Exclusion Theorem in an Efficiency Wage Model

Abstract

This paper uses Shapiro and Stiglitz’s (1984) efficiency wage model embodying the firm’s choice of location to show the existence of an optimal intermediate location without assuming a transport rate that increases with distance. Based on the viewpoint of Shapiro and Stiglitz, we demonstrate that the more time that the worker spends traveling to the plant, the higher will be\r\nthe wage that the firm will need to pay to motivate the worker not to shirk. To avoid paying a higher wage, the firm may choose its optimal location at an intermediate rather than a polar location.