An Income-Satiation Model of Efficiency Wages

Eric Bennett Rasmusen, Kelley School of Business, Indiana University

Abstract

Efficiency wages are wages that exceed a worker's reservation wage. A standard explanation for such wages is ``bonding'': by increasing the worker's fear of discharge, high wages increase the worker's cost from punishment. A neglected alternative is ``satiation'': by decreasing the worker's marginal utility of income, the high wage decreases the benefit from misbehavior. Satiation, unlike bonding, applies even in a one- period model, but it relies on the misbehavior having a monetary benefit and on at least part of the punishment being nonmonetary.