Question

Firm Q offers a fairly lucrative defined benefit pension. However, the full benefit is reserved for those who stay at

least 30 years. Moreover, in order to qualify for any reasonable pension a worker must first be vested. A worker is

only vested (eligible for full retirement benefits) at Firm Q after having been there at least ten years. According to

the Lazear contract model this combination of vesting and a lucrative defined benefit pension plan is designed

to:  

	a.	to encourage younger workers to quit
	b.	to encourage older workers to stay so that they can train younger workers
	c.	to encourage young workers to acquire skills that will make them more productive when they get older
	d.	to encourage younger workers to stay and older workers to retire

Answer 1

c) to encourage young workers to acquire skills that will make them more productive when they get older.

Lazear contracts were based on the fact that wages rise more quickly than productivity. So if the employees are given the incentive to stay longer then they would definitely boost their productivity by some or the other means like learning new skills. If firms can commit to a wage schedule with deferred compensation like the above case of lucrative defined benefit pension then the workers should respond by supplying sufficient effort to avoid dismissal. According to the Lazear contracts theory, wage patterns in which younger workers are underpaid relative to marginal revenue product and older workers are overpaid relative to marginal revenue product can be understood as an implicit contract designed to combat principal-agent problems in environments where monitoring of an employee is costly.