Working conditions and regulation

Philipp Weinschenk

Labour Economics, 2017, vol. 44, issue C, 177-191

Abstract: Do employers invest sufficiently in the working conditions of employees? We examine this question in a simple principal-agent model. We show that, even though investment is contractible, the principal underinvests whenever her agent's alternatives are rather poor. This provides a reason for regulation. The indirect regulatory approach of taking measures that improve the agent's bargaining power or outside option at least weakly enhances the agent's well-being and welfare. The direct regulatory approach of demanding a certain standard of working conditions increases the principal's investment, but may nonetheless leave the agent's well-being unaffected and deteriorate welfare. This holds true since due to a standard, the principal may provide the agent with a lower-powered incentive scheme and implement a lower effort level.

Keywords: Principal-agent model; Working conditions; Regulation; Standards (search for similar items in EconPapers)
JEL-codes: D82 J3 J81 J88 M52 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:labeco:v:44:y:2017:i:c:p:177-191

DOI: 10.1016/j.labeco.2017.01.004

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