A Game Theoretical View on Efficiency Wage Theories

Wesselbaum, Dennis (2009): A Game Theoretical View on Efficiency Wage Theories. Unpublished.

Abstract

The efficiency wage theory developed by Akerlof (1982) assumes observability of effort and the ability of firm and worker to commit on their effort/wage decisions. We show that, from a game theoretical point of view, we have to understand the firm/worker relationship as a repeated Prisoner's dilemma. Therefore, cooperation is per se not a (subgame perfect) Nash equilibrium and hence the Akerlof (1982) theory is based upon an implicit assumption of cooperation, which can not be implemented w.l.o.g.. In addition, we find that this approach is a special case of the Shapiro and Stiglitz (1984) approach and hence unify the two approaches.

• Item Type: MPRA Paper
• Language: English
• Keywords: Efficiency Wage, Prisoner's Dilemma, Repeated Game, Subgame Perfect Nash Equilibrium.
• Subjects: J - Labor and Demographic Economics > J4 - Particular Labor Markets > J41 - Contracts: Specific Human Capital, Matching Models, Efficiency Wage Models, and Internal Labor Markets; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C73 - Stochastic and Dynamic Games; Evolutionary Games; Repeated Games; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C72 - Noncooperative Games

References

Akerlof, George A.. 1982. "Labor Contracts as Partial Gift Exchange." Quarterly Journals of Economics, 97(4): 543-569.

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Danthine, Jean-Pierre and John B. Donaldson. 1990. "Efficiency wages and the business cycle puzzle." European Economic Review, 34(7): 1275-1301.

Lemieux, Thomas, W. Bentley MacLeod, and Daniel Parent. 2007. "Performance Pay and Wage Inequality." NBER Working Paper, No. 13128.

Ratliff, Jim. 1997. Lecture Slides to the Graduate-Level Course on Game Theory. Available via the following link: http://www.virtualperfection.com/gametheory/.

Shapiro, Carl and Joseph E. Stiglitz. 1984. "Equilibrium Unemployment as a Worker Discipline Device." American Economic Review, 74(3): 433-444.