High Compensation Creates a Ratchet Effect

17 Pages Posted: 16 Jun 2009

See all articles by Hans Gersbach

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Reseaarch; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Amihai Glazer

University of California, Irvine - Department of Economics

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Date Written: 0000

Abstract

Consider a firm which pays a (credit-constrained) worker for his effort over two periods. The more the firm pays in one period, the wealthier is the worker in the following period, and so the more he must then be paid for a given effort. We describe the profit-maximising contract under these conditions, showing how this wealth-ratchet effect can raise wages over time, and cause the firm to fire older workers.

Suggested Citation

Gersbach, Hans and Glazer, Amihai, High Compensation Creates a Ratchet Effect (0000). The Economic Journal, Vol. 119, Issue 539, pp. 1208-1224, July 2009. Available at SSRN: https://ssrn.com/abstract=1418175 or http://dx.doi.org/10.1111/j.1468-0297.2009.02256.x

Hans Gersbach (Contact Author)

ETH Zurich - CER-ETH -Center of Economic Reseaarch ( email )

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IZA Institute of Labor Economics

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CESifo (Center for Economic Studies and Ifo Institute)

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Centre for Economic Policy Research (CEPR)

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Amihai Glazer

University of California, Irvine - Department of Economics ( email )

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Irvine, CA 92697-5100
United States
949-854-6563 (Phone)
949-824-2182 (Fax)

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