Self-Enforcing Contracts, Shirking, and Life Cycle Incentives

he 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 modelled. Central to the new approach is the concept of a self-enforcing implicit contract. This is the latest in a series of variations on the ideas of Azariadis (1975), Baily (1974) and Gordon (1974), and is one of the more exciting new developments in the theory of labor markets. This essay will outline this approach and evaluate some of its accomplishments. The ideas will be presented in the context of an incentive model that is of some independent interest. The model was introduced by Becker and Stigler (1974), and was extended by Lazear (1979) to account for wage growth and mandatory retirement. In these papers the workers retire at a fixed age, lending the name "life cycle incentives" to the approach. More recently, Shapiro and Stiglitz (1984) have used a version without a fixed retirement date to account for unemployment. This version is often called the "shirking" model. These models have generated some controversy, but much of it can be resolved when the models are presented in the framework of self-enforcing contracts. In fact, this simple incentive model can do even more. It can provide a rationale for "competitive hierarchies," where firms place their workers in competition with