Consider the no shirking constraint (NSC) w > w(u) = = + (v + b) 1-q....

 

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Consider the no shirking constraint (NSC) w > w(u) = = + (v + b) 1-q. q s(u) where w(u) is the lowest wage that induces workers not to shirk given the unemployment rate u, q is the exogenous probability of detecting shirking, G is the worker's goofing-off utility, vis the value of leisure, b is the value of unemployment benefits and s(u) is the fraction of the period workers dismissed for shirking remain unemployed. Assume that the specific facts are as follows: G=0.01, v-4, b=3 and s(u)=u. Assume that the demand for labour is given by e-8-w, where e is the level of employment (note that e=1-u in this model where the population of workers, N, is normalized to 1). (i) What would be the equilibrium outcome if q-1 (i.e. perfect monitoring)? (1 point) (ii) Derive the NSC for q-0.5 (i.e. imperfect monitoring). Derive the equilibrium outcome for q=0.5. Provide a graphical representation. (3 points) Consider the no shirking constraint (NSC) w > w(u) = = + (v + b) 1-q. q s(u) where w(u) is the lowest wage that induces workers not to shirk given the unemployment rate u, q is the exogenous probability of detecting shirking, G is the worker's goofing-off utility, vis the value of leisure, b is the value of unemployment benefits and s(u) is the fraction of the period workers dismissed for shirking remain unemployed. Assume that the specific facts are as follows: G=0.01, v-4, b=3 and s(u)=u. Assume that the demand for labour is given by e-8-w, where e is the level of employment (note that e=1-u in this model where the population of workers, N, is normalized to 1). (i) What would be the equilibrium outcome if q-1 (i.e. perfect monitoring)? (1 point) (ii) Derive the NSC for q-0.5 (i.e. imperfect monitoring). Derive the equilibrium outcome for q=0.5. Provide a graphical representation. (3 points)

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i When q 1 perfect monitoring the no shirking constraint NSC equation becomes w wu 1 qq Gsu v b Substituting the given values G 001 v 4 b 3 and su u w... View the full answer