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Competition and relational contracts: The role of unemployment as a disciplinary device


Brown, Martin; Falk, Armin; Fehr, Ernst (2012). Competition and relational contracts: The role of unemployment as a disciplinary device. Journal of the European Economic Association, 10(4):887-907.

Abstract

When workers are faced with the threat of unemployment, their relationship with a particular firm becomes valuable. As a result, a worker may comply with the terms of a relational contract that demands high effort even when performance is not enforceable by a third party. But can relational contracts motivate high effort when workers can easily find alternative jobs? We examine how competition for labor affects the emergence of relational contracts and their effectiveness in overcoming moral hazard in the labor market. We show that effective relational contracts do emerge in a market with excess demand for labor. Long-term relationships turn out to be less frequent when there is excess demand for labor than they are in a market characterized by exogenous unemployment. However, stronger competition for labor does not impair labor market efficiency: higher wages induced by competition lead to higher effort out of concerns for reciprocity.

When workers are faced with the threat of unemployment, their relationship with a particular firm becomes valuable. As a result, a worker may comply with the terms of a relational contract that demands high effort even when performance is not enforceable by a third party. But can relational contracts motivate high effort when workers can easily find alternative jobs? We examine how competition for labor affects the emergence of relational contracts and their effectiveness in overcoming moral hazard in the labor market. We show that effective relational contracts do emerge in a market with excess demand for labor. Long-term relationships turn out to be less frequent when there is excess demand for labor than they are in a market characterized by exogenous unemployment. However, stronger competition for labor does not impair labor market efficiency: higher wages induced by competition lead to higher effort out of concerns for reciprocity.

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8 citations in Web of Science®
11 citations in Scopus®
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Language:English
Date:1 August 2012
Deposited On:16 May 2012 11:59
Last Modified:05 Apr 2016 15:49
Publisher:MIT Press
ISSN:1542-4766
Additional Information:Copyright: MIT Press
Publisher DOI:https://doi.org/10.1111/j.1542-4774.2011.01058.x
Other Identification Number:merlin-id:6987
Permanent URL: https://doi.org/10.5167/uzh-62414

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