The Ratchet Effect and the Market for Second-Hand Workers
Workers in a long-term relationship often have an incentive to hide their ability early in the relationship to avoid having the firm increase the level of output expected from them in the future. The authors show that competition for older workers will permit the implementation of efficient piece-rate contracts. When the difficulty of the job is unobserved by the firm, Robert Gibbons (1987) has shown that all piece-rate contracts will be inefficient. Together, these results may explain why piece rates are common in some jobs, such as agricultural work and sales, and not as popular for many manufacturing jobs. Copyright 1992 by University of Chicago Press.
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