NASH EQUILIBRIUM EFFICIENCY WAGE DISTRIBUTIONS

This paper extends the shirking model of efficiency wages by introduci ng worker heterogeneity with respect to the disutility of effort. Hete rogeneity leads to a problem of adverse selection in addition to the m oral hazard problem that is present in the original model. As a result of adverse selection, an equilibrium in which all firms offer the sam e efficiency wage cannot exist; rather, a continuously differentiable distribution of wages will be offered in equilibrium. We demonstrate t his equilibrium by construction, and derive it explicitly in the case of a uniform distribution of the effort aversion parameter.