Discipline Device Research Articles

With Friends Like These: Endogenous Labor Market Segregation with Homogeneous, Nonprejudiced Agents

AbstractIn the economics literature, labor market segregation is typically assumed to arise either from prejudice (Becker 1971) or from group differences in human capital accumulation (Benabou 1993; Durlauf 2006; Fryer 2006). Many sociological studies, by contrast, consider social network structure as an embodiment of various forms of social capital, including the creation of obligations, information channels, and enforceable trust (Coleman 1988; Portes and Sensenbrenner 1993). When firms hire by referral, social network segregation can lead to labor market segregation (Tilly 1998). Various social network structures may arise from the actions of self‐interested individuals (Watts and Strogatz 1998; Jackson 2006); by incorporating concepts of social capital into an economic framework of profit‐maximizing firms, this article develops a model of labor markets in which segregation arises endogenously even though agents are homogeneous and have no dislike for each other. Firms hire through referrals, and can enforce discipline by bribing a referrer to prevent a hiree from getting any outside job offers from other friends if he or she shirks. This is possible only if social networks are reasonably closed, so that the referee knows a majority of his or her friends' friends. By segregating into small communities, workers can more effectively create closed social networks. Social networks with different reservation wages will receive different wages; firms can induce such segregation and wage discrimination in the interest of profit. Workers may not benefit from such segregation, except as a best response to being in a society where it already exists; the “friends” in these social networks act as a worker discipline device, and in this way treat each other inimically.

Policymakers' horizon and the sustainability of international cooperation

This paper examines the impact of policymakers' horizon on the sustainability of international cooperation. We describe a prisoners' dilemma game between two infinitely-lived countries run by policymakers. We show that re-election incentives can act as a discipline device, making it easier to sustain cooperation between policymakers with finite but potentially renewable mandates than between infinitely-lived policymakers. We also show that, when voting suffers from a recency bias, policymakers may have incentives to “collude” to get re-elected and term limits may help international cooperation.

UNEMPLOYMENT POLICIES IN AN ECONOMY WITH ADVERSE SELECTION

ABSTRACTThis paper studies the effects of unemployment policies in a simple static general equilibrium model with adverse selection in the labour market. Firms offer a contract that induces the self‐selection of workers. In equilibrium, all unskilled workers are screened out and some skilled workers are rationed out. It is shown that the provision of unemployment insuranceraisesinvoluntary unemployment by encouraging adverse selection, while unemployment assistance – or subsidy to unemployment – reduces involuntary unemployment. A simple efficiency wage model is also presented to show that either of the two policies reduces employment by taxing effort and subsidizing shirking. The key is whether the social role of unemployment is a sorting device or a worker discipline device.

Characteristics and Predictability of Companies' Acquisitions; Empirical Evidence from Denmark 1993-1996

The purpose of this paper is to derive and test several hypotheses on the characteristics of Danish acquisitions during the period from 1993 to 1996, and to try to estimate a statistical model for prediction of acquisition targets. We use binary and multinomial logit models, with variables expressed on firm and industry level. The sample covers a broad cross section of firms of different sizes and in different industries. In the period from 1993 to 1996 our results characterize targets as poor performing and financially distressed units when compared to their industry average, and to the control group of non merging companies. The findings are in support of the inefficient management hypothesis and to the more general view that acquisitions can serve as the managerial discipline device. These findings shed also some lights on the possibility of considering mergers and acquisitions as an alternative for bankruptcy avoidance. Acquirers are identified as companies in need for growth opportunities and better profitability. The models are tested for prediction accuracy on a holdout sample of firms in year 1997.

Profit sharing as a worker discipline device

A synthesis of profit-sharing and efficiency wage models is constructed to provide a preliminary account of how a firm determines its pay parameters, and why it chooses to be a profit-sharing or a fixed-wage firm. We find that the properties of the worker's effort function crucially influence the firm's choices between different compensation systems, and that the adoption of a profit-sharing scheme cannot guarantee the attainment of full employment. Other findings of the paper also seem to be very different from those of Weitzman's share model.

Contractual Incompleteness and the Nature of Market Interactions

We provide experimental evidence that contractual incompleteness, ie, the absence of third party enforcement of workers’ effort or the quality of the good traded causes a fundamental change in the nature of market interactions. If contracts are complete the vast majority of trades are initiated by public offers. Most trades take place in one-shot transactions and the contracting parties are indifferent with regard to the identity of their trading partner. Moreover, the short side of the market attempts to appropriate the whole gains from trade, which causes much disagreement about contract terms. If contracts are incomplete the vast majority of trades are initiated by private offers. The contracting parties form long-term relations and the provision of low effort or bad quality is penalized by the termination of the relationship. The threat of terminating the relation turns out to be an extremely powerful discipline device. Markets with incomplete contracts resemble a collection of bilateral trading islands rather than a competitive market. The short side of the market shares the gains from trade with the long side of the market so that there is little disagreement about contract terms. Our results support theories of the labour market that are based on the idea that unemployment is a worker discipline device.

Discipline, Signaling, and Currency Boards

The paper models the choice between currency boards (CBs) and adjustable pegs (or managed floating). Countries adopting CBs have grown faster and inflated less on average than countries adopting other regimes. The explanation hinges on key features of CBs: policy discipline and inflation credibility. The authors find separating equilibria in which a weak government chooses a CB as a discipline device while a tough government chooses a standard peg for its policy flexibility. Paradoxically, the weak government can then outperform the tough government on average. In simulations performed, CBs welfare can exceed peg welfare even when unemployment persistence is strong.

Tournaments as a Worker Discipline Device

This article explores the macroeconomic implications of tournaments as a worker discipline device in the vein of shirking models. It is shown that, if the full exploitation of tournaments is feasible, there will be no involuntary unemployment. Thus, as far as the elimination of involuntary unemployment is concerned, tournaments can serve as a perfect substitute for the so‐called “employment fee” or “bonding” scheme. An immediate corollary of this finding is that the involuntary nature of unemployment must ultimately rely upon impediments that hinder the full exploitation of tournaments.

Group Lending under Dynamic Incentives as a Borrower Discipline Device

In recent years group lending has become an increasingly utilized tool for providing credit access to the poor in developing countries. Using empirical results from first‐hand field research on Guatemalan borrowing groups, this paper develops a simple game‐theoretic model of group lending. Results from the model show that through peer monitoring, the threat of group expulsion, and the safety net of intragroup credit insurance, group lending mitigates some risky investment behavior that would otherwise occur under an individual borrowing contract. The credible threat of social sanctions against group members who misallocate borrowed capital further reduces instances of such behavior.

Sharing default information as a borrower discipline device

Creditors often share information about their customers’ credit records. Besides helping them to spot bad risks, this acts as a disciplinary device. If creditors are known to inform one another of defaults, borrowers must consider that default on one lender would disrupt their credit rating with all the other lenders. This increases their incentive to perform. However, sharing more detailed information can reduce this disciplinary effect: borrowers’ incentives to perform may be greater when lenders only disclose past defaults than when they share all their information. In some instances, by ‘fine-tuning’ the type and accuracy of the information shared, lenders can raise borrowers’ incentives to their first-best level.

Marx Inside the Circuit: Discipline device, wage bargaining and unemployment in a sequential monetary economy

The aim of this paper is to show that Marxian labour theory of value can be consistently interpreted in terms of the monetary circuit model, where firms need initial finance to start production and where the money supply is endogenous. In contrast to the recently revived Marxian monetary models, in particular the New Interpretation, it is argued here that although the money wage is bargained for on the labour market, the real wage is determined by firms' choices, since firms autonomously determine the structure of production and hence real consumption for the working class as a whole. This does not mean that firms are able to set the real wage without economic and social constraints. Starting from our circuitist reading of the labour theory of value and distribution, a model is developed in order to determine the level of employment and income distribution, on the assumptions that (i) the industrial reserve army affects wage bargaining and labour effort and that (ii) workers react to the failure of their expectations on the real wage by reducing their work intensity. In this context, it is shown that firms may increase their share of profits over time only be means of innovations.

Exploring the interaction between efficiency wages and labor market frictions

This paper explores the combined effects of efficiency wages and labor market matching frictions. A combined efficiency wage-frictional model is developed in which separate efficiency wage, frictional, and undistorted models are nested. It is found that the inclusion of efficiency wages puts upward pressure on wages and raises unemployment, while the friction puts downward pressure on wages and raises unemployment. Thus, it appears that unemployment generated by the frictional model cannot completely fulfill the role of unemployment as a discipline device, and vice versa. Other results show that the combined model has significantly different characteristics than its components.

Wages, Labour Productivity and Unemployment in a Model of the Monetary Theory of Production

The aim of this paper is to integrate a direct wage-productivity relationship and a “discipline effect” of unemployment on wages and labour productivity into a model of the monetary theory of production, in order to provide an explanation of unemployment and to analyse income distribution. It is shown that the less effective the money wage is as a means of reducing conflict in the production process and/or the greater the necessity to use the discipline device of the threat of dismissal, the higher unemployment grows. Furthermore, the rate of inflation and income distribution are primarily determined by the workers’ reaction to the failure of their expectations about real wages and by firms’ temporal horizons. If firms are interested in future profits, when workers react to the failure of their expectations, the inflation rate tends to become lower and income distribution more equal

Conflict, distribution, and finance in alternative macroeconomic traditions

Power and conflict are issues that loom large in the work of David Gordon. They are also issues that are largely absent in conventional macroeconomics. This paper shows how these concepts can be introduced within alternative macroeconomic traditions, and it shows how their significance depends on the particulars governing the construction of the macroeconomic process. The paper details the implicit economic process embedded in the new classical, neo-Keynesian, classical Marxist, and Kaleckian constructions of macroeconomics. It then develops a general post Keynesian model that fuses the insights of the classical Marxist and Kaleckian models regarding the significance of conflict and income distribution, with the insights of the neo-Keynesian model regarding the place of finance. Last, the paper argues that finance matters both for aggregate demand and as a worker discipline device. This represents a supply side channel for finance that links with modern new classical models that emphasize credit rationing

Conflict, Distribution, and Finance in Alternative Macroeconomic Traditions

Power and conflict are issues that loom large in the work of David Gordon. They are also issues that are largely absent in conventional macroeconomics. This paper shows how these concepts can be introduced within alternative macroeconomic traditions, and it shows how their significance depends on the particulars governing the construction of the macroeconomic process. The paper details the implicit economic process embedded in the new classical, neo-Keynesian, classical Marxist, and Kaleckian constructions of macroeconomics. It then develops a general post Keynesian model that fuses the insights of the classical Marxist and Kaleckian models regarding the significance of conflict and income distribution, with the insights of the neo-Keynesian model regarding the place of finance. Last, the paper argues that finance matters both for aggregate demand and as a worker discipline device. This represents a supply side channel for finance that links with modern new classical models that emphasize credit rationing.

Sharing Default Information as a Borrower Discipline Device

Creditors often share information about their customers' credit record. Besides helping them to spot bad risks, this informational exchange acts as a disciplinary device. If creditors are known to exchange data about defaults, borrowers must consider that default on a current lender would disrupt their credit rating with all the other lenders. This raises their incentive to perform. But sharing more detailed information can reduce this disciplinary effect: when lenders only disclose past defaults, borrowers' incentives to perform may be greater than when lenders share all their information. In some instances, by fine-tuning the type and accuracy of the information shared, lenders can raise borrowers' incentives to their first-best level.

Bequests as a heir ?discipline device?

Bequests as a heir ?discipline device?

Biased principals as a discipline device

This paper rationalizes the existence of multiple, biased principals as a discipline device that induces agents to expend effort. Specifically, principals are given incentives that induce them to take actions that reward (punish) agents after good (bad) performance. This framework is illustrated in the case of corporations, which rely on equityholders and debtholders to keep management in check, and in the case of multiministry oversight of state-owned firms.

Zur Dynamik der alters- und geschlechtsspezifischen Verteihmg der Arbeitseinkommen

Based on a life-course perspective oof the distribution of labour earnings, it is argued that age- and gender-specific stratification is still strong in Germany. New labour market entrants are sorted early in their occupational careers into different segments. Since the mid 1980s unemployment is shown to operate more forcefully as a worker discipline device.

Involuntary Unemployment and Worker Moral Hazard

This paper critically examines the hypothesis that layoffs are involuntary in implicit labour contracts because they are used by employers to punish inferior worker performance. In repeated moral hazard situations, workers typically bear risk associated with whether they'are chosen to be laid off even though the latter is uninformative about previous effort choices and wages are performance-contingent. However the hypothesis is unsatisfactory as optimal contracts involve involuntary retentions rather than involuntary layoffs in a wide variety of circumstances. The theory of implicit labour contracts as developed over the past decade has thrown considerable light on the nature of long-term employment relationships. By emphasizing that firm owners are usually less risk-averse than workers and thus have an incentive to insure workers against fluctuations in the demand for the firm's product, the theory manages to explain the emergence of long term contracts characterized by (downward) real wage rigidity (see Holmstrom (1983)). However the theory also typically implies that workers will be indifferent about whether they are to be retained or laid off. This runs contrary to the common observation that there is an element of involuntariness in layoff decisions, i.e., within any job category (with given skill and performance history) if a proportion of randomly chosen workers are to be laid off in a recession, the laid off workers would strictly prefer to be retained. Not only is this phenomenon of involuntary layoffs interesting to explain per se, it also seems relevant to the Keynesian notion of involuntary unemployment (interpreted as unequal treatment of similar workers where some are employed while others are not, and unemployed workers would strictly prefer to be employed). It thus seems worthwhile to examine if the theory of implicit contracts can be extended to explain this phenomenon satisfactorily as a test of its plausibility, and as a possible source of a consistent microfoundation for Keynesian propositions.! To explain why the firm does not insure workers against the risk associated with selection of those to be laid off, it is natural to think of possible informational asymmetries. This has been attempted by Geanakoplos and Ito (1981) and Moore (1985). Geanakoplos and Ito introduce the realistic feature that a firm does not observe spot market opportunities available ex post to a laid off worker. This permits only incomplete insurance against the risk of layoff. However their model produces the paradoxical conclusion that with decreasing absolute risk aversion, workers strictly prefer ex ante being laid off. Moore allows workers to have better ex ante information about their spot market opportunities, but finds a similar tendency toward involuntary retentions rather than involuntary layoffs. In this paper we explore the alternative hypothesis that firms cannot perfectly observe effort decisions of employed workers, and use the threat of involuntary layoff as a discipline device. The analysis of Stiglitz and Weiss (1983), Shapiro and Stiglitz (1984) and Singh (1982) of principal-agent relations in the absence of demand fluctuations suggests that the threat of contract termination may be used as an incentive device. In their models