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Hidden effort, learning by doing, and wage dynamics

  • Arantxa Jarque

Many occupations are subject to learning by doing: Effort at the workplace early in the career of a worker results in higher productivity later on. In such occupations, if effort at work is unobservable, a moral hazard problem also arises. We study a particular specification of learning by doing in which the conditional distribution of output depends on the sum of undepreciated efforts. With this specification, we can overcome the technical difficulties for solving for the optimal contract that arise because of the persistent effects of effort in time. Our numerical example shows that effort is frontloaded over the contractual relationship, and follows a steeper decreasing pattern than in the case without learning by doing. On the other hand, the properties of wage dynamics remain unchanged with respect to those of the optimal contract without learning by doing.

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Article provided by Federal Reserve Bank of Richmond in its journal Economic Quarterly.

Volume (Year): (2010)
Issue (Month): 4Q ()
Pages: 339-372

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Handle: RePEc:fip:fedreq:y:2010:i:4q:p:339-372:n:v.96no.4
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  1. Arantxa Jarque, 2005. "Repeated Moral Hazard with Effort Persistence," 2005 Meeting Papers 428, Society for Economic Dynamics.
  2. Robert Gibbons & Kevin J. Murphy, 1991. "Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence," NBER Working Papers 3792, National Bureau of Economic Research, Inc.
  3. Illoong Kwon, 2006. "Incentives, wages, and promotions: theory and evidence," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 100-120, 03.
  4. Phelan, Christopher, 1994. "Incentives, insurance, and the variability of consumption and leisure," Journal of Economic Dynamics and Control, Elsevier, vol. 18(3-4), pages 581-599.
  5. Wang, Cheng, 1997. "Incentives, CEO Compensation, and Shareholder Wealth in a Dynamic Agency Model," Journal of Economic Theory, Elsevier, vol. 76(1), pages 72-105, September.
  6. Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-90, September.
  7. repec:rje:randje:v:37:y:2006:1:p:100-120 is not listed on IDEAS
  8. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-67, November.
  9. James Heckman & Lance Lochner & Christopher Taber, 1998. "Explaining Rising Wage Inequality: Explanations With A Dynamic General Equilibrium Model of Labor Earnings With Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 1-58, January.
  10. Fernandes, Ana & Phelan, Christopher, 2000. "A Recursive Formulation for Repeated Agency with History Dependence," Journal of Economic Theory, Elsevier, vol. 91(2), pages 223-247, April.
  11. Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 599-617, October.
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