The Intrinsic Inferiority of Efficiency Wages to Damages and Conditional Bonuses
In this paper, we argue that, as an enforcement mechanism, efficiency wages are intrinsically inferior to damages and to conditional bonuses â€“ an alternative positive sanction system overlooked in the labor economics literature, under which rents are only paid if monitoring has effectively taken place (and the employee is not found shirking). While all three alternatives succeed in incentivizing agents and satisfy the participation constraint of non-shirking employees, damages (and negative sanctions in general) do so at lower costs because they do not require the payment of any rents. Of the two positive sanction systems, conditional bonuses are less expensive than efficiency wages because the latter also pay rents when no monitoring has taken place and may allow employees who are found shirking to keep some rents. Moreover, we find that monitoring levels are inefficiently low under efficiency wages. While efficiency wages (if they are completely non-retroactive) remove the employerâ€™s incentive to falsely sanction the employee, they solve this appropriation problem in a less rational way than some decoupling mechanisms that can be used under damages and conditional bonus regimes. Therefore, it seems extremely unlikely that employers would ever opt for efficiency wages on such a massive scale that structural unemployment would result, as Shapiro and Stiglitz (1984) suggested.
|Date of creation:||Apr 2004|
|Date of revision:|
|Contact details of provider:|| Postal: P.O. Box 80125, NL-3508 TC Utrecht|
Phone: +31 30 253 9800
Fax: +31 30 253 7373
Web page: http://www.uu.nl/EN/faculties/leg/organisation/schools/schoolofeconomicsuse/Pages/default.aspx
More information through EDIRC
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gary S. Becker, 1974.
"Crime and Punishment: An Economic Approach,"
in: Essays in the Economics of Crime and Punishment, pages 1-54
National Bureau of Economic Research, Inc.
- Rasmusen, Eric, 1992. "An Income-Satiation Model of Efficiency Wages," Economic Inquiry, Western Economic Association International, vol. 30(3), pages 467-78, July.
- George A. Akerlof, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, Oxford University Press, vol. 97(4), pages 543-569.
- 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.
- Gary S. Becker & George J. Stigler, 1974. "Law Enforcement, Malfeasance, and Compensation of Enforcers," The Journal of Legal Studies, University of Chicago Press, vol. 3(1), pages 1-18, January.
- A. Mitchell Polinsky & Steven Shavell, 1999.
"Corruption and Optimal Law Enforcement,"
NBER Working Papers
6945, National Bureau of Economic Research, Inc.
- A. Mitchell Polinsky & Yeon-Koo Che, 1991.
"Decoupling Liability: Optimal Incentives for Care and Litigation,"
RAND Journal of Economics,
The RAND Corporation, vol. 22(4), pages 562-570, Winter.
- A. Mitchell Polinsky & Yeon-Koo Che, 1991. "Decoupling Liability: Optimal Incentives for Care and Litigation," NBER Working Papers 3634, National Bureau of Economic Research, Inc.
- Shapiro, Carl & Stiglitz, Joseph E, 1985. "Can Unemployment Be Involuntary? Reply [Equilibrium Unemployemnt as a Worker Discipline Device]," American Economic Review, American Economic Association, vol. 75(5), pages 1215-17, December.
- Shavell, Steven, 1997. "The optimal level of corporate liability given the limited ability of corporations to penalize their employees," International Review of Law and Economics, Elsevier, vol. 17(2), pages 203-213, June.
When requesting a correction, please mention this item's handle: RePEc:use:tkiwps:0415. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marina Muilwijk)
If references are entirely missing, you can add them using this form.