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Work Effort and Contract Length

1988; Wiley; Volume: 55; Issue: 219 Linguagem: Inglês

10.2307/2554012

1468-0335

Richard Cantor,

Fiscal Policy and Economic Growth

Contracts of deterministic duration are derived as solutions to a moral hazard problem in a framework that extends E. Fama's (1980) single-period labor contracts model by introducing recontracting costs and long-term contracts. A worker can be induced to put forth unobservable effort if he knows that his wages in future contracts will be related to his past overall productivity. As contract length is increased, the worker is more likely to shirk because the present value of future wage revisions associated with shirking is reduced. The optimal contract length minimizes the sum of explicit contracting costs and the costs of shirking. Copyright 1988 by The London School of Economics and Political Science.