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Title: Bonding Shirking and Adverse Selection
Authors: 林忠正
Keywords: Shirking;Adverse selection;Bonding;Labor quality;Externalities
Date: 2004-05
Issue Date: 2009-01-06 15:23:06 (UTC+8)
Abstract: The most serious theoretical difficulty regarding shirking-type efficiency wage models is that the introduction of the so-called bonding scheme eliminates involuntary unemployment. This paper develops a shirking-adverse selection model where the resulting key feature is that labor quality within an individual firm negatively depends on the average amount of bonds in the market. Under this situation, a larger bond required by an individual firm will lower the firm's labor quality and will discourage it from bonding its employees to the limit. This adverse selection problem gives rise to the possibility that bonding cannot eventually eliminate involuntary unemployment. Moreover, a larger bond required by a firm also worsens the labor quality within all other firms (negative externalities). The presence of these negative externalities implies that the profit-maximizing size of bonds required by individual firms in the market may be too large from the viewpoint of social welfare. This opens a possible role for bonding legislation to achieve an equilibrium Pareto superior to the competitive equilibrium.
Relation: Economic Modelling,21(3),545-560
Data Type: article
Appears in Collections:[財政學系] 期刊論文

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