Efficiency wage models have been criticized because worker malfeasance
can be prevented in a pareto efficient manner by requiring workers to post a bond
which they lose if they are caught cheating. However, since it is costly to
monitor workers and costless to demand a larger bond, firms should pay nothing
for monitoring and demand very large bonds. Since we observe that firms devote
considerable resources to monitoring workers, bonds must be limited. Therefore
firms must use second best alternatives -- intensive monitoring and/or efficiency
wages. The payment of efficiency wages cannot be ruled out on a priori theoretical
grounds.
Published: Journal of Labor Economic, Vol 7, July 1989
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