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| Author: | Thomas, J. Worrall, T. |
| Title: | Self-enforcing wage contracts. |
| Journal: | Review of Economic Studies
1988 : OCT, VOL. 55:184, p. 541-553 |
| Index terms: | PAY CONTRACTS ECONOMIC THEORY |
| Language: | eng |
| Abstract: | Long-term wage contracts between a risk-neutral firm and a risk-averse worker is examined when both can costlessly renege and buy or sell labor at a random spot market wage. A self-enforcing contract is one in which neither party ever has an incentive to renege. In the optimum self-enforcing contract, wages are sticky: they are less variable than spot market wages and positively setially correlated. They are updated by a simple rule: around each spot wage is a time invariant interval, and the contract wage changes each period by the smallest amount necessary to bring it into the current interval. |
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