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FRISAM-Fri prosjektstøtte samfunnsvitenskap

Incentive contracts in labour market equilibrium

Awarded: NOK 3.0 mill.

Project Number:

166987

Application Type:

Project Period:

2005 - 2012

The project examines the relationship between wage contracts in individual firms and the equilibrium in the labour market. We will analyse the interdependence between wage contracts and unemployment, human capital investment, turnover, and entrepreneurshi p. Much of the theoretical analysis will be undertaken within a search theoretical framework, and will include welfare analysis as an integral part of the study. When choosing the incentive power of the contract, firms trade off agency costs (for instance worker rents) and incentive provision. As worker rents translate into unemployment in equilibrium, this gives a link between unemployment and wage contracts. Whe n choosing between short-term (bonus-based) incentive and long-term incentive contracts, firms may trade off short-sighted worker behaviour and distortions in the turnover decisions. Equilibrium feedback mechanisms may give rise to multiple equilibria, wh ich may have consequences for turnover rates, human capital investment , and the supply of entrepreneurs. The project also studies the effects of hyperbolic discounting by workers on labour market equilibrium. We will analyse to what extent institutions arise in the market that help workers commit (from a prior perspective) to optimal behaviour if they become unemployed.

Funding scheme:

FRISAM-Fri prosjektstøtte samfunnsvitenskap

Funding Sources