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Recursive Contracts, Firm Longevity, and Rat Races: Theory and Experimental Evidence

  • Peter Bardsley
  • Nisvan Erkal
  • Nikos Nikiforakis
  • Tom Wilkening

This paper investigates the relationship between firm longevity and rat races in an environment where long-lived firms are operated by overlapping generations of short-lived players. We first present a complete information model in which workers in the young generation are offered employment contracts designed by the firms' owners who belong to the old generation. When old, employed workers are granted ownnership rights as long as the firm continues to operate. We test the theoretical predictions of the model in a laboratory experiment. In line with our model's predictions, as firm longevity increases, the recursive nature of the contracts leads to a rat race characterized by low wages, high effort levels, and rent dissipation

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File URL: http://www.economics.unimelb.edu.au/downloads/wp/wp11/1122.pdf
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Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 1122.

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Length: 30 pages
Date of creation: 2011
Date of revision: 2011
Handle: RePEc:mlb:wpaper:1122
Contact details of provider: Postal:
Department of Economics, The University of Melbourne, 4th Floor, FBE Building, Level 4, 111 Barry Street. Victoria, 3010, Australia

Phone: +61 3 8344 5355
Fax: +61 3 8344 6899
Web page: http://fbe.unimelb.edu.au/economics
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  15. Ananish Chaudhuri & Andrew Schotter & Barry Sopher, 2009. "Talking Ourselves to Efficiency: Coordination in Inter-Generational Minimum Effort Games with Private, Almost Common and Common Knowledge of Advice," Economic Journal, Royal Economic Society, vol. 119(534), pages 91-122, 01.
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