Supervision and monetary incentives

Sammanfattning: This thesis extends the standard shirking model of efficiency wages to a continuum of effort levels. The generalisation completely overturns previous intuitions. In particular, the characteristic feature of the earlier theory that monitoring and pay are substitute instruments for motivating workers, no longer exists. This is remarkable, since such a negative correlation has been used as the primary empirical test for the existence of efficiency wages. With a continuum of effort levels, the efficiency wage model can also more conveniently be compared with conventional linear incentive wages. The most frequently recurring objection against the efficiency wage model is that unemployed workers should offer to pay entrance fees. This criticism is responded to in a model with finitely many periods. It is shown that the per period worker rents associated with efficiency wages strongly diminishes with the number of periods. It is further argued that both bonds and entrance fees are inferior means of extracting the remaining worker rents compared to investments in firm specific human capital. Finally, the above refinements of the efficiency wage theory are translated to fit in the arena of environmental economics and government policy. The corresponding results establish a rationale for a government to subsidise polluting firms and explain why a command and control policy is preferable to market-based incentive schemes.