Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/35139 
Year of Publication: 
2008
Series/Report no.: 
IZA Discussion Papers No. 3345
Publisher: 
Institute for the Study of Labor (IZA), Bonn
Abstract: 
When unemployment prevails, relations with a particular firm are valuable for workers. As a consequence, a worker may adhere to an implicit agreement to provide high effort, even when performance is not third-party enforceable. But can implicit agreements - or relational contracts - also motivate high worker performance when the labor market is tight? We examine this question by implementing an experimental market in which there is an excess demand for labor and the performance of workers is not third-party enforceable. We show that relational contracts emerge in which firms reward performing workers with wages that exceed the going market rate. This motivates workers to provide high effort, even though they could shirk and switch firms. Our results thus suggest that unemployment is not a necessary device to motivate workers. We also discuss how market conditions affect relational contracting by comparing identical labor markets with excess supply and excess demand for labor. Long-term relationships turn out to be less frequent when there is excess demand for labor compared to a market characterized by unemployment. Surprisingly though, this does not compromise market performance.
Subjects: 
Relational contracts
involuntary unemployment
JEL: 
D82
Document Type: 
Working Paper

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