Optimal tenure choice and collusive behavior in contract negotiation models
Frascatore, Mark R.
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he assumption of a purely self-interested supervisor in a three-tier hierarchy (a principal-supervisor-agent framework) gives rise to the possibility of supervisor-agent collusion which lowers the principal's profits. It has also been shown that the transfer of information in side contract negotiations between the supervisor and the agent may hinder collusion and maintain high principal profits. In chapter 2, I show that imposing "credible" updating of type beliefs during negotiations can guarantee one of two outcomes that are Pareto superior for the supervisor-agent coalition. I further refine the equilibria by endogenizing the decision of who makes the side contract proposal, and a unique collusive equilibrium results. In allowing the principal to form a collusion-proof incentive contract, I find that the only plausible solution is for the principal to ignore the supervisor. It is clear that there is no value at all to the principal in hiring a self-interested supervisor. This casts doubt on the validity of the assumption that the supervisor is self-interested, and I discuss some possible alternatives. Chapter 3 studies job matching inefficiencies under two-sided uncertainty. I examine these inefficiencies in a setting of a single-stage, simultaneous-offer bargaining situation, where the applicant does not know his productivity with the firm, and the employer does not know the applicant's reservation wage. I compare linear bid strategy equilibria between the cases where the applicant is uninformed of his productivity and where he is informed. I find that the payoff to the applicant is higher if he is informed. He is thus willing to collude with an informed person within the firm, paying him up to the difference in payoffs to obtain his productivity information. It is noteworthy that the collusive equilibrium is always more efficient than the non-collusive equilibrium, and that most types of employer prefer the applicant to have the knowledge. In the cases that the employer does not wish the applicant to possess the information, I examine possible reward schemes for the employer to use to deter collusion. I find, however, that a successful reward scheme is too costly to the employer, and coalition formation always occurs in equilibrium. Chapter 4 studies the strategic choice of job tenures to maximize lifetime earnings. A worker's salary typically increases with tenure, and the possible net starting salary at a new job depends on such factors as search costs, training period duration, rate of human capital accumulation, and experience. The worker thus wishes to choose appropriate tenures considering the levels of these factors for the industry in which he works. I set up a general framework for the problem, and solve using specific functional forms for salary increments and the new starting salary. I find that these factors are important in determining the optimal number of jobs to work, and the optimal distribution of tenures among the jobs. It is easy to see how variations in these factors across industries can help explain variations in turnover rates and tenure choices of individuals at different points in their working lifetimes. Also, we see how realistic variations in these values over the course of a worker's lifetime yield results consistent with empirical findings.
- Doctoral Dissertations