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Author Fong, Yuk-Fai ♦ Li, Jin ♦ Michihiro, K. ♦ Matsusaka, John ♦ Murphy, Kevin ♦ Marino, Tony ♦ Ottaviani, Marco ♦ Schnabl, Peter
Source CiteSeerX
Content type Text
File Format PDF
Subject Domain (in DDC) Computer science, information & general works ♦ Data processing & computer science
Subject Keyword Relational Contract ♦ Limited Liability ♦ Employment Dynamic ♦ Working Paper ♦ Di Cult ♦ Probation Phase ♦ New Light ♦ Important Pattern ♦ Minimum Wage ♦ Monetary Reward ♦ Good Performance ♦ Discrete-time Dynamic Incentive Model ♦ Tractable Model ♦ Indepen-dent Interest ♦ Important Policy Issue ♦ Several Comparative Static ♦ Performance Increase ♦ Optimal Relational Contractort ♦ Turnover Rate ♦ Permanent Employment ♦ Optimal Relational Contract Shed Light ♦ Bad Performance ♦ Imperfect Public Mon-itoring ♦ Functional Operator ♦ Comparative Static ♦ Positive Probability ♦ Comparative Static Result ♦ Employ-ment Dynamic ♦ Employment Relationship ♦ Future Wage Growth
Abstract This paper develops a tractable model of relational contract with imperfect public mon-itoring where the agent has limited liability. In the optimal relational contractort, both monetary reward for good performance and punishment for bad performance through ter-mination are used. Both are postponed as much as possible yet termination always occurs with positive probability. The optimal relational contract sheds light on a number of important patterns of employ-ment dynamics. First, employment relationship sometimes starts with a probation phase, after which the agent either receives permanent employment or is terminated. Second, the sensitivity of wages to performance increases with experience and wages are backloaded. Third, turnover rates can be inverse-U shaped with seniority. Fourth, earlier successes are more important for future wage growth. The tractability of the model also allows us to carry out several comparative statics that are typically di ¢ cult to obtain in discrete-time dynamic incentive models. Our technique of obtaining comparative statics uses properties of functional operators and may be of indepen-dent interest. Some of the comparative statics results shed new light on important policy issues. For example, minimum wage may harm workers who are already employed because they are more likely to be terminated.
Educational Role Student ♦ Teacher
Age Range above 22 year
Educational Use Research
Education Level UG and PG ♦ Career/Technical Study
Learning Resource Type Article