A Dynamic Multitask Model: Fixed Wages, No Externalities, and Holdup Problems

Meg Adachi-Sato and Kazuya Kamiya
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Meg Adachi-Sato: Royal Melbourne Institute of Technology University

No CIRJE-F-825, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

Abstract: This article develops a multitask model in which the agent has to produce both verifiable and unverifiable outputs in a dynamic framework as observed in actual labor markets and practices. The model derives an important result regarding the timing and the length of a wage contract. A short-term wage contract allows for greater holdup, but it motivates the agent to engage in a task whose output is unverifiable. In contrast, a long-term wage contract does not allow for holdup and induces the first-best level effort for verifiable outputs, but it removes the incentive for unverifiable outputs. By studying an optimal wage profile and finding the optimal timing to sign a contract in a multitask framework, our model explains why individuals paid fixed wages have more frequent opportunities for wage negotiation compared with those paid through incentive pay. Furthermore, our model predicts that in industries where unverifiable outputs are valued, wage contracts are renewed more frequently.

Pages: 29 pages
Date: 2011-11
New Economics Papers: this item is included in nep-cta and nep-lab
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:tky:fseres:2011cf825

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