Auctioning Oo Labor Contracts: Legal Restrictions Reconsidered

The paper considers two di erent mechanisms of allocating jobs to workers under moral hazard and adverse selection. First, the optimal selection mechanism is derived. It is examined whether second degree wage discrimination (e.g. through progressive piece rates) increases the total surplus which may outweigh arguments of equal pay (piece rates should not di er between workers just because their output levels di er). This mechanism is contrasted with simple bargaining between the employer and job applicants about the allocation of a franchising contract. When the employer has all the bargaining power, the outcome can be described by a Vickrey auction. The employer's pro t is lower in this simple mechanism, but total welfare is higher as long as the employer does not impose a minimum franchise fee necessary to enter negotiations. Prohibiting second{degree wage discrimination can prevent output distortions, but cannot prevent underemployment due to asymmetric information. On the other hand, second{degree wage discrimination does not necessarily reduce underemployment, but mainly redistributes rent to the employer. In both allocation mechanisms, third{degree wage discrimination is bene cial for the on average less productive group.