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Unformatted text preview: Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY]. 1 1 Ecient Wage Theory 14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen December 10, 2007 Lecture 34 Externalities, Market Failure and Government Outline 1. Chap 17: Ecient Wage Theory 2. Chap 18: Externalities 3. Chap 18: Property Rights 4. Chap 18: Common Property Resources 1 Ecient Wage Theory Use the ecient wage theory to explain the presence of unemployment. Suppose the wage is w , and workers can choose to work or shirk provided a benefit of S . The unemployment rate is u , and the workers get caught and fired with a probability p . If a worker shirks, he can get S + (1 p ) w + p (1 u ) w = S + w (1 pu ) , if a worker does not shirk, he gets w . Therefore, a worker will work if w S + w (1 pu ) , that is, S w . pu This is called nonshirking constraint. Without information asymmetry, the market wage is w C , and full employ- ment exists at L C . With information asymmetry, the nonshirking constraint and the demand of labor determine the wage w and labor L (see Figure 1). With greater asymmetric information, the probability that shirking is de- tected, P decreases, and thus the nonshirking constraint rises. The wage and labor are w and L respectively (see Figure 1). Thereby Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY]....
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