Recursive Contracts, Firm Longevity, and Rat Races: Theory and Experimental Evidence

Peter Bardsley, Nisvan Erkal, Nikos Nikiforakis () and Tom Wilkening

No 1122, Department of Economics - Working Papers Series from The University of Melbourne

Abstract: This paper investigates the relationship between firm longevity and rat races in an environment where long-lived firms are operated by overlapping generations of short-lived players. We first present a complete information model in which workers in the young generation are offered employment contracts designed by the firms' owners who belong to the old generation. When old, employed workers are granted ownnership rights as long as the firm continues to operate. We test the theoretical predictions of the model in a laboratory experiment. In line with our model's predictions, as firm longevity increases, the recursive nature of the contracts leads to a rat race characterized by low wages, high effort levels, and rent dissipation

Keywords: Overlapping-generations models; Recursive contracts; Rat races; Experiments (search for similar items in EconPapers)
JEL-codes: C91 D02 D21 D86 D92 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2011, Revised 2011
New Economics Papers: this item is included in nep-bec, nep-cbe, nep-dge, nep-exp, nep-hrm and nep-lab
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Persistent link: https://EconPapers.repec.org/RePEc:mlb:wpaper:1122

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