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A note on internal and external reference in efficiency wage models

Journal of Economics volume 96, pages 79–86 (2009)Cite this article

Abstract

According to Bewley, a workers’ morale depends on being treated fairly within firms. This implies that the internal comparison of the own wage with wages paid to other workers within the firm affects individual effort determination. By contrast, the standard efficiency wage models only consider a comparison of the own wage with external income opportunities as the only determinant for individual effort. We provide a simple efficiency wage framework in which both the internal and external perspectives can affect individual effort determination. Our framework suggests that the internal reference is essential for the existence of real wage rigidity while the external reference ensures an upward-sloping wage-setting curve.

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Authors and Affiliations

  1. Department of Economics, University of Helsinki, P. O. Box 17, Arkadiankatu 7, 00014, Helsinki, Finland

    Erkki Koskela

  2. School of Business and Economics, Freie Universität Berlin, Boltzmannstr. 20, 14195, Berlin, Germany

    Ronnie Schöb

Authors
  1. Erkki Koskela
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  2. Ronnie Schöb
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Correspondence to Ronnie Schöb.

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Koskela, E., Schöb, R. A note on internal and external reference in efficiency wage models. J Econ 96, 79–86 (2009). https://doi.org/10.1007/s00712-008-0044-9

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  • DOI: https://doi.org/10.1007/s00712-008-0044-9

Keywords

  • Efficiency wages
  • Wage rigidity
  • Internal and external reference wage

JEL Classification

  • E24
  • E32
  • J50