Investigating rationality in wage-setting

Sonia Bhalotra

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper investigates the efficiency wage hypothesis and derives a tractable expression for the profit loss incurred by deviations from the efficiency wage. The extent of the wage deviation can be inferred from production function parameters. The resulting profit loss shown to depend upon the curvature of th effort function and the employment and wage elasticities of output. If the profit loss is small then near rationality may be claimed even if the hypothesis of rationality is statistically rejected. An application to Indian manufacturing is presented, which suggests that rationality cannot be rejected and that the profit function is remarkably flat aroung the optimum. This is consistent with positive effort returns to increasing the wage beyond its efficient level.

Keywords: Efficiency wage; near-rationality; panel data; India (search for similar items in EconPapers)
JEL-codes: C23 J41 O15 (search for similar items in EconPapers)
Pages: 53 pages
Date: 1998-02
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http://eprints.lse.ac.uk/6682/ Open access version. (application/pdf)

Related works:
Working Paper: Investigating Rationality in Wage-Setting (2000)
Working Paper: Investigating Rationality in Wage-Setting (1998)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:6682

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