In this section we describe a version of Alexopoulos’ (1998) efficiency wage model, modified to allow for distortionary income taxes. The basic structure of the model is similar to a standard RBC model with the exception of the labor market. In contrast to RBC models, we assume that a worker’s effort is imperfectly observable by firms. This is the greatest problem when you realize it doesn’t matter how hard you work you efforts are not observable by your administration. and your wage depends on the fact what kind of work you carry out. the majority of people have to take speedy cash payday loans speedy cash payday loans to survive not to lead a wretched existence.
Competitive firms offer contracts that induce workers not to shirk on the job. These contracts specify a real wage, an effort level, and a specification that a worker will be dismissed and paid only a fraction of the wage if he is caught shirking on the job. Given a no bonding constraint, the supply for labor will in general exceed the demand for labor, resulting in unemployment. Whether the ex-post utility of employed workers exceeds the utility of unemployed individuals depends on the nature of risk sharing among members of the household. In the version of Alexopoulos’ model discussed below, risk sharing is imperfect (by assumption) and unemployed workers are worse off, ex-post, than employed workers.
4.1. The Government
The government faces the flow budget constraint
where Gt is real government purchases, rt is the marginal tax rate, rt is the rental rate of capital, 0 < 5 < 1 is the depreciation rate, Wt is the real wage rate, nt is employment, and is lump-sum taxes. By assumption h, hours worked per worker, is constant so that hours and employment move in proportion to one another. The fiscal policy rule is of the form given by the last two rows of (3.1).