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Journal Article

Working conditions and regulation


Weinschenk,  Philipp
Max Planck Institute for Research on Collective Goods, Max Planck Society;

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Weinschenk, P. (2017). Working conditions and regulation. Labour Economics, 44, 177-191.

Cite as: https://hdl.handle.net/11858/00-001M-0000-002C-7F82-9
Do employers invest sufficiently in the working conditions of employees? We examine this question in a simple principal-agent model. We show that, even though investment is contractible, the principal underinvests whenever her agent's alternatives are rather poor. This provides a reason for regulation. The indirect regulatory approach of taking measures that improve the agent's bargaining power or outside option at least weakly enhances the agent's well-being and welfare. The direct regulatory approach of demanding a certain standard of working conditions increases the principal's investment, but may nonetheless leave the agent's well-being unaffected and deteriorate welfare. This holds true since due to a standard, the principal may provide the agent with a lower-powered incentive scheme and implement a lower effort level.