The Labour Discipline Model as an Example of External Effects
The labour discipline model illustrates an externality caused by an incomplete contract. In this model, an employee's effort provides a benefit to their employer, but this effort cannot be perfectly monitored. Because the employment contract is incomplete (it cannot specify and enforce effort), the worker chooses their effort level without fully accounting for the external benefit it creates for the firm. The model shows that this leads to an inefficient market equilibrium that includes involuntary unemployment.
0
1
Tags
Social Science
Empirical Science
Science
CORE Econ
Economy
Economics
Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
Ch.10 Market successes and failures: The societal effects of private decisions - The Economy 2.0 Microeconomics @ CORE Econ
Related
The Labour Discipline Model as an Example of External Effects
External Effects in Insurance Markets
Information Imbalance as an External Effect
In a market where sellers have private information about the quality of the product they are selling (a 'hidden attribute'), the presence of low-quality goods can reduce the price that buyers are willing to pay for any good, regardless of its actual quality. Why does this information imbalance represent an external effect?
Match each economic scenario with the term that best describes the underlying information problem which creates an external effect.
In a situation characterized by hidden actions, the resulting external effect arises because one party possesses unobservable characteristics before entering into an agreement, which negatively impacts the other party.
Analyzing Externalities from Hidden Actions
Evaluating Market Failure from Asymmetric Information
Evaluating a Policy Response to Hidden Actions
A firm hires a remote employee whose effort level cannot be perfectly monitored. The employee chooses to exert less effort than the firm expects, resulting in a lower-quality output. How does this scenario represent an external effect caused by asymmetric information?
Evaluating Policies to Address Information Asymmetry in the Restaurant Industry
Comparison of Hidden-Action Problems with Other Externalities
Market Failure as a Consequence of Hidden Actions
Learn After
In a typical employment relationship, a worker's effort benefits the firm, but this effort is difficult for the firm to observe and cannot be specified in an enforceable contract. This situation creates an inefficiency. Now, imagine a technological breakthrough allows a firm to perfectly and costlessly monitor the effort level of its employees. How would this change fundamentally alter the market outcome?
A new artisanal bakery is creating its initial budget. The plan includes funds for an industrial oven and a storefront lease (physical capital), flour and sugar (material inputs), and wages for the bakers who will make the bread (direct labor). For the bakery to operate as a successful business, which category of input has been most significantly overlooked in this initial plan?
Analyzing Effort and Incentives in a Tech Firm
Analyzing Effort and Incentives in a Tech Firm
In the context of an employment relationship where a worker's effort is unobservable, an externality arises. This externality exists because the worker's decision to exert effort imposes a direct, uncompensated cost on the firm.
A government proposes a policy that guarantees immediate re-employment at an identical wage for any worker who loses their job. According to the logic of a model where employment contracts are incomplete and worker effort is not perfectly observable, what is the most likely impact of this policy on the average level of worker effort?
Firm's Wage Strategy with Unobservable Effort
Conflicting Economic Pressures on Worker Motivation
Evaluating a Corporate Policy on Worker Motivation
A government significantly increases the value and duration of unemployment benefits. In an economic environment where individual worker effort is beneficial to firms but difficult to specify in a contract or monitor perfectly, what is the most likely consequence of this policy on the wages firms must pay to incentivize a given level of effort?