Workers' Trust Funds and the Logic of Wage Profiles
This paper defines a concept, a worker's trust fund, which is useful in analyzing optimal age-earnings profiles. The trust fund represents what a worker loses if dismissed from a job for shirking. In considering whether to work or shirk, a worker weighs the potential loss due to forfeiture of the trust fund if caught shirking against the benefits from reduced effort. This concept is used to show that the implicit bonding in upward sloping age-earnings profiles is not a perfect substitute for an explicit upfront performance bond (or employment fee). It is also shown that the second-best optimal earnings profile in the absence of an upfront employment fee pays total compensation in excess of market clearing in a variety of stylized cases.
|Date of creation:||Mar 1988|
|Date of revision:|
|Publication status:||published as The Quarterly Journal of Economics, Vol. CIV, No. 418, pp. 525-536,(August 1989).|
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