Are Efficiency Wages Efficient?

15 Pages Posted: 13 Dec 2000 Last revised: 20 Dec 2000

See all articles by William T. Dickens

William T. Dickens

Northeastern University - Department of Economics; Federal Reserve Banks - Federal Reserve Bank of Boston; Brookings Institution

Lawrence F. Katz

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Kevin Lang

Boston University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: June 1986

Abstract

Efficiency wage models have been criticized because worker malfeasance can be prevented in a pareto efficient manner by requiring workers to post a bond which they lose if they are caught cheating. However, since it is costly to monitor workers and costless to demand a larger bond, firms should pay nothing for monitoring and demand very large bonds. Since we observe that firms devote considerable resources to monitoring workers, bonds must be limited. Therefore firms must use second best alternatives -- intensive monitoring and/or efficiency wages. The payment of efficiency wages cannot be ruled out on a priori theoretical grounds.

Suggested Citation

Dickens, William T. and Katz, Lawrence F. and Lang, Kevin, Are Efficiency Wages Efficient? (June 1986). NBER Working Paper No. w1935, Available at SSRN: https://ssrn.com/abstract=251264

William T. Dickens (Contact Author)

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Lawrence F. Katz

Harvard University - Department of Economics ( email )

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Kevin Lang

Boston University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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United States

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