Essays in Labor Economics and Contract Theory

Abstract

This dissertation consists of three essays in labor economics and contract theory. The first essay examines whether one’s wage is based on information about the performance of one’s personal contacts. I study wage determination under two assumptions about belief formation: individual learning, under which employers observe only one’s own characteristics, and social learning, under which employers also observe those of one’s personal contacts. Using data on siblings in the NLSY79, I test whether a sibling’s characteristics are priced into one’s wage. If learning is social, then an older sibling’s test score should typically have a larger adjusted impact on a younger sibling’s log wage than vice versa. The empirical findings support this prediction. Furthermore, I perform several exercises to rule out other potential factors, such as asymmetric skill formation, human capital transfers, and role model effects. The second essay analyzes the influence of macroeconomic conditions during childhood on the labor market performance of adults. Based on Census data, I document the relationship of unemployment rates in childhood to schooling, employment, and income as an adult. In addition, a sample from the PSID is used to study how the background attributes of parents raising children vary over the business cycle. Finally, information from the NLSY79-CH is examined in order to characterize the impact of economic fluctuations on parental caregiving. Overall, the evidence is consistent with a negative effect of the average unemployment rate in childhood on parental investments in children and the stock of human capital in adulthood. The third essay studies the bilateral trade of divisible goods in the presence of stochastic transaction costs. The first-best solution requires each agent to transfer all of her good to the other agent when the transaction cost reaches a certain threshold value. However, in the absence of court-enforceable contracts, such a policy is not incentive compatible. We solve for the unique maximal symmetric subgame-perfect equilibrium, in which agents can realize some gains from trade by transferring their goods sequentially. Several comparative statics are derived. In some cases, the first-best outcome can be approximated as the agents become infinitely patient.