Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/25638 
Year of Publication: 
2007
Series/Report no.: 
Jena Economic Research Papers No. 2007,072
Publisher: 
Friedrich Schiller University Jena and Max Planck Institute of Economics, Jena
Abstract: 
Facing a stochastic market wage, which is independent of their own hiring policy, employers offer contracts specifying fixed wage, revenue share and employment duration. In ongoing employment relations it depends on the treatment whether fixed wages can be only increased or also decreased. Will the uncertainty of the future market wage and less wage flexibility lead to temporary employment? And, if not, will employers adjust wages to changing market wages and will workers in ongoing employment relations react to wage decreases via effort choices? Our results partly question empirical claims, e.g. of Bewley (1995), and confirm the tendency to establish ongoing employment relations. Granting more wage flexibility to employers altogether questions rather than enhances efficiency since it induces opportunistic wage cuts to which employees react with lower efforts.
Subjects: 
noncooperative game
labor contracts
labor market flexibility
principalagent theory
experimental economics
JEL: 
C72
C90
F16
J21
J24
L10
Document Type: 
Working Paper

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