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Reputation and Hierarchy in Dynamic Models of Employment

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  • Bentley MacLeod
  • James M. Malcomson

Abstract

This paper explores the nature of employment contracts in a dynamic model when workers vary by unobserved ability, and there is moral hazard on both sides of the contract. We find that even though a worker's ability is chosen from a continuum, the equilibrium contract is characterized by a hierarchy consisting of a finite number of ranks. Reputation effects are modelled as a Bayesian game, and are needed to ensure workers will not shirk. Workers are not immediately assigned to the appropriate rank, but are promoted through the ranks until they reach a level consistent with their ability.

Suggested Citation

  • Bentley MacLeod & James M. Malcomson, 1985. "Reputation and Hierarchy in Dynamic Models of Employment," Working Papers 628, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:628
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