Wage premiums and profit maximization in efficiency wage models

W. Bentley MacLeod; James M. Malcomson

doi:10.1016/0014-2921(93)90132-T

Wage premiums and profit maximization in efficiency wage models

W. Bentley MacLeod, James M. Malcomson

Research output: Contribution to journal › Article › peer-review

22 Scopus citations

Abstract

The standard shirking model of efficiency wages is essentially a continuous-time, repeated prisoners' dilemma game. Thus, to sustain an equilibrium with employment requires sufficient gains from future co-operation. Each division of these gains corresponds to some equilibrium. Efficiency wages correspond to employees receiving the gains. Bonds allow firms to receive them. In markets well informed about agents' pasts, employment is independent of the distribution of gains. But in anonymous markets with more workers than jobs, employment is highest in efficiency wage equilibria. Efficiency wages thus arise naturally as the unique efficient equilibrium without recourse to assumptions that limit bonding.

Original language	English (US)
Pages (from-to)	1223-1249
Number of pages	27
Journal	European Economic Review
Volume	37
Issue number	6
DOIs	https://doi.org/10.1016/0014-2921(93)90132-T
State	Published - Aug 1993
Externally published	Yes

All Science Journal Classification (ASJC) codes

Finance
Economics and Econometrics

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10.1016/0014-2921(93)90132-T

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AB - The standard shirking model of efficiency wages is essentially a continuous-time, repeated prisoners' dilemma game. Thus, to sustain an equilibrium with employment requires sufficient gains from future co-operation. Each division of these gains corresponds to some equilibrium. Efficiency wages correspond to employees receiving the gains. Bonds allow firms to receive them. In markets well informed about agents' pasts, employment is independent of the distribution of gains. But in anonymous markets with more workers than jobs, employment is highest in efficiency wage equilibria. Efficiency wages thus arise naturally as the unique efficient equilibrium without recourse to assumptions that limit bonding.

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Wage premiums and profit maximization in efficiency wage models

Abstract

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