SELF-ENFORCING CONTRACTS, SHIRKING, AND LIFE-CYCLE INCENTIVES

The labor market is a rich and complicated place. When a worker takes a job he expects to earn a wage, but will also care about rates of wage growth, fringe benefits, levels of risk, retirement practices, pensions, promotion and layoff rules, seniority rights, and grievance procedures. In return, the worker must give up some time, but he is also asked to upgrade his skills, train other workers, provide effort and ideas, and defer to authority in questions of how his time is spent. Great changes are occurring in the way labor market institutions such as these are modeled. Central to the new approach is the concept of a self-enforcing implicit contract. The focus of this essay is on developments in the theory of self-enforcing contracts, and how these can be used to derive predictions about labor market institutions.