Efficiency Wages

Summers' model of efficiency wages assumes that worker effort, , is a function of the wage, w and outside earnings opportunities, x, such that

= (w - x)

where 0 < < 1. The firm is assumed to minimise wage cost per unit of effort by choosing the optimal wage, w*, so that

w* = x / (1 - )
w* = / (1 - x)
w* = (1 - ) / x
w* = (1 - x) /

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