A Model of Involuntary Unemployment and Wage Rigidity: Worker Incentives and the Threat of Dismissal

Sparks, Roger

doi:10.1086/298110

Cited by 52 publications

(47 citation statements)

References 14 publications

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“…We show that contrary to the results found in the existing literature individual lobbyists do not specialize in either transmitting information or making financial contributions but rather provide an optimal mix of both. 55 This corresponds to what is observed in the lobbying industry. 56 Furthermore, there has been considerable comment both in the popular press and in the empirical literature on the importance of repeated relationships between policymakers and lobbyists.…”

Section: Commercial Lobbyingsupporting

confidence: 75%

“…Verification efforts are unobservable at t and imperfectly observable at t + 1, financial contributions are unobservable at t and perfectly observable at t + 1. Earlier efficiency wage models by Shapiro and Stiglitz (1984) and Sparks (1986) do not exhibit equilibrium dismissal of unlucky agents. 33 The main qualitative predictions of our analysis remain the same if longer performance histories are considered.…”

Section: Political Accessmentioning

confidence: 75%

“…55 For example, Bennedsen and Feldmann (2006) investigate information externalities when multiple interest groups attempt to influence a single policy. The information externality reduces an interest group's incentive to provide information and results in the interest group's specialization in either means.…”

Section: Commercial Lobbyingmentioning

confidence: 99%

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Repeated Lobbying by Commercial Lobbyists and Special Interests

Groll

Ellis

2015

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Using a model of repeated agency, we explain previously unexplained features of the real-world lobbying industry. Lobbying is divided between direct representation by special interests to policymakers, and indirect representation where special interests employ professional intermediaries called commercial lobbyists to lobby policymakers on their behalf. Our analytical structure allows us to explain several trends in lobbying. For example, using the observation that in the U.S. over the last 20 years policymakers have spent an increasing amount of their time fundraising as opposed to legislating, we are able to explain why the share of commercial lobbyist activity in total lobbying has risen dramatically and now constitutes over 60% of the total. The key scarce resource in our analysis is policymakers' time. They allocate this resource via implicit repeated agency contracts which are used to incent special interests and commercial lobbyists to provide a mix of financial contributions and information on policy proposals. These implicit agency contracts solve both an information problem in the presence of unverifiable policy information and a contracting problem in the absence of legal enforcement. These repeated relationship, that are often described using the pejorative term cronyism in the popular press, may in certain circumstances be welfare improving. Terms of use: Documents inJEL-Codes: D720, D780, D830, H110, P160.

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Section: Commercial Lobbyingsupporting

confidence: 75%

Section: Political Accessmentioning

confidence: 75%

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Repeated Lobbying by Commercial Lobbyists and Special Interests

Groll

Ellis

2015

SSRN Journal

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“…In Shapiro and Stiglitz (1984), the dismissal rule is given exogenously, and workers caught shirking are fired. Sparks (1986) and Yokoyama (2014) further developed the rule of Shapiro and Stiglitz (1984) by making workers' level of effort and criterion for dismissal endogenous. In Sparks' model, it is assumed that workers who provide effort equal to or above the minimum standard are never dismissed.…”

Section: Endnotesmentioning

confidence: 99%

“…In Sparks' model, it is assumed that workers who provide effort equal to or above the minimum standard are never dismissed. Yokoyama (2014) made the dismissal rule in Sparks (1986) contingent on the output price. 5 This condition corresponds to the instrument relevance assumption in the empirical section, which assures a sufficient correlation between the endogenous variable, i.e., wage cuts, and the instrumental variable, i.e., the status of a performance-based payment system.…”

Section: Endnotesmentioning

confidence: 99%

Optimal combination of wage cuts and layoffs—the unexpected side effect of a performance-based payment system

Yokoyama

Obara

2017

IZA J Labor Policy

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This study analyzes the trade-off relationship between layoffs and wage cuts. If the introduction of a performance-based payment system stimulates workers' pecuniarymotivated minds, their morale can be damaged more severely by wage cuts than prior to the introduction thereof. Utilizing this idea, we demonstrate theoretically that the more heavily wages are based on performance, the more firms, fearing that workers' morale will be damaged by wage cuts, try to avoid wage cuts and instead prefer layoffs. Next, we show empirically the trend whereby firms with performance-based payment systems are unlikely to implement wage cuts. Given this first-stage regression, the status of a performance-based payment system, based on the firm's past decision and assured to be exogenous, is employed as an instrumental variable (IV) for wage cuts in a layoff regression model to overcome simultaneous bias. In the second-stage regression, the IV estimates for the impact of wage cuts on layoffs are significantly negative: if a firm implements wage cuts, it will reduce the probability of layoffs by 0.172. This supports the theoretical implication that implementing wage cuts can be a potential device for reducing layoffs. These results may imply an unexpected side effect of the increasing use of performance-based payment systems: as such systems become more widespread, layoffs will increase because firms will become less likely to impose wage cuts, thus potentially resulting in high unemployment. JEL Classification: J30, J33, J63

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The Trade‐Off Between Supervision and Wages: Evidence of Efficiency Wages from the NLSY

Ewing¹,

Payne

1999

Southern Economic Journal

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Standard efficiency wage models suggest that workers employed in places with lower probabilities of identifying shirking will earn more, as will workers who have better alternative opportunities. This paper provides new empirical evidence in support of efficiency wage theory using the National Longitudinal Surveys of Youth data. The empirical results support the prediction of the model that workers employed in larger work groups are paid more, a finding consistent with a supervision‐wage trade‐off. Additional evidence supports the prediction that workers with better alternative opportunities earn more.

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A Model of Involuntary Unemployment and Wage Rigidity: Worker Incentives and the Threat of Dismissal

Cited by 52 publications

References 14 publications

Repeated Lobbying by Commercial Lobbyists and Special Interests

Repeated Lobbying by Commercial Lobbyists and Special Interests

Optimal combination of wage cuts and layoffs—the unexpected side effect of a performance-based payment system

The Trade‐Off Between Supervision and Wages: Evidence of Efficiency Wages from the NLSY

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