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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 341:
Limited Liability and Dynamic Incentives

Magnus Allgulin

Abstract: 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.

Keywords: Monitoring; efficiency wages; implicit bond; entrance fee; (follow links to similar papers)

JEL-Codes: J31; J41; (follow links to similar papers)

22 pages, October 1999

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