lecture_4 - Lecture 4 Shapiro-Stiglitz Model of Efficiency...

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Unformatted text preview: Lecture 4 Shapiro-Stiglitz Model of Efficiency Wages Leszek Wincenciak, Ph.D. Warsaw University May 22, 2007 Lecture 4 – Shapiro-Stiglitz Model of Efficiency Wages 2/41 Lecture outline: Introduction The model set-up Workers The effort decision of a worker Values of E , U and S No-Shirking Condition (NSC) Employers Market equilibrium Implications of the model Simple comparative statics Alternative methods for the enforcement of discipline Performance bonds Other costs of dismissal Heterogenous workers Next time Lecture 4 – Shapiro-Stiglitz Model of Efficiency Wages Introduction 3/41 Introduction ◮ Involuntary unemployment is a fact ◮ Why do not wages fall to clear the market? ◮ Informational structure of employer-employee relationship – imperfect monitoring of workers effort on the job ◮ Principal-agent problem ◮ Higher wages and a pool of unemployment offer incentives for the workers to exert effort ◮ This is a central idea of the Shapiro-Stiglitz model ( Equilibrium Unemployment as a Worker Discipline Device , American Economic Review, Vol. 74, No. 3, 1984) Lecture 4 – Shapiro-Stiglitz Model of Efficiency Wages Introduction 4/41 ◮ Consider a situation where all workers can receive the market wage and there is no unemployment ◮ In this case, the worst thing that can happen to a worker is that he will be fired and instantaneously rehired ◮ There is therefore no penalty for not exerting effort (’shirking’) ◮ To induce workers not to shirk, firms pay above-market wages. Therefore, job loss imposes a penalty ◮ But if one firm pays above-market wages, then presumably they all will ◮ In this case, the incentive not to shirk disappears, but: ◮ Unemployment results since wages are above the natural equilibrium level ◮ Unemployment creates its own penalty for shirking Lecture 4 – Shapiro-Stiglitz Model of Efficiency Wages Introduction 5/41 ◮ Hence, the model implies that unemployment and monitoring are substitutes ◮ Consequently, wages serve two functions: allocating labor and providing incentives for employee effort conditional on employment. As is usually the case when one instrument is used to solve two problems, this is likely to lead to inefficient outcomes Lecture 4 – Shapiro-Stiglitz Model of Efficiency Wages The model set-up 6/41 The model set-up Lecture 4 – Shapiro-Stiglitz Model of Efficiency Wages The model set-up 7/41 Workers Workers Assume there are L (total labor supply is fixed) identical workers, all of whom dislike putting forth effort, but enjoy consuming goods. The workers lifetime utility is: U = integraldisplay ∞ t =0 e − ρt u ( t ) dt, ρ > , (1) where u ( t ) is instantaneous utility at time t , and ρ is the discount rate. The instantaneous utility is defined as: u ( t ) = braceleftBigg w ( t )- e ( t ) if employed if unemployed ....
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This note was uploaded on 01/12/2011 for the course ECO 010023 taught by Professor Mrraggillpol during the Fall '09 term at Paris Tech.

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lecture_4 - Lecture 4 Shapiro-Stiglitz Model of Efficiency...

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