Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/94173
Authors: 
Brown, Martin
Falk, Armin
Fehr, Ernst
Year of Publication: 
2011
Series/Report no.: 
SFB/TR 15 Discussion Paper 359
Abstract: 
When workers are faced with the threat of unemployment, their relationship with a particular firm becomes valuable. As a result, a worker may comply with the terms of a relational contract that demands high effort even when performance is not enforceable by a third party. But can relational contracts motivate high effort when workers can easily find alternative jobs? We examine how competition for labor affects the emergence of relational contracts and their effectiveness in overcoming moral hazard in the labor market. We show that effective relational contracts do emerge in a market with excess demand for labor. Long-term relationships turn out to be less frequent when there is excess demand for labor than they are in a market characterized by exogenous unemployment. However, stronger competition for labor does not impair labor market efficiency: higher wages induced by competition lead to higher effort out of concerns for reciprocity.
Subjects: 
Relational Contracts
Involuntary Unemployment
JEL: 
D82
J3
J41
E24
C9
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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