Economic Origins of Good Jobs

In recent decades, many firms offered more discretion to their employees, often increasing the productivity of effort but also leaving more opportunities for shirking. We show experimentally that complementarities between high effort discretion, rent-sharing, screening opportunities, and competition are important driving forces behind these “high-performance work systems.” We document the endogenous emergence of two fundamentally distinct employment strategies. If employers cannot screen employees, a control strategy prevails, while the possibility of screening renders a trust strategy profitable. The introduction competition substantially fosters the trust strategy, reduces market segmentation, and leads to a large welfare gain for both employers and employees.