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Work Effort, Firm Closure and Signaling through Excess Capacity Investment

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Abstract

This paper puts forward a theoretical rationale for the existence of excess capacity investment in durable capital at the firm level. The model adds an informational issue to the efficiency wage framework by introducing idiosyncratic risk of firm closure to Bowles's (2004) labor discipline model based on contingent contract renewal. As the outcome of the effort bargain is determined, inter alia, by the expectation of future employment rents, the distribution of information about firm closure rates determines the effectiveness of the endogenous enforcement mechanism. The paper investigates the equilibria under perfect and imperfect information and introduces durable capital investment-decisions as a signal to bring about a separating equilibrium when there is private information about firm-specific closure probabilities.

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  • Johann Jaekel, 2012. "Work Effort, Firm Closure and Signaling through Excess Capacity Investment," SCEPA working paper series. 2012-7, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
    • Handle: RePEc:epa:cepawp:2012-7
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