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Self-Enforcing Wage Contracts

Self-Enforcing Wage Contracts Abstract We examine long-term wage contracts between a risk-neutral firm and a risk-averse worker when both can costlessly renege and buy or sell labour 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 serially 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. This content is only available as a PDF. © 1988 The Review of Economic Studies Limited http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Economic Studies Oxford University Press

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References (6)

Publisher
Oxford University Press
Copyright
© 1988 The Review of Economic Studies Limited
ISSN
0034-6527
eISSN
1467-937X
DOI
10.2307/2297404
Publisher site
See Article on Publisher Site

Abstract

Abstract We examine long-term wage contracts between a risk-neutral firm and a risk-averse worker when both can costlessly renege and buy or sell labour 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 serially 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. This content is only available as a PDF. © 1988 The Review of Economic Studies Limited

Journal

The Review of Economic StudiesOxford University Press

Published: Oct 1, 1988

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