Investigating rationality in wage-setting

Bhalotra, Sonia (1998) Investigating rationality in wage-setting. DEDPS (10). Suntory and Toyota International Centres for Economics and Related Disciplines, London, UK.

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Abstract

This paper investigates the efficiency wage hypothesis and derives a tractable expression for the profit loss incurred by deviations from the efficiency wage. The extent of the wage deviation can be inferred from production function parameters. The resulting profit loss shown to depend upon the curvature of th effort function and the employment and wage elasticities of output. If the profit loss is small then near rationality may be claimed even if the hypothesis of rationality is statistically rejected. An application to Indian manufacturing is presented, which suggests that rationality cannot be rejected and that the profit function is remarkably flat aroung the optimum. This is consistent with positive effort returns to increasing the wage beyond its efficient level.

Item Type:	Monograph (Discussion Paper)
Official URL:	http://sticerd.lse.ac.uk
Additional Information:	© 1998 Sonia Bhalotra
Divisions:	STICERD
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HD Industries. Land use. Labor
JEL classification:	C - Mathematical and Quantitative Methods > C2 - Econometric Methods: Single Equation Models; Single Variables > C23 - Models with Panel Data J - Labor and Demographic Economics > J4 - Particular Labor Markets > J41 - Contracts: Specific Human Capital, Matching Models, Efficiency Wage Models, and Internal Labor Markets O - Economic Development, Technological Change, and Growth > O1 - Economic Development > O15 - Human Resources; Human Development; Income Distribution; Migration
Date Deposited:	08 Jul 2008 13:00
Last Modified:	11 Dec 2024 18:25
URI:	http://eprints.lse.ac.uk/id/eprint/6682

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