A Foundation for Efficiency Wage Contracts

John Zhu

American Economic Journal: Microeconomics, 2018, vol. 10, issue 4, 248-88

Abstract: In many jobs, the worker generates only subjective performance measures privately observed by the employer, and contracts must rely on employer reports about these measures. This setting is a game with private monitoring, and prior work suggests that the optimal contract may be complex and non-recursive. I introduce a novel equilibrium refinement and show that the optimal contract simplifies to an efficiency wage contract: The worker receives a wage above his outside option and reports take a pass-fail form. Each report depends only on performance since the previous report, and effort incentives are provided purely through the threat of termination.

JEL-codes: D86 J41 (search for similar items in EconPapers)
Date: 2018
Note: DOI: 10.1257/mic.20160222
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Citations: View citations in EconPapers (1)

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