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Valuable Jobs and Uncertainty
Little attention has been given to the link between variation in a firm's circumstances and the resolution of agency problems that pervade the relationship between a firm and its employees. We construct stochastic versions of standard efficiency-wage and performance-bonding models and find that this connection has important and apparently inescapable consequences: (1) Compensation levels depend on characteristics of the firm. (2) The possibility of the firm's exit drives an important prediction in both classes of model: compensation rises in dying firms. (3) The firm's exit decision may be distorted. These result illustrates the need for careful attention to the circumstances under which valuable jobs are liquidated.