Optimal wage contracts under asymmetric information and moral hazard when investment decisions are delegated

I derive an optimal wage contract when risky investment decisions are delegated by riskaverse owners/investors to risk-neutral agents. The owners/investors do not know the probability distribution over the returns of any investment made by an agent. They know only the mean and the variance, and the upper and lower bounds of the return realizations of the different positive net present value (NPV) investment opportunities that can be discovered by their agents. They observe only the returns realized at the end of the period. Moral hazard with respect to investments made by agents, who are protected by limited liability, is also possible: an agent can falsely claim to have invested in one type of positive NPV investment opportunity and invest in another, or the agent can falsely claim to have invested in a positive NPV investment and invest in a negative NPV investment. I show that an optimal wage contract is simple under such conditions of severe asymmetric information and moral hazard. (JEL G20, G31)     

The staggering costs of drug criminalisation

The cost of maintaining the current illegalisation of narcotics far exceeds the public's perception while, in contrast, the damage to society that would follow from their legalisation is grossly exaggerated. Using economic and other relevant research, estimates are made in this article of the spread of drug addiction and the increase in crime that are likely to follow the decriminalisation of drugs; estimates that reveal an overwhelming case for their decriminalisation.     

The relationship between wage growth and wage levels

We estimate the covariance between the permanent component of wages and a random coefficient on experience in models both with potential experience and with actual experience. Actual experience is allowed to be arbitrarily correlated with both the permanent component of wages and the random component on experience. We find no evidence that workers of higher ability experience faster wage growth. Our point estimates suggest that a worker with a one standard deviation higher level of permanent ability would have a return to annual potential experience that is 0.61 of a percentage point lower. The analogous point estimate for actual experience is 0.87 of a point lower. Contrary to the popular perception, wage growth among low‐skill workers appears to be at least as high as that for a medium‐skilled worker. Copyright © 2009 John Wiley & Sons, Ltd.     

Verifiable wage offers and recontracting: effect on wage and consumption profiles

This paper analyzes the effect of recontracting and matching verifiable wage offers on the intertemporal structure of contract wage and consumption profile for a two-period economy. A contract firm provides specific training for a worker during the first period, which increases his productivity if he stays in the second period, but the worker may quit to accept an alternative wage offer after a successful search. Wage offers are private to the worker but can be presented to the contract firm for matching. This paper shows that when capital markets are imperfect and wage offers are verifiable, the contract firm recontracts and matches any wage offers the worker receives up to the second-period productivity. The ex ante contract wage profile will be flat. Inefficient quits will be eliminated and there will be complete ex ante consumption smoothing. It is significant to note that the result of rising wage profile derived in numerous contract models is fragile with respect to assumptions on mechanism of interfirm labor mobility.     

Psychological contracts and change

The concept of psychological contracts is not new, but its popularity among managers is relatively recent. As with most interpersonal structures, we don't know we need it until it is gone. The massive amount of organizational change that took place in the 1980s left damaged relationships in its wake. Implementing changes while discounting human needs played havoc with psychological contracts. Organizations lost something they had taken for granted. As leaders realized they didn't just need more efficient processes and technology in order to compete, but also needed motivated people, psychological contracts became an important topic. Unfortunately the concept was often used as just another technique to try to force people to become what their leaders thought they should be. Psychological contracts aren't very useful for that kind of work. They are much better as a tool for understanding the human needs and problems in an organization—including the needs of the change agents and leaders.     

Habit formation and wage determination

We analyse the implications of habit formation relating to wages in a multiperiod efficiency‐wage model. If employees have such preferences, their existence provides firms with incentives to raise wages and reduce employment over time. Greater intensity does not necessarily have the same consequences, because wage adjustments counteract the initial level impact. The firm's response additionally depends on the wage dependency of dismissal costs, because such costs make an increasing wage profile over time more attractive and mitigate the effects of greater intensity of habit formation. We further show that short‐lived productivity shocks have long‐lasting wage and employment consequences. Moreover, habit concerns by firm owners reduce wages.     

An efficiency wage approach to reconciling the wage curve and the Phillips curve

This study develops an efficiency wage model that generates a wage curve at the regional level and a Phillips curve at the national level, under the assumption that workers' efficiency depends on both regional and aggregate labor market conditions. An equation relating wages to unemployment and lagged wages is derived from the profit-maximizing behavior of firms, and it is demonstrated that the coefficient on lagged wages is less than 1 with regional data but equals 1 with aggregate data. In addition, there is an equilibrium relationship between unemployment and wages at the regional level, but not at the aggregate level.     

Business cycles and wage rigidity

In this paper, we analyze the impact of downward wage rigidity on the labor market dynamics. We shows that imposing downward wage rigidity in a matching model with cyclical fluctuations in productivity, endogenous match-destruction, and on-the-job search, quits are procyclical and layoffs countercyclical. Using the European Community Household Panel (ECHP), we provide evidence that downward wage rigidity is empirically relevant in ten European countries. Finally, we show that layoffs are countercyclical and quits are procyclical, as predicted by the model.     

Rising wage inequality,the decline of collective bargaining,and the gender wage gap

This paper investigates the increase in wage inequality, the decline in collective bargaining, and the evolution of the gender wage gap in West Germany between 2001 and 2006. Based on detailed linked employer–employee data, we show that wage inequality is rising strongly — driven not only by real wage increases at the top of the wage distribution, but also by real wage losses below the median. Coverage by collective wage bargaining plummets by 16.5 (19.1) percentage points for male (female) employees. Despite these changes, the gender wage gap remains almost constant, with some small gains for women at the bottom and at the top of the wage distribution. A sequential decomposition analysis using quantile regression shows that all workplace related effects (firm effects and bargaining effects) and coefficients for personal characteristics contribute strongly to the rise in wage inequality. Among these, the firm coefficients effect dominates, which is almost exclusively driven by wage differences within and between different industries. Labor demand or firm wage policy related effects contribute to an increase in the gender wage gap. Personal characteristics tend to reduce wage inequality for both males and females, as well as the gender wage gap.     

When promises become contracts: Implied contracts and handbook provisions on job security

In this article, policy capturing was used to examine how lawyers, as experts, understand the wording in employee handbook passages that promise procedural protections for employees. Specifically, how the wording of employee handbook passages can create both legal and nonlegal obligations was examined. Forty-six lawyers were asked to make the following judgments: whether the handbook passage constituted a legal or moral obligation and the chances of the employer winning or being granted a summary judgment in a wrongful discharge suit. Five aspects of the handbook passages were examined: verb strength, specificity, contract disclaimers, legalistic jargon, and the employee's signature.     

Debt contracts and cooperative improvements

In this paper, we consider a dynamic game with imperfect information between a borrower and lender who must write a contract to produce a consumption good. In order to analyze the game, we introduce the concept of a coalitional perfect Bayesian Nash equilibrium (cPBNE). We prove that equilibria exist and are efficient in a precise sense, and that deterministic contracts that resemble debt are optimal for a general class of economies. The cPBNE solution concept captures both the non-cooperative aspect of firm liquidation and the cooperative aspect of renegotiation.     

Labour market segmentation and wage dynamics

The article contains results of a quantitative empirical investigation into the effects of labour market segmentation on wage dynamics in total industry as well as in several industrial branches in West Germany. By testing correlations between several indicators of earnings and the labour market it is shown that wage dynamics, in so far as they are determined by shop floor bargaining, can be explained at least as well and partly even better by indicators of certain partial labour markets than by conditions of the general labor market (i.e. the traditional Philipps approach).     

Temporary contracts and employee effort

Temporary contracts provide employers with a tool to screen potential new employees and have been shown to provide “stepping stones” into permanent employment for workers. For both reasons, workers on temporary contracts have an incentive to provide more effort than permanent employees. Using indicators for unpaid overtime work and absences taken from the Swiss Labor Force Survey (SLFS), we present evidence that temporary workers indeed provide higher effort than permanent employees: Their probability of working unpaid overtime exceeds that of permanently employed workers by 60%. We show the heterogeneity of this effect across different types of temporary contracts, investigate differences between men and women, and discuss the relevance of endogenous selection into temporary employment.     

Corporate mergers and union wage premiums

Corporate mergers possibly enhance the labor negotiation advantage of employers. This study investigates the association between wage levels and merger activity to test the employer bargaining strength hypothesis. The results indicate significantly lower union wages as a consequence of merging. Merger activity, however, does not influence wage levels of non-union workers. These findings are supportive of the employer bargaining strength hypothesis.     

Commitment and strikes in wage bargaining

This paper analyzes the long-run strategic relationship between a firm and a union as a repeated bargaining game, where there is incomplete information on the player's motivation on both sides and each party has a fall-back position. The firm and the union will engage in a reputation-building activity, that will produce a limited number of strikes over time. The bargainer that succeeds in building up a reputation for toughness and obtains a favorable payoff in the long-run is, either the more patient (or alternatively the more centralized), or the party with a higher initial probability of stubbornness, or the party with a smaller fall-back position. Our model also offers predictions on the dependence of strike incidence over time on several parameters.     

论几种特殊合同中的要约与承诺

文章指出,在招投标形式订立合同的过程中,招标属于合同上的要约邀请,投标为要约,定标是承诺,但招标属于必须经过的阶段,投标的撤回随意性比较大,定标采取投邮生效主义。在拍卖订立合同的过程中,各行为的性质视增价拍卖和减价拍卖而有所不同。增价拍卖也会因为有底价拍卖和无底价拍卖的区别而导致行为性质的差异。招股说明书的要式特征,使其虽然不满足要约的条件,但法定成为了要约,而且不可撤回和撤销。     

Psychological and implied contracts in organizations

Two forms of unwritten contracts derive from relations between organizations and their members. Psychological contracts are individual beliefs in a reciprocal obligation between the individual and the organization. Implied contracts are mutual obligations characterizing interactions existing at the level of the relationship (e.g., dyadic, interunit). Employee/employer relations and changing conditions of employment give rise to issues not addressed in conventional transaction-oriented models of motivation and individual responses. The development, maintenance, and violation of psychological and implied contracts are described along with their organizational implications.Promise is most given when least is said. (George Chapman,Hero and Leander, 1598)     

Employment location and wage rates of poverty-area residents

This paper tests a crucial assumption in the debate between those who advocate ghetto development and those who advocate ghetto dispersal: that the suburban jobs held by urban poverty-area residents are economically superior to the jobs held by those who both live and work in the poverty area. The motivations of poverty-area residents for commuting to a suburban job are analyzed and tested using microeconomic data from the 1970 Census Employment Survey. The analysis finds no empirical support for the hypothesis and implied policies that suburban jobs provide superior pecuniary advantages for poverty-area residents.