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Is perfection optimal? Employment and product market competition


  • Amable, Bruno
  • Gatti, Donatella


This paper proposes a model of efficiency wage with endogenous workers flows in interaction with imperfect competition on the product markets. Subject to economy-wide shocks, firms hire and fire workers thus generating a certain turnover. We show that the intensity of this turnover negatively affects workers' incentives and induces higher efficiency wage premia. Increased competition pushes real wages up but effort incentive requirements prevent large wage adjustments. Hence, adjustments are made with quantities: both the separation and hiring rates increase with competition, increasing the wage premium and contributing to lower employment. As a consequence, an employmentmaximising level of competition may exist.

Suggested Citation

  • Amable, Bruno & Gatti, Donatella, 2000. "Is perfection optimal? Employment and product market competition," Discussion Papers, Research Unit: Economic Change and Employment FS I 00-304, Social Science Research Center Berlin (WZB).
  • Handle: RePEc:zbw:wzbece:fsi00304

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    References listed on IDEAS

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    Cited by:

    1. Zhiqi Chen & Bo Zhao, 2014. "Unemployment and product market competition in a Cournot model with efficiency wages," Canadian Journal of Economics, Canadian Economics Association, vol. 47(2), pages 555-579, May.

    More about this item


    unemployment; efficiency wage; imperfect competition;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets


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