Contracts, hold-up and labor markets

The implications for labor markets of contracts to avoid hold-up of investments are assessed. Employment at will protects the returns on a firm's general and specific investments without wages increasing with tenure. With turnover costs, fixed but renegotiable wages can protect general investments by both firm and employee, and generage wage stickiness without adversely affecting employment. Employment contracts that induce efficient specific investments by both firm and employee are problematic so it makes sense, wherever possible, for one side to make all such investments. With private information, fixed wages may induce fewer inefficient separations than employment at will

Motivation and markets

Many workers receive pay based on subjectively assessed performance, yet the shirking model of efficiency wages excludes it. This paper incorporates such pay, with the following results. Performance pay is more efficient than efficiency wages when the costs of having a job vacant are low and qualified workers in short supply. More capital-intensive industries pay more than less capital-intensive industries, as observed in studies of interindustry wages differentials. Sustaining an efficient outcome requires a social convention similar to the notion of a fair wage. The model also makes predictions about the relationship between turnover, wages, growth and unemployment