A Game Theoretical View on Efficiency Wage Theories

The efficiency wage theory developed by Akerlof (1982) assumes observability of effort and the ability of firm and worker to commit on their effort/wage decisions. We show that, from a game theoretical point of view, we have to understand the firm/worker relationship as a repeated Prisoner's dilemma. Therefore, cooperation is per se not a (subgame perfect) Nash equilibrium and hence the Akerlof (1982) theory is based upon an implicit assumption of cooperation, which can not be implemented w.l.o.g.. In addition, we find that this approach is a special case of the Shapiro and Stiglitz (1984) approach and hence unify the two approaches.