A MODEL OF EFFICIENCY WAGES AS A SIGNAL OF FIRM VALUE

We consider performance contracts with firm private information. The verifiable components of the contract, an up-front wage and employment, may serve both as a signal and a performance incentive. Job rent may be necessary for signalling and, since efficient signalling is multidimensional, there is an inextricable link between job rent and underemployment. Signalling can explain the lack of explicit bonding in actuality. Though our basic model is static, our underemployment result is not a consequence of firm myopia. When the firm is farsighted, it will not maximize the joint future surplus if it cannot extract the worker's share at present.