Optimal labour contracts and involuntary unemployment under costly and imperfect monitoring

Seung Ahn, Roger L. Faith

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Abstract

This paper provides an explanation for the concurrence of rigid wages and involuntary unemployment. We consider cases in which a firm monitors its workers, but at some cost. A key assumption in the model is that the firm cannot perfectly distinguish shirkers from nonshirkers. Thus, the firm has to rely on negotiated compensation and work effort, as well as monitoring, to reduce the incentive to shirk. We find that rigid wages and involuntary unemployment arise simultaneously when monitoring costs are large and the effectiveness of monitoring is low.

Original languageEnglish (US)
Pages (from-to)569-588
Number of pages20
JournalEconomica
Volume63
Issue number252
DOIs
StatePublished - Nov 1996

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ASJC Scopus subject areas

  • Economics and Econometrics

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