WAGE PREMIUMS AND PROFIT MAXIMIZATION IN EFFICIENCY WAGE MODELS

The standard shirking model of efficiency wages is essentially a conti nuous-time, repeated prisoners' dilemma game. Thus, to sustain an equi librium with employment requires sufficient gains from future co-opera tion. Each division of these gains corresponds to some equilibrium. Ef ficiency wages correspond to employees receiving the gains. Bonds allo w firms to receive them. In markets well informed about agents' pasts, employment is independent of the distribution of gains. But in anonym ous markets with more workers than jobs, employment is highest in effi ciency wage equilibria. Efficiency wages thus arise naturally as the u nique efficient equilibrium without recourse to assumptions that limit bonding.