We conduct a laboratory experiment with agents working on and principals benefiting from a real effort task in which the agents’ performance can only be evaluated subjectively. Principals give subjective performance feedback to agents and agents have an opportunity to sanction principals. In contrast to existing models of reciprocity we find that agents tend to sanction whenever the feedback of...

This paper considers the optimal design of unemployment insurance (UI) within an equilibrium matching framework when wages are determined by strategic bargaining. Unlike the Nash bargaining approach, reducing UI payments with duration is welfare increasing. A co-ordinated policy approach, however, one that chooses job creation subsidies and UI optimally, implies a much greater welfare gain than...

In this paper fiscal policy is examined for an open economy characterised by unemployment due to efficiency wages. We allow for capital and firm mobility in a model where the government chooses the level of wage, source-based capital and profit taxation. The taxing choices of governments are analyzed in scenarios which differ with respect to the constraints imposed on the set of available taxes...

This paper extends the now familiar Shapiro-Stiglitz (1984) model of labor market behavior to reconsider the controversial proposition that some forms of innovation have persistent displacement e ects. In particular, it nds that when distinctions between random production failures and reduced e ort level are di cult to draw, the adoption of new methods of production that compel more e ort, brea...

We study how diversity evolves at a firm with entry-level and upper-level employees who vary in ability and "type" (gender or ethnicity). The ability of entry-level employees is increased by mentoring. An employee receives more mentoring when more upper-level employees have the same type. Optimal promotions are biased by type, and this bias may favor either the minority or the majority. We char...

This paper analyses the contract-posting equilibrium in a general equilibrium matching model of the labour market with on-the-job turnover. Privately optimal contracts have a rising wage-tenure profile, even when productivity is constant. The effect is to reduce equilibrium turnover; when jobs differ in productivity, turnover is below the level required for efficient matching of workers to jobs...

Wage determination under asymmetric information generates ine¢ ciencies due to excess turnover. Layo¤ taxes can improve e¢ ciency. We show that ine¢ cient separations can even be fully removed with …xed separation taxes in the case where the relevant private information is exponentially distributed. With search frictions, such policies a¤ect the fallback option of labor market participants, hen...

This comment finds an error in De Fraja (1999), the correction of which overturns its main result. In contrast to his claim, under a mild condition, the suggested contract is not only unable to solve the hold-up problem but it can provide almost no incentive for specific investments, when they exhibit sufficiently large direct externalities. His result holds primarily when the investments have ...

We test predictions from theories of tournament, fairness and tastes for skewness about the effects of pay spread and skewness on employee effort and firm productivity. The data come from the population of 6,501 medium-to-large sized Danish private sector firms matched with all their employees during 1992-95. Potential simultaneity problems are addressed by instrumental variables provided by in...

This paper explores the rationale for unemployment beneÞts as a complement to optimal non-linear income taxation. High-skilled workers and low-skilled workers face different exogenous risks of being unemployed. As long as the low-skilled workers face a higher unemployment risk, we Þnd that there is a case for over-insuring the lowskilled, hence the unemployment beneÞts of the low-skilled should...