Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/149350 
Authors: 
Year of Publication: 
2016
Series/Report no.: 
CESifo Working Paper No. 6263
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
This paper studies general equilibrium when workers in the economy are also consumers of final goods. Once a firm and a worker are matched, there is a standard moral hazard problem. However, the firm’s profit depends on the price of the good the worker produces, and the price is determined by the total supply and demand in the economy. The worker’s expected utility also depends on the number of units they consume and therefore depends on the price of the good. I characterize the set of equilibria and show that there is a unique equilibrium level of worker’s outside option to price ratio. When the government changes minimum wage, the outside option for workers change through limited liability. In any equilibrium, the price responds proportionally to the change in minimum wage; the incentivized effort, the expected outcome, consumption and the expected utility of workers all remain exactly the same, and only the prices change as a result.
Subjects: 
general equilibrium
contracts
moral hazard
minimum wage
Document Type: 
Working Paper
Appears in Collections:

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.