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A Model of Efficiency Wages as a Signal of Firm Value

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  • Arvan, Lanny
  • Esfahani, Hadi Salehi

Abstract

We consider performance contracts with firm private information. The verifiable components of the contract, an up-front wage and employment, may serve both as a signal and a performance incentive. Job rent may be necessary for signaling and, since efficient signaling is multidimensional, there is an inextricable link between job rent and underemployment. Signaling can explain the lack of explicit bonding in actuality. Though our basic model is static, our underemployment result is not a consequence of firm myopia. When the firm is farsighted, it will not maximize the joint future surplus if it cannot extract the worker's share at present. Copyright 1993 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Arvan, Lanny & Esfahani, Hadi Salehi, 1993. "A Model of Efficiency Wages as a Signal of Firm Value," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(3), pages 503-524, August.
    • Handle: RePEc:ier:iecrev:v:34:y:1993:i:3:p:503-24
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    Cited by:

    1. Vahey, Shaun P., 2004. "Signalling ability to pay and rent sharing dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 28(11), pages 2327-2339, October.
    2. Esfahani, Hadi Salehi, 2000. "Institutions and government controls," Journal of Development Economics, Elsevier, vol. 63(2), pages 197-229, December.
    3. André Zylberberg, 1994. "Effort et contrats : quelques enseignements concernant le marché du travail," Économie et Prévision, Programme National Persée, vol. 113(2), pages 1-20.
    4. Esfahani, Hadi Salehi & Mookherjee, Dilip, 1995. "Productivity, contracting modes, and development," Journal of Development Economics, Elsevier, vol. 46(2), pages 203-231, April.
    5. Pierre Cahuc & André Zylberberg, 1994. "Que reste-t-il de la théorie du salaire d'efficience ?," Revue Économique, Programme National Persée, vol. 45(3), pages 385-398.

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