Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

Design, analysis and simulation of an optimal wage contract in firms

Design, analysis and simulation of an optimal wage contract in firms Purpose – The purpose of this paper is to analyze and solve the problem of moral hazard in firms because of asymmetry information between firms and workers and to contract upon the workers' shiftless actions. Design/methodology/approach – Based on principle‐agent theory and human resource management practice, an optimal dynamic wage contract model is designed. By applying simulation technology, the dynamic wage contract model is compared to the general static wage contract model and the affects made by the optimal dynamic wage contract to workers and firms are analyzed. Findings – According to the consequences of simulation, the dynamic wage contract has better characteristics and is more practical than the static one. In the dynamic wage contract, the current action of a worker has a persistent effect on the future outcome. It is proved that the dynamic wage contract is optimal to the firm. The optimal dynamic wage contract is renegation‐proofness. It not only can incentive workers to work hard and help the firm achieve Pareto efficiency, but also can smooth the firm's incentive costs and reduce the risk born by workers. Originality/value – The paper provides some reasonable conclusions for the human resource management in firms. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Kybernetes Emerald Publishing

Design, analysis and simulation of an optimal wage contract in firms

Kybernetes , Volume 38 (10): 9 – Jan 1, 2009

Loading next page...
 
/lp/emerald-publishing/design-analysis-and-simulation-of-an-optimal-wage-contract-in-firms-TagcJEibmp

References (22)

Publisher
Emerald Publishing
Copyright
Copyright © 2009 Emerald Group Publishing Limited. All rights reserved.
ISSN
0368-492X
DOI
10.1108/03684920910994295
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to analyze and solve the problem of moral hazard in firms because of asymmetry information between firms and workers and to contract upon the workers' shiftless actions. Design/methodology/approach – Based on principle‐agent theory and human resource management practice, an optimal dynamic wage contract model is designed. By applying simulation technology, the dynamic wage contract model is compared to the general static wage contract model and the affects made by the optimal dynamic wage contract to workers and firms are analyzed. Findings – According to the consequences of simulation, the dynamic wage contract has better characteristics and is more practical than the static one. In the dynamic wage contract, the current action of a worker has a persistent effect on the future outcome. It is proved that the dynamic wage contract is optimal to the firm. The optimal dynamic wage contract is renegation‐proofness. It not only can incentive workers to work hard and help the firm achieve Pareto efficiency, but also can smooth the firm's incentive costs and reduce the risk born by workers. Originality/value – The paper provides some reasonable conclusions for the human resource management in firms.

Journal

KybernetesEmerald Publishing

Published: Jan 1, 2009

Keywords: Cybernetics; Pay; Contracts of employment; Moral hazards; Employee behaviour

There are no references for this article.