Specific Capital, Employmemt Contracts, and Wage Rigidity

Masanori Hashimoto and Ben T. Yu

Bell Journal of Economics, 1980, vol. 11, issue 2, 536-549

Abstract: When firm-specific human capital is involved, both the worker and the employer have the incentive to prespecify future wages. This incentive arises from transaction costs associated with spot contracts and from opportunistic bargaining which may occur during the postinvestment period. In prespecifying wages the parties may use economic indicators to estimate productivities. To the extent that such indicators are less than perfect measures of true productivities, some wage rigidity will occur. Wage rigidity causes resource loss of various types. This article analyzes various contractual arrangements designed to minimize such a loss, and discusses potentially testable implications.

Date: 1980
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