Limited Liability and Dynamic Incentives

If efficiency wages really exist, as proposed by Shapiro and Stiglitz (1984), why do we not see more job purchases? A conventional answer is that with multiple periods, low pay in initial periods serves as an implicit payment (Lazear (1981)). This paper presents a formal analysis of this issue. A major result is that the per period worker rents associated with efficiency wages are inversely related to the number of periods, but are never zero. The paper also discusses how remaining worker rents can be eliminated by implicit bonds, such as firm-specific human capital investments.Monitoring; efficiency wages; implicit bond; entrance fee

Monitoring and Pay: General results

This paper considers the opitmal incentives for motivating a risk neutral, wealth constrained agent. In particular, monitoring and pay are shown to be complementary instruments under very general conditions, extending earlier results by Allgulin and Ellingsen (1998). The paper also proves that linear incentive schemes are strictly sub-optimal in this setting.Monitoring; efficiency wages; incentive pay

Monitoring and Pay

The shirking model of efficiency wages has been thought to imply that monitoring and pay are substitute instruments for motivating workers. We demonstrate that this result is not generally true. As monitoring becomes cheaper, a given effort level will be implemented with more monitoring and less pay, but it is typically also optimal to implement a higher effort. The article provides conditions under which the latter "scale effect" dominates the former "substitution effect" and vice versa. If the ease of monitoring varies across occupations, the model predicts a nonmonotonic relationship between the wage level and workers' rents.

Monitoring and Pay

The shirking model of efficiency wages has been thought to imply that monitoring and pay are substitute instruments for motivating workers. We demonstrate that this result hinges critically on restrictive assumptions regarding workers' choice of effort - for example that there are only two possible effort levels. Under more reasonable assumptions, monitoring and pay are complementary instruments. Another result is that there is a non-monotonic relationship between the wage level and the workers' rents. Finally, much of the empirical literature on the monitoring-pay relationship is shown to be seriously misguided.Monitoring; efficiency wages; incentive pay.