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A Foundation for Efficiency Wage Contracts

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  • John Y. Zhu

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.

Suggested Citation

  • John Y. Zhu, 2018. "A Foundation for Efficiency Wage Contracts," American Economic Journal: Microeconomics, American Economic Association, vol. 10(4), pages 248-288, November.
    • Handle: RePEc:aea:aejmic:v:10:y:2018:i:4:p:248-88
    Note: DOI: 10.1257/mic.20160222
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    Cited by:

    1. Daniel Barron & Yingni Guo, 0. "The Use and Misuse of Coordinated Punishments," The Quarterly Journal of Economics, Oxford University Press, vol. 136(1), pages 471-504.

    More about this item

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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