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

Martin Brown, Armin Falk and Ernst Fehr

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

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.

Keywords: Relational Contracts; Involuntary Unemployment (search for similar items in EconPapers)
JEL-codes: C9 D82 E24 J3 J41 (search for similar items in EconPapers)
Date: 2011-05
New Economics Papers: this item is included in nep-bec, nep-cbe, nep-cta, nep-hrm, nep-lab and nep-ltv
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: COMPETITION AND RELATIONAL CONTRACTS: THE ROLE OF UNEMPLOYMENT AS A DISCIPLINARY DEVICE (2012)
Working Paper: Competition and Relational Contracts: The Role of Unemployment as a Disciplinary Device (2008)
Working Paper: Competition and Relational Contracts: The Role of Unemployment as a Disciplinary Device (2008)
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