IDEAS home Printed from https://ideas.repec.org/p/zbw/vfsc13/79983.html
   My bibliography  Save this paper

Effort Incentives and On-the-Job Search: An Alternative Role for Efficiency Wages in Employment Contracts

Author

Listed:
  • Herbold, Daniel

Abstract

We study an infinitely repeated principal-agent relationship with on-the-job search. On-the-job search is modeled as a dimension of the agent's effort vector that has no effect on output, but raises his future outside option. The agent's incentives to search are increasing in the degree to which a higher outside option improves his gains from trade. Search also increases the agent's cost of effort thus generating an effort-substitution problem between work and search effort. We show that the principal can mute search incentives by offering an e fficiency wage contract. Due to effort substitution, e fficiency wages increase the agent's work effort incentives for a given bonus scheme. Thus, effi ciency wages serve as a complement rather than as a substitute to piece rates. Our results provide a new rationale for the use of effi ciency wages as an incentive device and hence greatly extend the set of environments in which e fficiency wages are predicted to be useful as an incentive device. Our findings thus also contribute to the explanation of empirically observed inter-industry variation in the size and composition of worker compensation.

Suggested Citation

  • Herbold, Daniel, 2013. "Effort Incentives and On-the-Job Search: An Alternative Role for Efficiency Wages in Employment Contracts," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79983, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc13:79983
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/79983/1/VfS_2013_pid_370.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Leonard, Jonathan S, 1987. "Carrots and Sticks: Pay, Supervision, and Turnover," Journal of Labor Economics, University of Chicago Press, vol. 5(4), pages 136-152, October.
    2. Autor, David H. (ed.), 2009. "Studies of Labor Market Intermediation," National Bureau of Economic Research Books, University of Chicago Press, number 9780226032887, January.
    3. Kreps,David M. & Wallis,Kenneth F. (ed.), 1997. "Advances in Economics and Econometrics: Theory and Applications," Cambridge Books, Cambridge University Press, number 9780521589819.
    4. Bent Jesper Christensen & Rasmus Lentz & Dale T. Mortensen & George R. Neumann & Axel Werwatz, 2005. "On-the-Job Search and the Wage Distribution," Journal of Labor Economics, University of Chicago Press, vol. 23(1), pages 31-58, January.
    5. William Fuchs, 2007. "Contracting with Repeated Moral Hazard and Private Evaluations," American Economic Review, American Economic Association, vol. 97(4), pages 1432-1448, September.
    6. Lawrence F. Katz, 1986. "Layoffs, Recall and the Duration of Unemployment," NBER Working Papers 1825, National Bureau of Economic Research, Inc.
    7. Robert H. Topel & Michael P. Ward, 1992. "Job Mobility and the Careers of Young Men," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 439-479.
    8. Neal, Derek, 1993. "Supervision and Wages across Industries," The Review of Economics and Statistics, MIT Press, vol. 75(3), pages 409-417, August.
    9. Rebitzer, James B., 1995. "Is there a trade-off between supervision and wages? An empirical test of efficiency wage theory," Journal of Economic Behavior & Organization, Elsevier, vol. 28(1), pages 107-129, September.
    10. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, February.
    11. Radner, Roy, 1985. "Repeated Principal-Agent Games with Discounting," Econometrica, Econometric Society, vol. 53(5), pages 1173-1198, September.
    12. Kreps,David M. & Wallis,Kenneth F. (ed.), 1997. "Advances in Economics and Econometrics: Theory and Applications," Cambridge Books, Cambridge University Press, number 9780521589833.
    13. David H. Autor, 2009. "Studies of Labor Market Intermediation," NBER Books, National Bureau of Economic Research, Inc, number auto07-1, June.
    14. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
    15. Kreps,David M. & Wallis,Kenneth F. (ed.), 1997. "Advances in Economics and Econometrics: Theory and Applications," Cambridge Books, Cambridge University Press, number 9780521589826.
    16. Prendergast, Canice J, 1995. "A Theory of Responsibility in Organizations," Journal of Labor Economics, University of Chicago Press, vol. 13(3), pages 387-400, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. van den Berg, Gerard J. & van Vuuren, Aico, 2010. "The effect of search frictions on wages," Labour Economics, Elsevier, vol. 17(6), pages 875-885, December.
    2. Stephanie Lluis, 2005. "The Role of Comparative Advantage and Learning in Wage Dynamics and Intrafirm Mobility: Evidence from Germany," Journal of Labor Economics, University of Chicago Press, vol. 23(4), pages 725-768, October.
    3. van den Berg, Gerard J, 1999. "Empirical Inference with Equilibrium Search Models of the Labour Market," Economic Journal, Royal Economic Society, vol. 109(456), pages 283-306, June.
    4. Xin Jin, 2014. "The Signaling Role of Not Being Promoted: Theory and Evidence," Working Papers 0314, University of South Florida, Department of Economics.
    5. Georg Duernecker, 2010. "Informational Frictions and the Life-Cycle Dynamics of Job Mobility," 2010 Meeting Papers 482, Society for Economic Dynamics.
    6. Lluis, S., 2001. "Wage Policy of Firms: An Empirical Investigation," Cahiers de recherche 2001-18, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    7. Vincenzo Scoppa, 2003. "The Role of Turnover Costs in the Enforcement of Performance–Related Pay Contracts," Metroeconomica, Wiley Blackwell, vol. 54(1), pages 60-78, February.
    8. W. Bentley MacLeod, 2007. "Reputations, Relationships, and Contract Enforcement," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 595-628, September.
    9. Jin, Xin, 2014. "The Signaling Role of Note Being Promoted: Theory and Evidence," MPRA Paper 58484, University Library of Munich, Germany.
    10. Symeonidis, George, 2001. "Price Competition, Innovation and Profitability: Theory and UK Evidence," CEPR Discussion Papers 2816, C.E.P.R. Discussion Papers.
    11. repec:zbw:bofrdp:2007_032 is not listed on IDEAS
    12. Alexander L. Brown & Zhikang Eric Chua & Colin F. Camerer, 2009. "Learning and Visceral Temptation in Dynamic Saving Experiments," The Quarterly Journal of Economics, Oxford University Press, vol. 124(1), pages 197-231.
    13. Patrick Francois & Joanne Roberts, 2003. "Contracting Productivity Growth," Review of Economic Studies, Oxford University Press, vol. 70(1), pages 59-85.
    14. Joachim Inkmann, 2000. "Finite Sample Properties of One-Step, Two-Step and Bootstrap Empirical Likelihood Approaches to Efficient GMM Estimation," Econometric Society World Congress 2000 Contributed Papers 0332, Econometric Society.
    15. Donatella, Baiardi & Claudio, Morana, 2015. "Financial deepening and income distribution inequality in the euro area," Working Papers 316, University of Milano-Bicocca, Department of Economics, revised 04 Dec 2015.
    16. Sandholm, William H. & Izquierdo, Segismundo S. & Izquierdo, Luis R., 2019. "Best experienced payoff dynamics and cooperation in the Centipede game," Theoretical Economics, Econometric Society, vol. 14(4), November.
    17. Martin Gaynor & James B. Rebitzer & Lowell J. Taylor, 2004. "Physician Incentives in Health Maintenance Organizations," Journal of Political Economy, University of Chicago Press, vol. 112(4), pages 915-931, August.
    18. Dufour, Jean-Marie, 2006. "Monte Carlo tests with nuisance parameters: A general approach to finite-sample inference and nonstandard asymptotics," Journal of Econometrics, Elsevier, vol. 133(2), pages 443-477, August.
    19. Giovanna Devetag, 2000. "Transfer, Focality and Coordination: Some Experimental Results," LEM Papers Series 2000/02, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    20. Dmitri Kolyuzhnov & Anna Bogomolova, 2004. "Escape Dynamics: A Continuous Time Approximation," Econometric Society 2004 Latin American Meetings 27, Econometric Society.
    21. Yang, Qing Gong & Temple, Paul, 2012. "Reform and competitive selection in China: An analysis of firm exits," Structural Change and Economic Dynamics, Elsevier, vol. 23(3), pages 286-299.

    More about this item

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:vfsc13:79983. 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: . General contact details of provider: https://edirc.repec.org/data/vfsocea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/vfsocea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.