Markets for Rhetorical Services
Daniel Barron (Northwestern)
Michael Powell (Northwestern)

Abstract : This paper studies markets for advertising and other “rhetorical services.” A monopolist prices a service that a sender can purchase and which changes the distribution over signals observed by a decision-maker. We show that the decision-maker's beliefs about purchase behavior influence the value of these services. This feedback from beliefs to demand determines pricing and can lead to unusual market features, including upward-sloping equilibrium demand. We discuss welfare and regulation in this market and characterize the monopolist's optimal product design. To serve as a foundation for this analysis, we develop a parsimonious model of rhetorical ability.

Relational Contracts in the Market: the Lure of Relationships
Florian Englmaier (LMU Munich)
Carmit Segal (U Zurich)

Abstract : In many labor situations third parties cannot verify whether workers and firms adhered to their pre-trade promises. In such situations, long-term self-enforcing contracts may emerge endogenously to allow for an efficiency-improving solution to the agency problem. We implement such a situation in the lab by allowing workers and firms to interact repeatedly in a market without third-party enforcement. In this setting, persistently different human resource policies emerge endogenously: we find (long-term) relationships characterized by generous surplus sharing and spot-interactions with little to no rent for the workers. Efficiency, i.e. exerted effort, is comparable across the different policies. Hence, spot-interactions are at least as profitable for firms engaging in such practices. Analyzing individual level data, we document that firm and worker behavior is individually rational and that both firms and workers are “lured” by the possibility of entering a relationship and that individual histories play a significant role in explaining the observed behavior. In control treatments, we show that neither limited firm commitment nor structural unemployment alone are sufficient to generate the above described patterns.

Market Competition and Informal Incentives
Matthias Fahn (JKU Linz)
Takeshi Murooka (Osaka University)

Abstract : We develop a model where firms compete on a product market and employ workers whose effort increases revenue, but where no formal contracts can be used to provide incentives for the workers. Firms and workers are matched on a labor market and wages are determined by a bargaining process. Both parties incur costs to find a new match, and these costs depend on competition in the labor market. In particular, more labor market competition (i.e., more available workers) reduces firms' replacement costs. We show that such a reduction decreases workers' wages, industry-wide production effciency, and consumer surplus. It also makes collusion between firms easier to sustain because the incentive to deviate from a collusive agreement is lower. By contrast, lowering workers' costs in the labor market increases workers' wages, production effciency, and consumer surplus - highlighting that there is a sharp asymmetry between reducing labor-market costs for firms and for workers. The mechansim we derive has interesting implications on a number of policy issues. For example, a higher minimum and a more stringent employment protection can increase effort and consequently production efficiency. Furthermore, more generous unemployment benefits have no adverse effects on a worker's effort.

The Firm-growth Imperative: a Theory of Production and Personnel Management
Rongzhu Ke (Hong Kong Baptist University)
Jin Li (London School of Economics)
Michael Powell (Northwestern University)

Abstract : We develop a model in which a firm makes a sequence of production decisions and has to motivate each of its employees to exert effort. The firm motivates its employees through incentive pay and promotion opportunities, which may differ across different cohorts of workers. We show that the firm benefits from reallocating promotion opportunities across cohorts, resulting in an optimal personnel policy that is seniority-based. Our main contribution is to highlight a novel time-inconsistent motive for firm growth: when the firm adopts an optimal personnel policy, it may pursue future growth precisely to create promotion opportunities for existing employees.