ECON 327 – Labor Economics
Spring 2014
Name_______________________________________
Problem Set #11
Due Monday, May 5 (30 points) – Turn in as hardcopy or electronically as PDF or Word Document.
1.
(6) In a competitive market setting, why is it essential for the validity of the canonical approach that the
ILM comes into contact at a few distinct entry and exit ports?
2.
(6) State the main features that are common to a career concerns approach and a rat race approach.
How do these concepts differ?
3.
(6) Give some reasons for why contracts tend to be incomplete. When contracts are incomplete, what is
the advantage of ownership?
4.
(6) Why would firms tie compensation of executives to the value of the firm (stock price) rather than
current accounting profits? Why would firms enter into contracts that ensure a “golden parachute
(handshake)” to executives upon leaving a firm, regardless of the performance of the firm?
5.
(6) List and briefly describe the three general theories of executive pay. How do these theories accord
with the evidence on executive pay?
BONUS
6.
(10) In 19th-century Britain, employers sometimes used corporal punishment to motivate children in the
workplace. Modern armies may use capital punishment in the event of desertion during a time of war.
Why might they resort to these practices? (HINT: efficiency wages).
1