A MODEL OF EFFICIENCY WAGES AS A SIGNAL OF FIRM VALUE

We consider performance contracts with firm private information. The v erifiable 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 multidi mensional, there is an inextricable link between job rent and underemp loyment. Signalling can explain the lack of explicit bonding in actual ity. Though our basic model is static, our underemployment result is n ot 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.