Are Efficiency Wages Efficient?

William T. Dickens, Lawrence Katz and Kevin Lang

No 1935, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Efficiency wage models have been criticized because worker malfeasance can be prevented in a pareto efficient manner by requiring workers to post a bond which they lose if they are caught cheating. However, since it is costly to monitor workers and costless to demand a larger bond, firms should pay nothing for monitoring and demand very large bonds. Since we observe that firms devote considerable resources to monitoring workers, bonds must be limited. Therefore firms must use second best alternatives -- intensive monitoring and/or efficiency wages. The payment of efficiency wages cannot be ruled out on a priori theoretical grounds.

Date: 1986-06
Note: LS
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Published as Journal of Labor Economic, Vol 7, July 1989

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