Malfeasance in Long Term Employment Contracts: A New General Model with an Application to Unionism
NBER Working Paper No. 1045
This paper argues that the structure of long-term employment contractsis influenced by the possibility that at least four different kinds of opportunistic behavior, or "malfeasance,"may occur in them. While the consequences of some of these problems have been examined in various papers,no single model has yet treated all four and thus brought out their essential symmetry. In particular, a certain kind of malfeasance by firms has apparently been universally overlooked-an oversight we try to remedy by developing a simple model here. Other advantages of the present model are that, unlike other models, it endogenizes the path of both sides of the contract -wages and effort -and has fairly intuitive first-order conditions. It also shows how earlier conclusions, such as the notion that wages are likely to rise faster than marginal products in equilibrium, are the results of less-than-general model specification, and has some interesting implications when applied to unionism: by proposing that unions act as workers'equivalent to certain contract enforcement policies like the disciplinary dismissals used by firms, it provides what is to the author's knowledge the only consistent theoretical explanation of the quite commonly observed U-shaped pattern of the union wage effect by age and shows how unions might play a positive efficiency role in this regard.