Working Paper: NBER ID: w2548
Authors: George A. Akerlof; Lawrence F. Katz
Abstract: This paper defines a concept, a worker's trust fund, which is useful in analyzing optimal age-earnings profiles. The trust fund represents what a worker loses if dismissed from a job for shirking. In considering whether to work or shirk, a worker weighs the potential loss due to forfeiture of the trust fund if caught shirking against the benefits from reduced effort. This concept is used to show that the implicit bonding in upward sloping age-earnings profiles is not a perfect substitute for an explicit upfront performance bond (or employment fee). It is also shown that the second-best optimal earnings profile in the absence of an upfront employment fee pays total compensation in excess of market clearing in a variety of stylized cases.
Keywords: trust funds; wage profiles; worker incentives; efficiency wage model
JEL Codes: J31; J41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trust fund loss (G23) | worker decision to work or shirk (J29) |
| expected cost of shirking (J32) | worker decision to work or shirk (J29) |
| expected gain from shirking (D89) | worker decision to work or shirk (J29) |
| trust fund accumulation (G23) | effectiveness of implicit bonding (D91) |
| wage premium above market-clearing levels (J31) | worker compliance (J81) |
| absence of upfront bonds (H74) | inefficiencies in labor market (J49) |
| worker shirking (J22) | higher costs for firms (D21) |
| wage premia (J31) | mitigation of shirking costs (J33) |