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   Course Title    Employment: Contracts, Compensation and Careers
Lecturer    Larisa Lugacheva
Institution    Novosibirsk State University
Country    Russia

Course objective

The course presents an economic treatment of the nature of the employment relationship, examining explicit and implicit employment contracts, compensation policies, and career paths. It reviews the classical theory of labor markets and more modern theories that explain why long-term employment relations predominate in every developed economy. The course focuses on job assignments and promotions and particularly on how firms resolve the tension between assigning people to the jobs that best suit them and using promotions as a reward for past performance. The way compensation is determined puzzles almost everyone at some time in his or her life. There are four main objectives: 1) the student should obtain a general survey of the problems, methods, and substantive literature in employment policy and human resource management; 2) to learn the basic empirical facts regarding the problems of contracting; 3) to study internal labor market job assignments  promotions; 4) reviews the facts and theories about the controversial matter of executive compensation.


These objectives will be met through class lectures and discussion and a final exam.  The course will be analytical in nature.





1. The classical theory of wages, employment, and human capital.

Wages and levels of employment. Human capital, defects of the classical model.

2. Employment policy and human resource management.

Labor contracts and the employment relationship. Employment as a relationship. Employment contracts. Implicit contracts. Risk sharing in employment relations. Borrowing and lending in employment relationships. Recruiting , retention, separations.

Case Study: Human-resource policies in Russia. Hiring and retention. Protecting interests of permanent employees.

3. Internal labor markets, job assignments and promotions

Internal labor markets and labor market segmentation patterns. Pay in internal labor markets. The rationale for internal labor markets. Long-term employment. Firm specific human capital. Promotion policies. Pay attached to jobs. Internal labor markets as systems. Influence costs, incentives, and job assignment. A job-assignment problem. Organizational responses. Tenure and up-or-out rules.

4. Rents and efficiency.

Distribution affects and efficiency. Efficiency wages for employment incentives. The Shilfliro-Stiglitz model. Applications of efficiency wage theory. Reputations as contract enforcers. The elementary theory: reputations in repeated transactions. Ambiguity, complexity, and limits of reputations. The advanced theory: reputations aided by institutions. Rent-seeking, influence costs and efficient decision routines. Rents and quasi-rents. Rent seeking in the public and private sectors. Organizational design: optimising influence activities. Influence costs and the legal system. Participatory management.

5. Compensation and motivation.

The forms and functions of compensation. Differing forms of pay. The objective of compensation policy.

6. Incentives for individual performance.

Explicit incentive pay. Piece rates. Safes commissions. Individual incentive pay in other contexts. Eliciting employees' private information. Implicit incentive pay. Performance evaluation. Performance evaluation with explicit performance pay. Performance evacuation in subjective systems. Job design and incentive pay. Job enrichment programs and complementary between tasks, responsibility and personal business.

7.Incentive pay for groups of employees.

Forms of group incentives. The effectiveness of group incentive contracts. Pay equity and fairness.

8. Executive and managerial compensation.

Patterns and trends in executive compensation. CEO compensation in large U.S. firms. Patterns and compensation, middle-level executives. Motivating risk-taking. The puzzle, managerial investment decisions and human capital risk, inducing risk taking, paying for investment proposals deferred. Deferred compensation. Commitment problems. Setting CEO pay. The debate on executive compensation. The tasks and temptations facing senior executives, value maximization and incentives. The evidence on performance and pay.



Ehrenberg R.G., Smith R.S. Modern Labor Economics. Theory and Public Policy. N.Y.: HarperCoUins College Publishers, 1994.

Labor Economics and social – economic relationships. ̀.: Moscow State University Publishers, 1997.


Further readings:

Becker G.S. The Economics of Discrimination. Chicago: The University of Chicago Press, 1957.

Beeker G.S. Human Capital, 2nd edn. Columbia University Press, 1975.

Borjas G.J. Labor Economics. N.Y.: The MeGraw-Hill Companies, 1996.

Employment Outlook, July 1999, OECD.

Employment Outlook, July 2000, OECD.

Hicks J. R. The Theory of Wages, 2-nd ed. London: Maemillan, 1963.


Schedule of topics and readings

No textbook suitable for the level of this course is available. We will be studying a number of articles from the professional literature, also listed below. Photocopies of most "required" articles will be made available in a reader, while other articles are included to encourage interested students to pursue particular interests, including for the purpose of choosing course project topics.


I.  The classical theory of wages, employment, and human capital

II. Employment policy and human resource management


Akerlof, G. "Discriminatory Status-Based Wages Among Tradition-Oriented, Stochastically Trading Coconut Producers," Jourmal of Political Economy, 92 (1985), 265-76.

Alchian, A., and H. Demsetz. "Production, Information Costs, and Economic Organization," AmerIcan Economic Review, 62 (1972), 775-95.

Aoki, M. "Toward an Economic Model of the Japanese Firm," Journal of Economic Literature, 28 (March 1990), 1-27.

Arrow, K.J. "Models of lob Discrimination," Racial Discrimination in Economic Life, A.H. Pascal, ed. (Lexington, MA: Lexington Books, 1972).

Azsariadis, C. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, 83 (1975), 1183-1202.

Bally, M. "Wages and Employment Under Uncertain Demand," Review of Economic Studies, 41 (1974), 37-50.

Baron, J. "The Employment Relation as a Social Relation," Journal of the Japanese and International Economies, 2 (1988), 492-525.

Beeker, G.S. Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education (New York: Columbia University Press, 1964).

Coldberg, V. "A Relational Exchange Perspective on the Employment Relationship,"  Working Paper No. 208, Department of Economics, University of California, Davis (1982).

Gordon, D.F. "A Neoclassical Theory of Keynesian Unemployment," Economic Inquiry, 21(1974), 431-49.

Hams, M., and B. Holmstrom. "A Theory of Wage Dynamics," Review of Economic Studies, 49 (1982), 315-33.

Hart, 0. "Optimal Labour Contracts Under Asymmetric Information: An Introduction," Review of Economic Studies, 50 (January 1983), 3-36.

Hart, O., and B. Holmstrom. "The Theory of Contracts," Advances in Economic Theory: Fifth World Congress, T. Bewley, ed. (Cambridge: Cambridge University Press, 1987).

Lundberg, S., and R. Startz. "Private Discrimination and Social Intervention in Competitive Labor Markets," American Economic Review, 73 (1983), 340-47.

Kreps, D. "Corporate Culture and Economic Theory," Perspectives on Positive Political Economy, J. Alt and K. Shepsle, eds. (Cambridge: Cambridge University Press, 1990), 90-143.

Milgrom, P. "Employment Contracts, Influence Activities, and Efficient Organization  Design," Jourrnal of Political Economy, 96 (1988), 42-60.

Milgrom, P., and S. Oster. "Job Discrimination, Market Forces and the Invisibility Hypothesis," Quarterly fournal of Economics, 102 (August, 1987), 453-76.

Rosen, S. "Implicit Contracts: A Survey," Journal of Economic Literature, 23 (1985), 1144-75.

Simon, H. A. "A Formal Theory ofthe Employment Relationship," Economertca, 19(1951), 293-305.

Spencc, A.M. Market Signalling: Information Transfer in Hiring and Related Processes (Cambridge, MA: Harvard University Press, 1973).

Williamson, 0. The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting (New York: The Free Press, 1985).


III. Internal labor markets, job assignments and promotions

IV. Rents and efficiency.


Aoki, M. Information, Incentives and Bargaining in the Japanese Economy (Cambridge: Cambridge University Press, 1988).

Carmichael, H. L. "Incentives in Academics: Why is There Tenure?" Journal of Political Economy, 96 (1988), 453-72.

Doeringer, P., and M. Piore. Internal Labor Markets and Manpower Analysis (Lexington, MA: D.C. Heath, 1971).

Edwards, R. Contested Terrain: The Transformation of the Work Place in the Twentieth Century (New York: Basic Books, 1979).

Harries, M., and Y. Weiss. «Job Matching with a Finite Horizon and Risk Aversion," Journal of Political Economy, 92 (August 1984), 758-79.

Gilson, R., and R. Mnookin. "Coming of Age in a Corporate Law Firm: The Economics of Associate Career Patterns," Stanford Law Review, 41(1989), 567-95

Lazear, E., and S. Rosen. "Rank Order Tournaments as Optimal Labor Contracts," Journal of Political Economy, 89 (October 1981), 841-64.

MacLeod, W. B., and. Malcomson. "Reputation and Hierarchy in Dynamic Models of Employment," Journal of Political Economy, 96 (August, 1988), 832- 54

Mesters, M. Technology and Management of Human Capital, unpublished dissertation, Stanford University Graduate School of Business (1990).

Milgrorn, P., and J. Roberts. "An Economic Approach to Influence Activities in Organizations," American Journal of Sociology 94 (Supplement), 1988a: SI54- SI79.


V. Compensation and motivation.

VI. Incentives for individual performance.

VII. Incentive pay for groups of employees.


Baker, G., M. Jensen, and K. Murphy. "Compensation and Incentives: Practice VS. Theory," Journal of Finance, 43 (1988), 593-616.

Belcher, D., and T. Atchison. Cornfiensiltion Administration, 2nd edition (Englewood Cliffs, NJ: Prentice Hall, 1987).

Holmstrom, B., and P. Milgrorn. "Multi-task Principle Agent Analysis: Incentive Contracts, Asset Ownership and Job Design," Working paper 6, Stanford Institute for Theoretical Economics (1990).

Lawler, E. Strategic Pay: Aligning Organizational Strategies and Pay Systems (San Francisco, CA: Jossey-Bass Publishers, 1990).

Lazear, E. "Labor Economics and the Psychology of Organizations," Journal of Economic Persfiectives, 5 (Spring 1991), 89-110.


VIII. Executive and managerial compensation.

Foulkes, F., cd. Executive Compensation: A Strategic Guide for the 1990s (Boston: Harvard Business School Press, 1991).

Hannaway, J., "Supply Creates Demands: An Organizational Process View of Administrative Expansion, " Journal of Policy Analysis and Management, 7 ( 1987), 118-l34.

Holmstrom, B. "Managerial Incentive Problems: A Dynamic Perspective," in Essays in Economics and Management in Honor of Lars Wahlbeck (Helsinki, Finland: Swedisll School of Economics, 1982).

Holmstrom, B., and J. Ricart i Costa. "Managerial Incentives and Capital Management." (Quarterly Journal of Economics, 101 (1986), 835-60.

 Rosen. S. "Contracts and the Market for Executives," National Bureau of Economic Research working paper 3542 (1990).


Teaching methods and evaluation:

Lectures combined with class discussion.

        test + report 40 %.

        Classroom discussion activity 20 %.

        Final controlled multiple-choice comprehensive test 40%.

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