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Risk Aversion and the Efficiency Wage Contract
Author(s) -
Chouikhi Ouassila,
Ramani Shyama V.
Publication year - 2004
Publication title -
labour
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.403
H-Index - 34
eISSN - 1467-9914
pISSN - 1121-7081
DOI - 10.1111/j.1121-7081.2004.00258.x
Subject(s) - economics , risk aversion (psychology) , wage , microeconomics , efficiency wage , complete information , degree (music) , labour economics , expected utility hypothesis , financial economics , physics , acoustics
Abstract. The efficiency wage model of Shapiro and Stiglitz ( American Economic Review 74: 433–444, 1984) has not always been confirmed by empirical investigations. This could be due to informational problems. Reformulating the Shapiro and Stiglitz model as a sequential game, this paper examines the relations between the terms of the efficiency wage contract offered by a firm and the responses of a worker, under incomplete information about the degree of risk aversion of the firm and the worker. It shows that under incomplete information about the degree of risk aversion of the worker, shirking can emerge as an equilibrium phenomenon. For any efficiency wage contract, a worker will shirk if the degree of risk aversion of the worker is less than that corresponding to the contract.