Reputation and Hierarchy in Dynamic Models of Employment
W. Bentley Macleod and
James Malcomson ()
Working Paper from Economics Department, Queen's University
This paper explores the nature of employment contracts in a dynamic model when workers vary by unobserved ability, and there is moral hazard on both sides of the contract. We find that even though a worker's ability is chosen from a continuum, the equilibrium contract is characterized by a hierarchy consisting of a finite number of ranks. Reputation effects are modelled as a Bayesian game, and are needed to ensure workers will not shirk. Workers are not immediately assigned to the appropriate rank, but are promoted through the ranks until they reach a level consistent with their ability.
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Journal Article: Reputation and Hierarchy in Dynamic Models of Employment (1988)
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Persistent link: https://EconPapers.repec.org/RePEc:qed:wpaper:628
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