Competition and Relational Contracts: The Role of Unemployment as a Disciplinary Device

Brown, Martin; Falk, Armin und Fehr, Ernst (May 2011): Competition and Relational Contracts: The Role of Unemployment as a Disciplinary Device. SFB/TR 15 Discussion Paper No. 359

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.

• Item Type: Paper
• Keywords: Relational Contracts, Involuntary Unemployment
• Faculties: Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems; Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > C8 - Verhaltensökonomische Implikationen für Institutionen
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: D82, J3, J41, E24, C9
• Language: English