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A Game Theoretical View on Efficiency Wage Theories

  • Wesselbaum, Dennis

The efficiency wage theory developed by Akerlof (1982) assumes observability of effort and the ability of firm and worker to commit on their effort/wage decisions. We show that, from a game theoretical point of view, we have to understand the firm/worker relationship as a repeated Prisoner's dilemma. Therefore, cooperation is per se not a (subgame perfect) Nash equilibrium and hence the Akerlof (1982) theory is based upon an implicit assumption of cooperation, which can not be implemented w.l.o.g.. In addition, we find that this approach is a special case of the Shapiro and Stiglitz (1984) approach and hence unify the two approaches.

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File URL: http://mpra.ub.uni-muenchen.de/18026/1/MPRA_paper_18026.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 18026.

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Date of creation: Oct 2009
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Handle: RePEc:pra:mprapa:18026
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  1. Jean-Pierre Danthine & Andre Kurmann, 2004. "Fair Wages in a New Keynesian Model of the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(1), pages 107-142, January.
  2. Danthine, Jean-Pierre & Donaldson, John B., 1990. "Efficiency wages and the business cycle puzzle," European Economic Review, Elsevier, vol. 34(7), pages 1275-1301, November.
  3. Lemieux, Thomas & MacLeod, W. Bentley & Parent, Daniel, 2007. "Performance Pay and Wage Inequality," IZA Discussion Papers 2850, Institute for the Study of Labor (IZA).
  4. Akerlof, George A, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, MIT Press, vol. 97(4), pages 543-69, November.
  5. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
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