34(7), pages 1275-1301, November.
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