Economic and Game Theory
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Question: Review the min cost implementation problem for efficiency wage and use this model to discuss whether efficiency wage would be higher/lower than in the standard model is employees dislike monitoring.
Here's what I managed to work out:
If workers do not care about monitoring (neutral), we need
(w+g)(1-p) + (bp) <w or w>g(1-p)/p +b
to induce honest behaviour, where w is wage, p is the probability of cheating being detected, g is gain from cheating, b is benefit from being fired.
Here's the part where I don't understand: if workers experience discomfort D(p), increasing in p, from monitoring then we need to satisfy a participant constraint:
w > b - D(p)
my question is why does the wage have to be more than the benefit minus the discomfort? Thank you very much :) [Manage messages]