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Robust Regulation of Labour Contracts

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  • Th'eo Durandard
  • Alexis Ghersengorin

Abstract

We study the robust regulation of labour contracts in moral hazard problems. A firm offers a contract to incentivise production by an agent protected by limited liability. A regulator chooses the set of permissible contracts to (i) improve efficiency and (ii) protect the worker. The regulator ignores the agent's productive actions and the firm's costs and evaluates regulation by its worst-case regret. The regret-minimising regulation imposes a linear minimum wage, allowing all contracts above this linear threshold. The slope of the minimum contract balances the worker's protection - by ensuring they receive a minimal share of the production - and the necessary flexibility for incentive provision.

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  • Th'eo Durandard & Alexis Ghersengorin, 2024. "Robust Regulation of Labour Contracts," Papers 2411.04841, arXiv.org.
    • Handle: RePEc:arx:papers:2411.04841
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    References listed on IDEAS

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    1. Brian Bell & Stephen Machin, 2018. "Minimum Wages and Firm Value," Journal of Labor Economics, University of Chicago Press, vol. 36(1), pages 159-195.
    2. Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-1190, September.
    3. Garrett, Daniel F. & Georgiadis, George & Smolin, Alex & Szentes, Balázs, 2023. "Optimal technology design," Journal of Economic Theory, Elsevier, vol. 209(C).
    4. Jewitt, Ian & Kadan, Ohad & Swinkels, Jeroen M., 2008. "Moral hazard with bounded payments," Journal of Economic Theory, Elsevier, vol. 143(1), pages 59-82, November.
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