| This thesis concerns the optimal design of labor contracts in environments with asymmetric information between employers and workers. To this end, it develops and applies models from game theory, recursive mechanism design and computational economics to the study of optimal compensation schemes in a variety of environments.; Chapter 1 provides the introduction. Chapter 2 analyzes the nature of optimal static contracts in an setting with moral hazard, where multiple workers contracting with the same employer receive unobserved idiosyncratic and correlated productivity shocks. It considers the role of relative performance of workers in designing an optimal compensation scheme in such an environment.; Chapter 3 develops the optimal dynamic contracts between an employer and multiple workers that condition on individual histories. These contracts are formulated recursively, where the expected lifetime utility of each worker is used as a state variable. Results suggest that for the same per-period preferences and technology, the optimal static relative and the optimal dynamic relative contracts can be substantially different. In some cases, the dynamic contract relies on relative performance while the static contract relies on absolute performance. Chapter 3 elaborates on the trade-off between consumption smoothing and incentives for effort that give rise to these differences.; Chapter 4, building on the joint work with Chris Sleet, explores the implications of these contracts for fluctuations in effort and employment across time and productivity states. It considers a model where output depends upon worker effort and a shock that only the worker observes. The firm's revenue depends upon realized output and an observable persistent shock. Two types of environments are considered. In the first, the firm can lay off workers temporarily, but cannot terminate the contract. In the second environment, poor realizations of the persistent and publicly observable revenue shock can lead to efficient separations. It is shown that the firm's dynamic choice problem can be formulated recursively, and an algorithm to solve for the optimal dynamic contract is provided. |
