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Industry Profits, Wages and Competition under Incentive Labour Contracts with Unverifiable Effort

Author

Listed:
  • Nicola Meccheri

    () (Department of Economics, University of Pisa, Italy; The Rimini Centre for Economic Analysis (RCEA), Italy)

  • Luciano Fanti

    () (Department of Economics, University of Pisa, Italy)

Abstract

This paper studies the interaction between incentive labour contracts, competition à la Cournot and industry profits, in a context where workers' effort is not verifiable and the probability of the unemployed getting a job can depend on their employment histories according to the degree of product market competition. It is shown that efficiency wages paid by each firm can decrease when competition becomes fiercer. With discretionary bonuses, instead, wages are generally uncorrelated with competition, but there exists an upper threshold for the number of competing firms, over which profits collapse to zero. Moreover, if information about firms' misbehaviour in paying bonuses flows in the labour market at a low rate, firms can make positive profits only by paying efficiency wages.

Suggested Citation

  • Nicola Meccheri & Luciano Fanti, 2010. "Industry Profits, Wages and Competition under Incentive Labour Contracts with Unverifiable Effort," Working Paper series 37_10, Rimini Centre for Economic Analysis.
  • Handle: RePEc:rim:rimwps:37_10
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    File URL: http://www.rcea.org/RePEc/pdf/wp37_10.pdf
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    References listed on IDEAS

    as
    1. Vicente Cuñat & Maria Guadalupe, 2005. "How Does Product Market Competition Shape Incentive Contracts?," Journal of the European Economic Association, MIT Press, vol. 3(5), pages 1058-1082, September.
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    More about this item

    Keywords

    industry profits; Cournot competition; efficiency wages; performance pay;

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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