EFFICIENCY WAGES, MANAGERIAL DISCRETION, AND THE FEAR OF BANKRUPTCY

In the absence of complete contracts, a firm's shareholders may be una ble to credibly commit to honor performance-contingent rewards to work ers. However, it is managers who usually administer compensation contr acts and ensure that implicit commitments are fulfilled. The separatio n of ownership and control can increase the value of labor's specific investments in the firm. Departing from previous work on delegation, I allow managers to transfer wealth from shareholders to workers. This creates a beneficial role for debt and a fear of bankruptcy that ensur es managers take an 'appropriate' view of the effect that the payments they make to workers have on the financial health of the firm.