Income Addiction and Efficiency Wages

Robert W Drago ()
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Robert W Drago: University of Wisconsin - Milwaukee

Working papers from University of Wisconsin - Milwaukee

Abstract: This analysis uses rational income addiction to explain efficiency wages. Absent addiction, the model yields an efficient pension scheme with mandatory retirement. With income addiction, firms may generate unemployment by providing above-market wages in tandem with pensions and mandatory retirment. The model predicts steeper wage profiles for high-skill workers or economies with low unemployment, flatter wage profiles for workers with a high rate of time preference, and that potential addicts will exhibit a high propensity to save but little savings early in the life-cycle.

JEL-codes: J33 J41 (search for similar items in EconPapers)
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Forthcoming Australian Economic Papers

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