Underpayment followed by overpayment relative to mrp

Info icon This preview shows pages 23–31. Sign up to view the full content.

View Full Document Right Arrow Icon
“underpayment” followed by “overpayment” relative to MRP.
Image of page 23

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Deferred Pay Risks to employee firm has an incentive to fire once wage exceeds MRP. reputation effects may prevent firm from violating implicit agreement. age discrimination laws may also prevent firm from violating agreement.
Image of page 24
Deferred Pay Risks to employer worker may want to postpone retirement beyond “implicit” agreement. firm may respond with “mandatory retirement” (no longer legal). firm may respond with pension that encourages retirement (DB plan, not DC).
Image of page 25

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Deferred Pay vs. Efficiency Wages Both can be used to reduce shirking and turnover. Deferred pay is “cheaper” because PV of pay is same as best alternative, whereas efficiency wage pays more than best alternative. Drawbacks to deferred pay are listed above (risks to employee) Efficiency wage stories have been used to justify trade protection, affirmative action, minimum wages, wrongful discharge legislation, and a wide range of other government policies.
Image of page 26
Deferred Pay vs. Efficiency Wages Efficiency wages may lead to employer discrimination against Elderly Women Deferred pay May require legal intervention by government to make contract credible. employment law regarding wrongful discharge ERISA
Image of page 27

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Tournament Theory Suppose that employees produce output according to Q i = a*e i + u i + v e i = person i’s effort u i = random error affecting person i’s output v = random error affecting all workers’ output e,u and v are unobservable to employer.
Image of page 28
Tournament theory How should firm compensate worker? Pay according to Q? Pro: encourages effort by employee Con: risk averse workers will avoid; must pay risk premium. More costly as variance of v and u increases. Pay by time and attempt to monitor output Pro: no risk premium Con: costly to monitor if variance of e or u is high; Incentive to provide effort is reduced.
Image of page 29

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Tournament theory Pay according to relative performance Eliminates risk in pay due to common shocks (v) Most beneficial when Var(v) is large, Var(u) small. Possible problems If different ability among workers, low level workers may Follow risky strategies Not put forth effort if no chance of winning Hybrid schemes: tournament plus time pay.
Image of page 30
Tournament Theory Knoeber and Thurman: use data on broiler producers facing both tournament and linear performance evaluation compensation structures to test three predictions In mixed tournaments, more able players will choose less risky strategies tournament organizers handicap players to avoid the disincentive effects of mixed tournaments.. Testing the Theory of Tournaments: An Empirical Analysis of Broiler Production. Charles R. Knoeber; Walter N. Thurman Journal of Labor Economics, Vol. 12, No. 2. (Apr., 1994), pp. 155-179.
Image of page 31
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern