The Ratchet Effect and the Market for Secondhand Workers

Kanemoto, Yoshitsugu; MacLeod, W. Bentley

doi:10.1086/298279

Cited by 81 publications

(48 citation statements)

References 11 publications

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“…Moreover, under U.S. law, performance-pay contracts are enforceable under the doctrine of good faith and fair dealing -namely a firm cannot renege upon a bonus pay commitment by firing a worker. Moreover, (James M Malcomson and Frans Spinnewyn 1988) and (Yoshi Kanemoto and W. Bentley MacLeod 1992) show that in a competitive market that efficient agency contracts can be implemented with a sequence of competitive performance-pay contracts. Hence, a priori the there should be no systematic differences between bonus-pay and fixed-wage jobs.…”

Section: Does Contract Form Matter Formentioning

confidence: 99%

Contract Form, Wage Flexibility, and Employment

Lemieux

MacLeod

Parent

2012

American Economic Review

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We begin with two uncontroversial hypotheses - firm productivity is expensive to measure and employment entails relationship-specific investments. These assumptions imply that firms would optimally choose fixed-wage contracts, and complement these with bonus pay when measuring employee performance is not too costly. These assumptions imply that under an optimal employment contract hours of work is less responsive, while total compensation is more responsive to shocks under bonus-pay contracts compared to fixed wage contracts. Using data from the Panel Study of Income Dynamics (PSID) where shocks are proxied using the local unemployment rate, we find strong support for these two implications.

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Section: Does Contract Form Matter Formentioning

confidence: 99%

Contract Form, Wage Flexibility, and Employment

Lemieux

MacLeod

Parent

2012

American Economic Review

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“…Quite a few articles combine career concerns with organizational design. Meyer and Vickers (1997) study how better (comparative performance) information affects incentives, and Kanemoto and MacLeod (1992) show that it may be hard to separate types, unless the labor market is sufficiently competitive. Ortega (2003) models centralization versus decentralization in a way similar to my "nontransparent" firm and finds that some centralization is typically optimal since the larger visibility of the manager encourages more effort.…”

Section: Related Literaturementioning

confidence: 99%

“…Kanemoto and MacLeod (1992) instead let the worker face some cost C if switching jobs. As they show, a worker's wage equals her outside option minus this fixed cost (if C is not too large).…”

Section: If Firms Have More Bargaining Powermentioning

confidence: 99%

Organizational Form and the Market for Talent

Harstad¹

2007

Journal of Labor Economics

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This article brings together the market for products, the market for talent, and firms' organizational form. While the organizational design determines the allocation of blame and fame within the firm, the value of a good reputation depends on the market structure. Consequently, the market structure dictates the optimal organizational design. If competition becomes tougher and the market thicker, transparent firms decentralize while nontransparent firms concentrate control, transparency itself is improved, corporations switch from unitary to multidivisional form, and the turnover of managers increases. The model rationalizes recent trends in both executive pay and organizational design.

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“…For example, while ratchet effects may be common in labor markets characterized by substantial mobility costs or firm-specific capital, the importance of ratchet effects in markets characterized by a high degree of competition and (at least potential) mobility is less clear. One model of ratchet effects that expands the treatment of agents' labor market alternatives is the one designed by Kanemoto and MacLeod (1992).…”

Section: Introductionmentioning

confidence: 99%

Competition and the Ratchet Effect

2008

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JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.. Marie Claire Villeval, University of Lyon 2, CNRS-GATEIn labor markets, the ratchet effect refers to a situation where workers subject to performance pay choose to restrict their output, because they rationally anticipate that firms will respond to higher output levels by raising output requirements or by cutting pay. We model this effect as a multiperiod principal-agent problem with hidden information and study its robustness to labor market competition both theoretically and experimentally. Consistent with our theoretical model, we observe substantial ratchet effects in the absence of competition, which are nearly eliminated when competition is introduced; this is true regardless of whether market conditions favor firms or workers.

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The Ratchet Effect and the Market for Secondhand Workers

Cited by 81 publications

References 11 publications

Contract Form, Wage Flexibility, and Employment

Contract Form, Wage Flexibility, and Employment

Organizational Form and the Market for Talent

Competition and the Ratchet Effect

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