AltInst: Job Bonds to Discourage Shirking

TITLE
    Do Deferred Wages Dominate Involuntary Unemployment
    as a Worker Discipline Device?
AUTHOR(S)
    Akerlof,-George-A.; Katz,-Lawrence-F.
SOURCE (BIBLIOGRAPHIC CITATION)
    National Bureau of Economic Research Working Paper: 2025, September 1986.
ABSTRACT
    In the most widely analyzed type of efficiency wage model
of involuntary unemployment, firms pay wages in excess of market
clearing to give workers an incentive not to shirk. Such payments
in excess of market clearing and the resultant equilibrium
unemployment act as a worker discipline device. This paper concerns
what is usually considered the most important theoretical
criticism of such models: the so-called bonding argument. The
essence of the bonding critique is that contracts whereby
workers pay a bond to the firm upon taking a job (or pay an employment
fee to gain employment) can eliminate involuntary
unemployment. Explicit upfront bonds are only quite rarely observed.
A more subtle form of the bonding critique argues that
implicit bonding through upward sloping wage profiles and other
deferred payment schemes can perfectly substitute for
upfront bonds in providing incentives not to shirk and
thereby allow the labor market to clear. This paper shows that upward
sloping wage profiles do not act as a perfect substitute for explicit
bonds in a natural extension of the shirking model in which
workers are finite lived, the monitoring of worker behaviors on the
job is costly, and firms have reputations for honesty as
employers. In the absence of direct upfront bonding, optimal payment
schedules will be in excess of market clearing. The
reason why upward sloping wage profiles that are market clearing will
not generally be the optimal labor contract is simple:
delayed payment may provide sufficient incentive to prevent shirking
late in the life of the contract, but in the beginning of the
contract it does not prevent shirking. And it turns out in a variety
of stylized cases, it is cheaper for the firm to pay a wage
premium rather than to accept worker shirking early in the contract.
The implications of potential worker malfeasance in the
absence of explicit bonds for compensation schedules, job assignments,
and firm monitoring strategies over the course of a
worker's career are also analyzed.

Robin Hanson
hanson@econ.berkeley.edu http://hanson.berkeley.edu/
RWJF Health Policy Scholar, Sch. of Public Health 510-643-1884
140 Warren Hall, UC Berkeley, CA 94720-7360 FAX: 510-643-8614

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Received on Wed Oct 21 23:14:31 1998