Efficiency Wages and Employment Rents: The Employer-Size Wage Effect in the Job Market for Lawyers

Abstract

The "efficiency wage hypothesis" offers an explanation for employment rents. According to this hypothesis, firms pay wages above the opportunity cost of labor to elicit productivity or quality-enhancing behaviors from employees. Firms pursue this strategy when alternative incentive schemes are unavailable or too costly. Thus, firms will not pay premium wages when employees post sufficiently large performance bonds. This article examines employment rents in a setting where employees post sizable performance bonds-large law firms. Contrary to the efficiency wage hypothesis, we find that associates in these large firms post substantial performance bonds while also receiving substantial, ex ante rents.