Salary prospects, unemployment, and work effort

Abstract

In this paper, we address the problem of inducing workers to provide effort when backloading of wages (bonding) is not possible. Firms offer salary prospects: those monitored and found not shirking are paid a higher wage than others; those found shirking are discharged. Unlike other schemes, unemployment is not caused by such a contract, nor is unemployment required for salary prospects to deter shirking. Salary prospects are compared to rank-order tournaments. Both are found to have beneficial aspects, and neither appears clearly to dominate the other.