Motivation and Markets
USC Law School Olin Working Paper No. 97-23
Posted: 16 May 1998
Date Written: 1997
Many workers receive pay based on subjectively assessed performance, yet the shirking model of efficiency wages excludes it. This paper incorporates such pay, with the following results. Performance pay is more efficient than efficiency wages when the costs of having a job vacant are low and qualified workers in short supply. More capital-intensive industries pay more than less capital-intensive industries, as observed in studies of interindustry wages differentials. Sustaining an efficient outcome requires a social convention similar to the notion of a fair wage. The model also makes predictions about the relationship between turnover, wages, growth and unemployment.
JEL Classification: J31, J33
Suggested Citation: Suggested Citation