American Economic Journal:
Microeconomics
ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)
A Foundation for Efficiency Wage Contracts
American Economic Journal: Microeconomics
(pp. 248–88)
Abstract
In many jobs, the worker generates only subjective performance measures privately observed by the employer, and contracts must rely on employer reports about these measures. This setting is a game with private monitoring, and prior work suggests that the optimal contract may be complex and non-recursive. I introduce a novel equilibrium refinement and show that the optimal contract simplifies to an efficiency wage contract: The worker receives a wage above his outside option and reports take a pass-fail form. Each report depends only on performance since the previous report, and effort incentives are provided purely through the threat of termination.Citation
Zhu, John Y. 2018. "A Foundation for Efficiency Wage Contracts." American Economic Journal: Microeconomics 10 (4): 248–88. DOI: 10.1257/mic.20160222Additional Materials
JEL Classification
- D86 Economics of Contract: Theory
- J41 Labor Contracts