That it is easy to implement the insights obtained

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that it is easy to implement the insights obtained here since the optimal choice of the effort v depends only upon a threshold value of a single criterion, the initial skill level of a programmer. The firm is likely to have a good estimate of the skill level of an incoming programmer since the recruiting process is mainly geared toward evaluating this parameter. Further, the optimal policy does not need to vary continuously with the initial skill level; it is only necessary to estimate whether the incoming skill level is lower or higher than the skill level x G . Next we focus on characterizing the cutoff times instants, t and . While the algebraic expressions for both the cutoffs t are obtainable, these expressions are tedious (see Appendix). Here, we present results that capture the impact of the individual rationality constraint on these cutoffs. PROPOSITION 2. When the learning effect of open source is larger than a threshold , the beginning of the c c c c c 2 4 4 3 1 > intermediate region of the contract (with effort split between open and closed source work) is unaffected by wage pressure from the labor market of programmers. However, the termination of the intermediate region of the contract is extended due to this wage pressure. The beginning of the intermediate contract region is unaf- fected by the wage pressures from the market since this point is dictated completely by the firm’s considerations of maximizing the current and future productivity. In this region the firm maintains a constant split of effort between open and closed source work and, consequently, a steady skill level of the programmers. However, the wage pressures from the market become important near the end of the contract since the firm may meet the wage demands by altering the effort split in a way that results in higher skill levels for program- mers at contract termination. This allows the programmers to get more highly paid jobs in the future, thereby obviating the need to pay direct wages to the programmers to meet the market wage pressure. Note that the firm normally does not bother about the skills of its programmers toward the end of the contract and dictates full dedication of their time to closed source work ( v = 0) in order to maximize its productivity. In order to increase programmer skills at contract termination as market pressures go up, the firm may choose to maintain the intermediate region for a longer duration before moving its focus completely to current productivity. In this way, it gives up on some productive output of the programmer toward the end of the contract, but benefits as its programmer has higher skills at the end of the contract. We now delve into the issue of when exactly the termination of the intermediate region is extended due to market wage pressures. In Proposition 3, we specifically lay out these conditions. Thus we extend the results presented in Lemma 1 to give specific conditions under which w is strictly positive and its value in such cases.

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