Econ 366-Markets with Frictions
1. Unemployment and wages as workers’ discipline devices. Consider the labor market model of Shapiro and Stiglitz (1984). Suppose that a firm can discipline shirking workers by firing them and by withholding part of their paycheck. In particular, suppose that if a firm catches a worker shirking, it fires the worker and withholds c dollars from his paycheck, c ∈ (0, e).
a. Write down an expression for the lifetime utility of a worker employed at the wage w. In this expression, make sure to identify the periodical utility of a worker who chooses effort a ∈ {0, 1}, and the continuation utility of a worker who chooses effort a ∈ {0, 1}.
b. Derive a condition under which the worker chooses to exert effort.
DETAILED ASSIGNMENT
