Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 341: Limited Liability and Dynamic Incentives

Magnus Allgulin
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Magnus Allgulin: Dept. of Economics, Stockholm School of Economics, Postal: P.O. Box 6501, S-113 83 Stockholm, Sweden

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

JEL-codes: J31; J41

22 pages, October 1999

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